What changed in this filing

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Item 1. Financial Statements

2021-05-13 compared with 2020-11-12 · 517 added, 672 removed, 1214 unchanged (49% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Cash and cash equivalents $ 18,464,161 $ 18,607,952

4 unchanged sentences

Loans held for investment acquired through participation, net 4,292,148 4,294,053

Equity investment in a limited partnership, net 50,505,511 36,259,959

Real estate owned, net ( Note 6 )

9 unchanged sentences

71,613,358 71,581,897

Repurchase agreement payable, net of deferred financing fees — 79,608,437

Mortgage loan payable, net of deferred financing fees and other 40,728,560 44,117,293

Revolving credit facility payable 25,000,000 —

Revolving line of credit payable, net of deferred financing fees 7,407,536 —

Secured borrowing 21,983,096 18,187,663

Interest reserve and other deposits held on investments 7,096,549 12,145,616

15 unchanged sentences

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

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

both March 31, 2021 and December 31, 2020 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

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

19,487,460 shares issued and outstanding at both March 31, 2021 and

December 31, 2020, respectively 194,875 194,875

Additional paid-in capital 373,443,672 373,443,672

5 unchanged sentences

Consolidated Statements of Operations

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Interest income $ 8,120,949 $ 9,651,865

Real estate operating revenue 2,011,641 2,313,051

Prepayment fee income — — — 98,775

Other operating income 156,662 112,655

7 unchanged sentences

Depreciation and amortization 931,725 946,494

Impairment charge — — — 1,550,000

Professional fees 520,419 294,761

407,444 333,203 1,075,303 3,051,310

Directors fees 36,250 83,750

3 unchanged sentences

Other income and expenses

Interest expense from obligations under

participation agreements ( 2,211,901 ) ( 3,022,202 ) ( 6,805,402 ) ( 8,921,349 )

Interest expense on repurchase agreement

payable ( 706,527 ) ( 1,407,889 ) ( 3,727,466 ) ( 3,708,424 )

Interest expense from obligations under participation agreements ( 1,880,081 ) ( 2,560,267 )

Interest expense on repurchase agreement payable — ( 1,551,270 )

Interest expense on mortgage loan payable ( 686,150 ) ( 750,636 )

Interest expense on revolving credit facility ( 463,333 ) ( 74,794 ) ( 1,238,311 ) ( 74,794 )

Interest expense on revolving line of credit ( 17,846 ) ( 174,989 )

Interest expense on term loan payable ( 1,672,768 ) —

Net loss on extinguishment of obligations

under participation agreements — — ( 319,453 ) —

Interest expense on secured borrowing ( 299,805 ) ( 40,491 )

Net loss on extinguishment of obligations under participation agreements — ( 319,453 )

Net change in unrealized losses on marketable securities ( 14,608 ) —

Income from equity investment in a limited partnership 1,337,827 —

Realized gains on marketable securities — 8,894

Unrealized (losses) gains on marketable

securities ( 38,527 ) — 28,995 —

( 3,233,431 ) ( 5,388,212 )

Net income $ 1,476,096 $ 578,963

Preferred stock dividend declared ( 3,906 ) ( 3,906 ) ( 11,718 ) ( 11,718 )

Series A preferred stock dividend declared ( 3,906 ) ( 3,906 )

Net income allocable to common stock $ 1,472,190 $ 575,057

1 unchanged sentence

$ 0.08 $ 0.03

Weighted-average shares — basic and

Weighted-average shares — basic and diluted

19,487,460 16,707,279

Distributions declared per common share $ 0.20 $ 0.53

_______________

(1) Amount for the nine months ended September 30, 2019 included $ 2.4 million of professional fees directly incurred, and which were previously deferred, in contemplation of the Company becoming a public entity.

In the second quarter of 2019, Management decided to postpone indefinitely the Company’s public offering.

See notes to unaudited consolidated financial statements.

1 unchanged sentence

Consolidated Statements of Comprehensive Income

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Comprehensive income, net of tax

2 unchanged sentences

Net unrealized gains on marketable securities — 192,919

Reclassification of net realized gains on

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

Reclassification of net realized gains on marketable securities into earnings — ( 8,894 )

Total comprehensive income $ 1,476,096 $ 762,988

Preferred stock dividend declared ( 3,906 ) ( 3,906 ) ( 11,718 ) ( 11,718 )

Comprehensive income attributable to common

shares $ 2,139,224 $ 3,143,728 $ 5,356,417 $ 6,905,306

Series A preferred stock dividend declared ( 3,906 ) ( 3,906 )

Comprehensive income attributable to common shares $ 1,472,190 $ 759,082

See notes to unaudited consolidated financial statements.

5 unchanged sentences

Shares Amount Shares Amount Total equity

Balance at December 31, 2019 $ — 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

Balance at January 1, 2021 $ — 125 $ 125,000 19,487,460 $ 194,875 $ 373,443,672 $ ( 70,438,482 ) $ — $ 303,325,065

Distributions declared on common shares ($0.20 per share) — — — — — — ( 3,893,595 ) — ( 3,893,595 )

6 unchanged sentences

Balance at March 31, 2021 $ — 125 $ 125,000 19,487,460 $ 194,875 $ 373,443,672 $ ( 72,859,887 ) $ — $ 300,903,660

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

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

Distributions declared on common share ($0.20 per share) — — — — — — ( 4,033,127 ) — ( 4,033,127 )

Distributions declared on preferred shares — — — — — — ( 3,906 ) — ( 3,906 )

Comprehensive income:

Net income — — — — — — 2,143,130 — 2,143,130

Balance at September 30, 2020 $ — 125 $ 125,000 19,487,460 $ 194,875 $ 373,443,672 $ ( 66,428,577 ) $ — $ 307,334,970

See notes to unaudited consolidated financial statements .

Terra Property Trust, Inc.

Consolidated Statements of Changes in Equity (Continued)

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

2 unchanged sentences

Shares Amount Shares Amount Total equity

Balance at December 31, 2018 $ — 125 $ 125,000 14,912,990 $ 149,130 $ 298,109,424 $ ( 33,091,195 ) $ — $ 265,292,359

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

Distributions declared on common shares ($0.53 per share) — — — — — — ( 8,832,071 ) — ( 8,832,071 )

6 unchanged sentences

Balance at March 31, 2020 $ — 125 $ 125,000 19,700,151 $ 197,002 $ 377,061,545 $ ( 62,716,835 ) $ 184,025 $ 314,850,737

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 )

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

Issuance of common stock — — — 212,691 2,127 3,617,873 — 3,620,000

Distributions declared on common share ($0.51 per share) — — — — — — ( 7,568,342 ) — ( 7,568,342 )

Distributions declared on preferred shares — — — — — — ( 3,906 ) — ( 3,906 )

Comprehensive income:

Net income — — — — — — 3,147,634 — 3,147,634

Balance at September 30, 2019 $ — 125 $ 125,000 15,125,681 $ 151,257 $ 301,727,297 $ ( 48,937,147 ) $ — $ 253,066,407

See notes to unaudited consolidated financial statements .

1 unchanged sentence

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net income $ 1,476,096 $ 578,963

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

Adjustments to reconcile net income to net cash (used in) provided by operating

Paid-in-kind interest income, net ( 224,197 ) ( 80,116 )

1 unchanged sentence

Provision for loan losses 276,020 1,144,994

Impairment charge — 1,550,000

Lease termination fee income ( 236,000 ) —

Amortization of net purchase premiums on loans 15,348 11,112

5 unchanged sentences

Amortization of above-market rent ground lease ( 32,588 ) ( 32,587 )

Realized gains on marketable securities ( 1,160,162 ) —

Unrealized gains on marketable securities 14,608 —

Income from equity investment in a limited partnership ( 1,337,827 ) —

Changes in operating assets and liabilities:

6 unchanged sentences

Other liabilities ( 6,964 ) 222,194

Net cash provided by operating activities 6,225,486 12,958,955

Net cash (used in) provided by operating activities ( 1,757,148 ) 3,377,515

Cash flows from investing activities:

1 unchanged sentence

Proceeds from repayments of loans 31,531,804 13,371,565

Purchase of partnership interest in a limited partnership ( 12,907,725 ) —

Purchase of marketable securities ( 4,979,088 ) ( 3,354,442 )

Proceeds from sale of marketable securities — 48,073

Capital expenditures on real estate — ( 242,071 )

Net cash (used in) provided by investing activities ( 57,084,192 ) 32,841,524

Net cash used in investing activities ( 765,715 ) ( 28,311,252 )

Cash flows from financing activities:

Proceeds from borrowings under the term loan 1,469,656 —

Proceeds from borrowings under revolving credit facility 35,000,000 4,000,000

Proceeds from borrowings under repurchase agreement 22,860,134 51,290,313

Proceeds from issuance of common stock in the Merger 16,897,074 —

Proceeds from issuance of common stock to Terra Offshore Funds 8,600,000 —

Proceeds from borrowings under revolving line of credit 8,030,611 35,000,000

Repayments of obligations under participation agreements ( 3,962,509 ) —

Distributions paid ( 3,893,595 ) ( 8,832,071 )

Proceeds from secured borrowing 3,751,680 8,257,583

Proceeds from obligations under participation agreements 3,520,514 6,034,316

Repayment of borrowings under repurchase agreement ( 103,994,570 ) ( 34,200,000 )

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

Repayment of borrowings under revolving credit facility ( 10,000,000 ) ( 4,000,000 )

Proceeds from issuance of common stock — 3,620,000

Change in interest reserve and other deposits held on investments 7,475,137 5,160,013

Repayment of mortgage principal ( 3,423,245 ) ( 132,625 )

Change in interest reserve and other deposits held on investments ( 5,049,067 ) ( 2,286,740 )

Repayment of borrowings under the term loan ( 2,600,000 ) —

Payment of financing costs ( 641,446 ) ( 84,175 )

Repayments of obligations under participation agreements ( 557,778 ) ( 31,252,803 )

Net cash provided by (used in) financing activities 93,920,352 ( 13,653,193 )

Net increase in cash, cash equivalents and restricted cash 43,061,646 32,147,286

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

Proceeds from borrowings under repurchase agreement — 14,807,834

Proceeds from issuance of common stock in the Merger — 16,897,074

Proceeds from issuance of common stock to Terra Offshore REIT — 8,600,000

Net cash (used in) provided by financing activities ( 2,797,401 ) 74,865,456

Net (decrease) increase in cash, cash equivalents and restricted cash ( 5,320,264 ) 49,931,719

Cash, cash equivalents and restricted cash at beginning of period 32,920,323 50,549,700

3 unchanged sentences

Consolidated Statements of Cash Flows (Continued)

Nine Months Ended September 30,

Three Months Ended March 31,

Supplemental Disclosure of Cash Flows Information:

15 unchanged sentences

Due to Manager ( 50,694 )

Non-cash Proceeds from Issuance of Common Stock to Terra Offshore Funds

In addition, on March 2, 2020, the Company entered into two separate contribution agreements, one by and among the Company, Terra Offshore Funds REIT, LLC (formerly known as Terra International Fund 3 REIT, LLC) (the “Terra Offshore Funds”) and Terra Income Fund International, and another by and among the Company, Terra Offshore Funds and Terra Secured Income Fund 5 International, pursuant to which the Company issued an aggregate of 2,457,684.59 shares of common stock in exchange for the settlement of $ 32.1 million of participation interests in loans held by the Company, $ 8.6 million in cash, and other net working capital (“Issuance of Common Stock to Terra Offshore Funds”) ( Note 3 ).

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 Terra Offshore Funds:

Non-cash Proceeds from Issuance of Common Stock to Terra Offshore REIT

In addition, on March 2, 2020, the Company entered into two separate contribution agreements, one by and among the Company, Terra Offshore Funds REIT, LLC (the “Terra Offshore REIT”) and Terra Income Fund International, and another by and among the Company, Terra Offshore REIT and Terra Secured Income Fund 5 International, pursuant to which the Company issued an aggregate of 2,457,684.59 shares of common stock in exchange for the settlement of $ 32.1 million of participation interests in loans held by the Company, $ 8.6 million in cash, and other net working capital (“Issuance of Common Stock to Terra Offshore REIT”) ( Note 3 ).

Total Consideration

Equity issued to Terra Offshore Funds $ 40,749,378

Proceeds from equity issued to Terra Offshore Funds 8,600,000

Equity issued to Terra Offshore REIT $ 40,749,378

Proceeds from equity issued to Terra Offshore REIT 8,600,000

Net Assets exchanged

3 unchanged sentences

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

Terra Property Trust, Inc.

Consolidated Statements of Cash Flows (Continued)

Supplemental Non-Cash Investing Activities:

Lease Termination

In June 2020, the Company received a notice from a tenant occupying a portion of the office building that the Company acquired in July 2018 via foreclosure of their intention to terminate the lease ( Note 5 ).

The following table presents a summary of assets received and written off in connection with the lease termination effective September 4, 2020:

Lease Termination Fees:

Cash $ 142,620

Furniture & Fixture 236,000

Assets and Liabilities Write-offs:

In-place lease intangible assets $ 869,694

Below-market rent liabilities ( 616,392 )

Rent receivable 125,318

Deed in Lieu of Foreclosure

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 as of the date of the deed in lieu of foreclosure:

Carrying Value of First Mortgage

Loan held for investment $ 14,325,000

Interest receivable 439,300

Restricted cash applied against loan principal amount ( 60,941 )

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)

September 30, 2020

March 31, 2021

Terra Property Trust, Inc.

6 unchanged sentences

Upon receipt of the contribution of the consolidated portfolio of net assets from Terra Fund 5, the Company commenced its operations on January 1, 2016 .

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.

As of September 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 Terra Offshore Funds ( Note 3 ).

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 its 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.

As of March 31, 2021, 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 Terra Offshore 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.

1 unchanged sentence

The Company also operates its business in a manner that permits it to maintain its exclusion from registration under the Investment Company Act of 1940, as amended.

The Company’s investment activities are externally managed by Terra REIT Advisors, LLC (“Terra REIT Advisors” or the “Manager”), a subsidiary of the Company’s sponsor, Terra Capital Partners, LLC, pursuant to a management agreement (the “Management Agreement”), under the oversight of the Company’s board of directors ( Note 7 ).

The Company’s investment activities are externally managed by Terra REIT Advisors, LLC (“Terra REIT Advisors” or the “Manager”), a subsidiary of the Company’s sponsor, Terra Capital Partners, LLC (“Terra Capital Partners”), pursuant to a management agreement (the “Management Agreement”), under the oversight of the Company’s board of directors ( Note 8 ).

The Company does not currently have any employees and does not expect to have any employees.

Services necessary for the Company’s business are provided by individuals who are employees of the Manager or by individuals who were contracted by the Company or by the Manager to work on behalf of the Company pursuant to the terms of the Management Agreement.

On April 1, 2021, Mavik Capital Management, LP (“Mavik”), an entity controlled by Vikram S.

Uppal, the Chief Executive Officer of the Company, completed a series of related transactions that resulted in all of the outstanding interests in Terra Capital Partners, LLC, being acquired by Mavik for a combination of cash and interests in Mavik (the “Recapitalization”).

No amendments or other modifications were made to the Management Agreement in connection with the Recapitalization and the Manager and its personnel continue to serve as the external manager of the Company pursuant to the terms of the Management Agreement.

Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S.

GAAP”) and include all of the Company’s accounts and those of its consolidated subsidiaries.

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

All intercompany balances and transactions have been eliminated.

Principles of Consolidation

The consolidated financial statements include all of the Company’s accounts and those of its consolidated subsidiaries.

All significant intercompany balances and transactions have been eliminated in consolidation.

Certain prior period amounts have been reclassified to conform to the current period presentation.

The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest model.

The Company is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE.

If the Company determines it does not hold a variable interest in a VIE, it then applies the voting interest model.

Under the voting interest model, the Company consolidates an entity when it holds a majority voting interest in an entity.

Notes to Unaudited Consolidated Financial Statements

The Company accounts for investments in which it has significant influence but not a controlling financial interest using the equity method of accounting (see Note 5 ).

An entity is considered to be a VIE if any of the following conditions exist:

(a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) the holders of the equity investment at risk, as a group, lack either the direct or indirect ability through voting rights or similar rights to make decisions that have a significant effect on the success of the entity or the obligation to absorb the entity’s expected losses or right to receive the entity’s expected residual returns, or (c) the voting rights of some equity investors are disproportionate to their obligation to absorb losses of the entity, their rights to receive returns from an entity, or both and substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately few voting rights.

Under the VIE model, limited partnerships are considered VIE unless the limited partners hold substantive kick-out or participating rights over the general partner.

The Company consolidates entities that are VIEs when the Company determines it is the primary beneficiary.

Generally, the primary beneficiary of a VIE is a reporting entity that has (a) the power to direct the activities that most significantly affect the VIE’s economic performance, and (b) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.

Loans Held for Investment

3 unchanged sentences

Loans are carried at cost less allowance for loan losses.

Notes to Unaudited Consolidated Financial Statements

Allowance for Loan Losses

19 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:

Notes to Unaudited Consolidated Financial Statements

Risk Rating Description

7 unchanged sentences

Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

Equity Investment in a Limited Partnership

The Company accounts for its equity interest in a limited partnership under the equity method of accounting, i.e., at cost, increased or decreased by its share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting.

Marketable Securities

7 unchanged sentences

Under asset acquisition accounting, the costs to acquire real estate, including transaction costs, are accumulated and then allocated to individual assets and liabilities acquired based upon their relative fair value.

The Company allocates the purchase price of its real estate acquisitions to land, building,

Notes to Unaudited Consolidated Financial Statements

tenant improvements, acquired in-place leases, intangibles for the value of any above or below market leases at fair value and to any other identified intangible assets or liabilities.

The Company allocates the purchase price of its real estate acquisitions to land, building, tenant improvements, acquired in-place leases, intangibles for the value of any above or below market leases at fair value and to any other identified intangible assets or liabilities.

The Company amortizes the value allocated to in-place leases over the remaining lease term, which is reported in depreciation and amortization expense on its consolidated statements of operations.

9 unchanged sentences

Operating leases in which the Company is the lessee are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets.

Notes to Unaudited Consolidated Financial Statements

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease.

23 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:

10 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:

September 30, 2020 September 30, 2019

Notes to Unaudited Consolidated Financial Statements

March 31, 2021 March 31, 2020

Cash and cash equivalents $ 18,464,161 $ 82,163,055

10 unchanged sentences

The Company accounts for the borrowings as a term loan, which is carried at the contractual amount (cost), net of unamortized deferred financing fees.

Repurchase Agreement

The Company financed certain of its senior loans through repurchase transactions under a master repurchase agreement.

The Company accounted for the repurchase transactions as secured borrowing transactions, which are carried at their contractual amounts (cost), net of unamortized deferred financing fees.

Fair Value Measurements

United States generally accepted accounting principles (“U.S.

GAAP”) establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs.

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.

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, secured borrowing, mortgage loan payable and revolving line of credit.

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

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

Notes to Unaudited Consolidated Financial Statements

Deferred Financing Costs

9 unchanged sentences

federal and state income taxes at regular corporate rates.

As of September 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 nine months ended September 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.

As of March 31, 2021, 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 months ended March 31, 2021 and 2020.

Notes to Unaudited Consolidated Financial Statements

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 and nine months ended September 30, 2020 and 2019, the Company did not incur any interest or penalties.

For the three months ended March 31, 2021 and 2020, the Company did not incur any interest or penalties.

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

The Company’s inception-to-date federal tax returns remain subject to examination by the Internal Revenue Service.

The Company’s 2017-2019 federal tax returns remain subject to examination by the Internal Revenue Service.

Earnings Per Share

5 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.

As of September 30, 2020, there has been an ongoing 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.

The global impact of the outbreak 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 operations of non-essential offices and retail centers.

Such actions are creating disruption in global supply chains, and adversely impacting many industries.

The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown.

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 September 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 September 30, 2020 inherently less

Notes to Unaudited Consolidated Financial Statements

certain than they would be absent the current and potential impacts of COVID-19.

As of March 31, 2021, the outbreak of the coronavirus (“COVID-19”) pandemic around the globe continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets.

The COVID-19 pandemic and preventative measures taken by local, state and federal authorities to alleviate the public health crisis have had a continued and prolonged adverse impact on economic and market conditions and have caused a global economic slowdown which has had and could further have a material adverse effect on the Company’s results and financial condition.

The pandemic continues to evolve, and the full impact of COVID-19 on the real estate industry, the commercial real estate market, and the credit markets generally, and consequently on the Company’s financial condition and results of operations is uncertain and cannot be predicted at the current time as it depends on several factors beyond the control of the Company including, but not limited to, (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of the United States public health response, including the administration of vaccines throughout the United States (iii) the pandemic’s impact on the U.S.

and global economies, (iv) the timing, scope and effectiveness of governmental responses to the pandemic, including the PPP and other programs under the CARES Act, (v) the timing and speed of economic recovery, (vi) the availability of a treatment or vaccination for COVID-19, and (vii) the negative impact on our borrowers, real estate values and cost of capital.

The Company believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2021, however uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of March 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19.

Actual results may ultimately differ from those estimates.

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The Company meets the definition of a smaller reporting company under the regulation of the Securities and Exchange Commission.

As such, the Company will adopt this ASU and related amendments on January 1, 2023.

As such, the Company will adopt this

Notes to Unaudited Consolidated Financial Statements

ASU and related amendments on January 1, 2023.

Management is currently evaluating the impact this change will have on the Company’s consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”).

The objective of ASU 2018-13 is to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of information required by U.S.

The amendments in ASU 2018-13 added, removed and modified certain fair value measurement disclosure requirements.

ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.

All other amendments should be applied retrospectively to all periods presented upon their effective date.

The Company adopted ASU 2018-13 on January 1, 2020.

The adoption of ASU 2018-13 did not have a material impact on its consolidated financial statements and disclosures.

London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities.

At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR.

At the end of 2021, banks will no longer be required to report certain information that is used to determine LIBOR.

As a result, LIBOR could be discontinued.

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In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”).

The amendments in ASU 2020-04 provide companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued.

The provisions of optional relief include:

(i) contract modifications - account for the modification as a continuation of the existing contract without additional analysis;

(ii) hedging accounting - continue hedge accounting when certain critical terms of a hedging relationship change;

and (iii) held-to-maturity (HTM) debt securities - one-time sale and/or transfer to available for sale or trading may be made for HTM debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020.

Companies can apply the amendments in ASU 2020-04 immediately.

However, ASU 2020-04 will only be available for a limited time (generally through December 31, 2022).

The Company is currently evaluating the impact of the reference rate reform and ASU 2020-04 on its consolidated financial statements and disclosures.

Merger and Issuance of Common Stock to Terra Offshore Funds

The amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

In January 2021, the FASB issued ASU No.

2021-01, Reference Rate Reform (Topic 848), which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition (“ASU 2021-01”).

ASU 2020-04 and ASU 2021-01 are effective for all entities through December 31, 2022.

The expedients and exceptions provided by the amendments do not apply to contract modifications and hedging relationships entered into or evaluated after December 31, 2022, except for hedging transactions as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.

In the event LIBOR is unavailable, the Company’s investment documents provide for a substitute index, on a basis generally consistent with market practice, intended to put the Company in substantially the same economic position as LIBOR.

As a result, the Company does not expect the reference rate reform and the adoption of ASU 2020-04 and ASU 2021-01 to have a material impact on its consolidated financial statements and disclosures.

Merger and Issuance of Common Stock to Terra Offshore REIT

On February 28, 2020, the Company entered into the Merger Agreement pursuant to which TPT2 was merged with and into the Company, with the Company continuing as the surviving corporation, effective March 1, 2020.

In connection with the

Notes to Unaudited Consolidated Financial Statements

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 .

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.

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Total identifiable net assets $ 34,630,615

Notes to Unaudited Consolidated Financial Statements

The fair value of the 2,116,785.76 shares of the Company’s stock issued in the Merger as consideration paid for TPT2 was derived from the fair value per share of the Company as of December 31, 2019 as adjusted to reflect the change in the net working capital of the Company during the period from January 1, 2020 through March 1, 2020, the effective time of the Merger.

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Evans continuing as directors of the Company.

Issuance of Common Stock to Terra Offshore Funds

In addition, on March 2, 2020, the Company entered into two separate contribution agreements, one by and among the Company, Terra Offshore Funds and Terra Income Fund International, and another by and among the Company, Terra Offshore Funds and Terra Secured Income Fund 5 International, pursuant to which the Company issued 2,457,684.59 shares of common stock of the Company to Terra Offshore Funds in exchange for the settlement of $ 32.1 million of participation interests in loans also held by the Company, $ 8.6 million in cash and other net working capital.

Issuance of Common Stock to Terra Offshore REIT

In addition, on March 2, 2020, the Company entered into two separate contribution agreements, one by and among the Company, Terra Offshore REIT and Terra Income Fund International, and another by and among the Company, Terra Offshore REIT and Terra Secured Income Fund 5 International, pursuant to which the Company issued 2,457,684.59 shares of common stock of the Company to Terra Offshore REIT in exchange for the settlement of $ 32.1 million of participation interests in loans also held by the Company, $ 8.6 million in cash and other net working capital.

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

The fair value of the 2,457,684.59 shares of the Company’s stock issued in the transaction as consideration paid for Terra Offshore Funds 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 fair value of the 2,457,684.59 shares of the Company’s stock issued in the transaction as consideration paid for Terra Offshore 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.

Total Consideration

Equity issued to Terra Offshore Funds $ 40,749,378

Net Assets of Terra Offshore Funds Received

Equity issued to Terra Offshore REIT $ 40,749,378

Net Assets of Terra Offshore REIT Received

Investments through participation interest, at fair value $ 32,112,257

3 unchanged sentences

Total identifiable net assets $ 40,749,378

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

On April 29, 2020, the Company repurchased 212,691 shares of common stock at a price of $ 17.02 per share that the Company had previously sold to Terra Offshore REIT on September 30, 2019 ( Note 8 ).

Terra JV, LLC

Prior to the completion of the Merger and the Issuance of Common Stock to Terra Offshore Funds transactions described above, Terra Fund 5 owned approximately 98.6 % of the issued and outstanding shares of the Company’s common stock indirectly through its wholly owned subsidiary, Terra JV, of which Terra Fund 5 was the sole managing member, and the remaining issued and outstanding shares of the Company’s common stock were owned by Terra Offshore Funds.

Prior to the completion of the Merger and the Issuance of Common Stock to Terra Offshore REIT transactions described above, Terra Fund 5 owned approximately 98.6 % of the issued and outstanding shares of the Company’s common stock indirectly through its wholly owned subsidiary, Terra JV, of which Terra Fund 5 was the sole managing member, and the remaining issued and outstanding shares of the Company’s common stock were owned by Terra Offshore REIT.

As described above, the Company acquired TPT2 in the Merger and, in connection with such transaction, 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 amended and restated operating agreement of Terra JV, dated March 2, 2020 (the “JV Agreement”).

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On March 2, 2020, the Company, Terra Fund 5, Terra JV and Terra REIT Advisors also entered into the Amended and Restated Voting Agreement (the “Voting Agreement”), pursuant to which Terra Fund 5 assigned its rights and obligations under the Voting Agreement to Terra JV.

Consistent with the original voting agreement dated February 8, 2018, for the period that Terra REIT Advisors remains the external manager of 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.

As of September 30, 2020, Terra JV owns 87.4 % of the issued and outstanding shares of the Company’s common stock with the remainder held by Terra Offshore Funds, 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

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.

As of March 31, 2021, Terra JV owns 87.4 % of the issued and outstanding shares of the Company’s common stock with the remainder held by Terra Offshore 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

As discussed in Note 7 , in the normal course of business, the Company may enter into participation agreements with related parties, primarily other affiliated funds managed by the Manager, and to a lesser extent, unrelated parties.

The obligations under participation agreements were released as a result of the Merger and the Issuance of Common Stock to Terra Offshore Funds.

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

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 September 30, 2020 and December 31, 2019:

September 30, 2020 December 31, 2019

The following table provides a summary of the Company’s loan portfolio as of March 31, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

Fixed Rate Floating

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

Coupon rate shown was determined using LIBOR of 0.15 % and 1.76 % as of September 30, 2020 and December 31, 2019, respectively.

(2) As of September 30, 2020, amounts included $ 181.0 million of senior mortgages used as collateral for $ 105.9 million of borrowings under a term loan ( Note 8 ).

These borrowings bear interest at an annual rate of LIBOR plus 4.25 % with a LIBOR floor of 1.00 % as of September 30, 2020.

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

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 September 30, 2020 and December 31, 2019, eleven and twelve of these loans, respectively, are subject to a LIBOR floor.

Coupon rate shown was determined using LIBOR of 0.11 % and 0.14 % as of March 31, 2021 and December 31, 2020, respectively.

(2) As of March 31, 2021 and December 31, 2020, amounts included $ 183.7 million and $ 184.2 million of senior mortgages used as collateral for $ 106.5 million and $ 107.6 million of borrowings under a term loan, respectively ( Note 9 ).

As of March 31, 2021, amounts also included $ 11.9 million of senior mortgages used as collateral for $ 8.0 million of borrowings under a revolving line of credit.

Borrowings under the term loan bear interest at an annual rate of LIBOR plus 4.25 % with a LIBOR floor of 1.00 %.

Borrowings under the revolving line of credit bear interest at a minimum rate of 4.0 %.

(3) As of March 31, 2021 and December 31, 2020, eleven and twelve of these loans, respectively, are subject to a LIBOR floor.

Notes to Unaudited Consolidated Financial Statements

Lending Activities

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

The following table presents the activities of the Company’s loan portfolio for the three months ended March 31, 2021 and 2020:

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

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Provision for loan losses ( 276,020 ) — ( 276,020 )

Balance, September 30, 2020 $ 433,684,904 $ 4,296,001 $ 437,980,905

Notes to Unaudited Consolidated Financial Statements

Balance, March 31, 2021 $ 401,776,723 $ 4,292,148 $ 406,068,871

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

2 unchanged sentences

Principal repayments received ( 13,371,565 ) — ( 13,371,565 )

Foreclosure of collateral (2)

( 14,325,000 ) — ( 14,325,000 )

PIK interest (1)

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Accrual, payment and accretion of investment-related fees, net 202,793 15,174 217,967

( 2,132,701 ) 7,952 ( 2,124,749 )

Balance, September 30, 2019 $ 338,908,630 $ 1,975,543 $ 340,884,173

Provision for loan losses ( 1,144,994 ) — ( 1,144,994 )

Balance, March 31, 2020 $ 398,931,946 $ 4,037,567 $ 402,969,513

_______________

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

PIK interest related to obligations under participation agreements amounted to $ 1.1 million and $ 0.5 million for the nine months ended September 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 ).

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

PIK interest related to obligations under participation agreements amounted to $ 0.5 million and $ 0.2 million for the three months ended March 31, 2021 and 2020, respectively.

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 September 30, 2020 and December 31, 2019:

September 30, 2020 December 31, 2019

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, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

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

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Total $ 407,730,308 $ 406,068,871 100.0 % $ 424,174,758 $ 422,280,515 100.0 %

September 30, 2020 December 31, 2019

Notes to Unaudited Consolidated Financial Statements

March 31, 2021 December 31, 2020

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

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Multifamily 127,657,844 128,599,015 31.6 % 150,873,173 151,768,347 35.9 %

Hotel 62,340,215 62,724,439 14.3 % 46,598,011 46,731,939 12.3 %

Student housing 46,970,724 47,395,804 10.8 % 58,049,717 58,553,496 15.5 %

Hotel - full/select service 47,112,522 47,704,223 11.7 % 49,142,809 49,393,251 11.7 %

Mixed use 16,512,842 16,512,842 4.1 % 16,767,984 16,767,984 4.0 %

Infill land 10,669,168 10,768,255 2.7 % 10,442,567 10,537,512 2.5 %

Condominium 10,600,000 10,700,459 2.4 % 10,600,000 10,696,587 2.8 %

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

Hotel - extended stay 4,250,000 4,292,148 1.1 % 4,250,000 4,294,053 1.0 %

Student housing 3,000,000 3,189,700 0.8 % 3,000,000 3,204,375 0.8 %

Allowance for loan losses — ( 4,014,778 ) ( 1.0 ) % — ( 3,738,758 ) ( 0.9 ) %

Total $ 407,730,308 $ 406,068,871 100.0 % $ 424,174,758 $ 422,280,515 100.0 %

Notes to Unaudited Consolidated Financial Statements

September 30, 2020 December 31, 2019

During the first quarter of 2021, the Company reclassified the property types of collateral on certain loans to multifamily to better reflect the tenant mixed of each property.

Additionally, the Company categorized hotel properties further to hotel - full/selected service and hotel - extended stay.

The prior period amounts have been reclassified to conform to the current period presentation.

March 31, 2021 December 31, 2020

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

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Texas 3,890,140 3,929,042 1.0 % 3,848,712 3,887,200 0.9 %

Illinois 3,404,877 3,434,172 0.8 % 8,004,877 8,071,562 2.1 %

Kansas 3,098,139 3,124,794 0.7 % 6,200,000 6,251,649 1.7 %

12,025,714 12,322,440 2.8 % 4,095,123 4,367,531 1.2 %

South Carolina 3,000,000 3,189,700 0.8 % 3,000,000 3,204,375 0.8 %

Allowance for loan losses — ( 4,014,778 ) ( 1.0 ) % — ( 3,738,758 ) ( 0.9 ) %

Total $ 407,730,308 $ 406,068,871 100.0 % $ 424,174,758 $ 422,280,515 100.0 %

_______________

(1) Other includes $ 9.0 million and $ 1.1 million of the unused portion of a credit facility at September 30, 2020 and December 31, 2019, respectively.

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

September 30, 2020 December 31, 2019

Notes to Unaudited Consolidated Financial Statements

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, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

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

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_______________

(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.

(1) 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 September 30, 2020, the Company had five loans with a loan risk rating of “4” and recorded a general allowance for loan losses of $ 1.4 million.

Notes to Unaudited Consolidated Financial Statements

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

Nine Months Ended September 30,

As of March 31, 2021 and December 31, 2020, the specific allowance for loan losses on this loan was $ 2.7 million and $ 2.5 million, respectively, as a result of a decline in the fair value of the collateral.

As of March 31, 2021, the Company had three loans with a loan risk rating of “4” and one loan with a loan risk rating of “5”, which were unchanged from those as December 31, 2020, and recorded an additional general allowance for loan losses of $ 0.04 million for the three months ended March 31, 2021.

As of March 31, 2020, the Company had three loans with a loan risk rating of “4” and one loan with a loan risk rating of “5”, and recorded a general allowance for loan losses of $ 1.1 million for the three months ended March 31, 2020.

The following table presents the activity in the Company’s allowance for loan losses for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

Allowance for loan losses, beginning of period $ 3,738,758 $ —

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

As of March 31, 2021 and December 31, 2020, the Company had two and one loans that were in maturity default, respectively.

Additionally, for the three months ended March 31, 2021, the Company suspended interest income accrual of $ 0.7 million on two loans because recovery of such income was doubtful.

There was no suspension of such interest income for the three months ended March 31, 2020.

Equity Investment in a Limited Partnership

On August 3, 2020, the Company entered into a subscription agreement with Mavik Real Estate Special Opportunities Fund, LP (“Mavik RESOF”) (formerly known as Terra Real Estate Credit Opportunities Fund, LP) whereby the Company committed to fund up to $ 50.0 million to purchase a limited partnership interest in Mavik RESOF.

Mavik RESOF ’s primary investment objective is to generate attractive risk-adjusted returns by purchasing performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets.

Mavik RESOF may also opportunistically originate high-yield mortgages or loans in real estate special situations including rescue financings, bridge loans, restructurings and bankruptcies (including debtor-in-possession loans).

The general partner of Mavik RESOF is Mavik Real Estate Special Opportunities Fund GP, LLC (formerly known as Terra Real Estate Credit Opportunities Fund GP, LLC) ,

Notes to Unaudited Consolidated Financial Statements

which is a subsidiary of the Company’s sponsor, Terra Capital Partners .

As of March 31, 2021 and December 31, 2020, the unfunded commitment was $ 1.3 million and $ 14.1 million, respectively.

The Company evaluated its equity interest in Mavik RESOF and determined it does not have a controlling financial interest and is not the primary beneficiary.

Accordingly, the equity interest in Mavik RESOF is accounted for as an equity method investment.

As of March 31, 2021 and December 31, 2020, the Company owned 83.5 % and 90.3 % of equity interest in Mavik RESOF, respectively.

As of March 31, 2021 and December 31, 2020, the carrying value of the Company ’ s investment in MAVIK RESOF was $ 50.5 million and $ 36.3 million, respectively.

For the three months ended March 31, 2021, the Company recorded equity income from Mavik RESOF of $ 1.3 million and did not receive any distributions from Mavik RESOF.

There was no such equity income recorded or distributions received for the three months ended March 31, 2020.

In connection with the equity investment in Mavik RESOF, the Company paid origination fees to the Manager totaling $ 0.5 million, to be amortized to equity income on a straight-line basis over the life of Mavik RESOF.

The following tables present summarized financial information of the Company’s equity investment in Mavik RESOF.

Amounts provided are the total amounts attributable to the investment and do not represent the Company’s proportionate share:

March 31, 2021 December 31, 2020

Investments at fair value (cost of $63,791,529 and $44,174,031) $ 64,371,103 $ 44,715,979

Other assets 7,706,409 5,331,840

Total assets 72,077,512 50,047,819

Obligations under participation agreement (proceeds of $6,295,100 and $6,295,100) 6,349,884 6,347,478

Other liabilities 5,974,566 4,204,147

Total liabilities $ 12,324,450 $ 10,551,625

Partners’ capital $ 59,753,062 $ 39,496,194

Three Months Ended March 31,

Total investment income $ 2,042,100 $ —

Total expenses 471,212 —

Net investment income 1,570,888 —

Unrealized appreciation on investments 53,697 —

Net increase in partners' capital resulting from operations $ 1,624,585 $ —

Real Estate Owned, Net

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In connection with the lease termination effective September 4, 2020, the Company received from the tenant lease termination fee of $ 0.4 million, which included approximately $ 0.2 million of cash and $ 0.2 million of the furniture and fixtures in the office space.

The furniture and fixtures have a remaining useful life of 2.5 year life and is being depreciated on a straight-line basis over the remaining useful life.

The furniture and fixtures have a remaining useful life of 2.5 years and are being depreciated on a straight-line basis over the remaining useful life.

Additionally, the Company wrote off the related unamortized in-place lease intangible assets of $ 0.9 million, unamortized below-market rent intangible liabilities of $ 0.6 million and rent receivable of $ 0.1 million.

There was no gain or loss recognized on the lease termination.

2019 — On January 9, 2019, the Company acquired 4.9 acres of adjacent land encumbering a first mortgage via deed in lieu of foreclosure in exchange for the payment of the first mortgage and related fees and expenses.

The following table summarizes the carrying value of the first mortgage prior to the deed in lieu of foreclosure on January 9, 2019:

Carrying Value of First Mortgage

Loan held for investment $ 14,325,000

Interest receivable 439,300

Restricted cash applied against loan principal amount ( 60,941 )

The table below summarizes the allocation of the estimated fair value of the real estate acquired on January 9, 2019 based on the policy described in Note 2 :

Assets Acquired

Real estate owned:

Land $ 14,703,359

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

For the nine months ended September 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

2 unchanged sentences

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

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

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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 September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Real estate operating revenues:

11 unchanged sentences

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

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

Notes to Unaudited Consolidated Financial Statements

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.

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.

6 unchanged sentences

The result of the lease classification test indicated that the tenant leases and the ground lease shall be classified as operating leases on the date of foreclosure.

On January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective transition approach and chose not to adjust comparable periods ( Note 2 ).

The Company elected to use the package of practical expedients for its existing leases whereby the Company did not need to reassess whether a contract is or contains a lease, lease classification and initial direct costs.

As a result, the leases continue to be classified as operating leases under ASC 842, Leases .

The adoption of ASU 2016-02 did not have any impact on the tenant leases;

however, for the ground lease, the Company recognized $ 16.1 million of both operating lease right-of-use assets and operating lease liabilities on its consolidated balance sheets.

No cumulative effect adjustment was recorded because there was no change to operating lease cost.

In addition, as of January 1, 2019, the Company had $ 0.5 million of unamortized leasing commission (initial direct costs) on the tenant leases.

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

Scheduled Future Minimum Rent Income

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

Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, under non-cancelable operating leases at March 31, 2021 are as follows:

Years Ending December 31, Total

2020 (October 1 through December 31) $ 1,709,310

2021 (April 1 through December 31) $ 4,919,262

2022 7,132,812

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Scheduled Annual Net Amortization of Intangibles

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

Based on the intangible assets and liabilities recorded at March 31, 2021, 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)

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Decrease in Rent Expense (1)

2020 (October 1 through December 31) $ ( 84,555 ) $ 515,515 $ ( 32,587 ) $ 398,373

2021 (April 1 through December 31) $ ( 253,665 ) $ 1,546,545 $ ( 97,761 ) $ 1,195,119

2022 ( 338,220 ) 2,062,060 ( 130,348 ) 1,593,492

4 unchanged sentences

Total $ ( 1,469,844 ) $ 9,163,970 $ ( 8,548,674 ) $ ( 854,548 )

Notes to Unaudited Consolidated Financial Statements

_______________

2 unchanged sentences

and amortization of above-market ground lease is recorded as a reduction to rent expense.

Notes to Unaudited Consolidated Financial Statements

Supplemental Ground Lease Disclosures

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Operating lease

4 unchanged sentences

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Operating lease cost $ 316,125 $ 316,125

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

Nine Months Ended September 30,

Three Months Ended March 31,

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

4 unchanged sentences

Years Ending December 31, Operating Lease

2020 (October 1 through December 31) (Year of rent reset) $ 316,125

2021 (April 1 through December 31) $ 948,375

2022 1,264,500

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ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring investments at fair value.

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

Notes to Unaudited Consolidated Financial Statements

market participants).

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

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

Notes to Unaudited Consolidated Financial Statements

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

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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.

As of September 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, term loan payable, mortgage loan payable, repurchase agreement payable and revolving credit facility payable.

As of March 31, 2021 and December 31, 2020, 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, secured borrowing, term loan payable, mortgage loan payable and revolving line of credit.

Such financial instruments are carried at cost, less impairment or less net deferred costs, where applicable.

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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 September 30, 2020, according to the fair value hierarchy:

September 30, 2020

The following tables present fair value measurements of marketable securities, by major class, as of March 31, 2021 and December 31, 2020, according to the fair value hierarchy:

March 31, 2021

Fair Value Measurements

4 unchanged sentences

Total $ 6,251,980 $ — $ — $ 6,251,980

December 31, 2020

Fair Value Measurements

Level 1 Level 2 Level 3 Total

Marketable Securities:

Equity securities $ 1,287,500 $ — $ — $ 1,287,500

Debt securities — — — —

Total $ 1,287,500 $ — $ — $ 1,287,500

Notes to Unaudited Consolidated Financial Statements

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

Nine Months Ended September 30,

Three Months Ended March 31,

Beginning balance $ 1,287,500 $ —

1 unchanged sentence

Proceeds from sale — ( 48,073 )

Realized gains on marketable securities 1,160,162 —

Unrealized gains on marketable securities 28,995 —

Reclassification of net realized gains on marketable securities into earnings — ( 8,894 )

Unrealized (losses) gains on marketable securities ( 14,608 ) 192,919

Ending balance $ 6,251,980 $ 3,490,394

1 unchanged sentence

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:

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

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

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Mortgage loan payable 3 40,596,980 40,728,560 40,899,901 44,020,225 44,117,293 44,348,689

Repurchase agreement payable 3 — — — 81,134,436 79,608,437 81,134,436

Revolving credit facility

Secured borrowing 3 22,033,529 21,983,096 20,800,526 18,281,848 18,187,663 17,037,032

Revolving line of credit

payable 3 8,030,611 7,407,536 8,030,611 — — —

Total liabilities $ 248,391,983 $ 245,967,816 $ 246,646,942 $ 241,152,827 $ 239,132,654 $ 239,327,483

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 September 30, 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 March 31, 2021 and December 31, 2020 due to their short-term nature.

Valuation Process for Fair Value Measurement

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the portfolio company’s ability to make payments, net operating income and debt-service coverage ratio;

construction progress reports and construction

Notes to Unaudited Consolidated Financial Statements

budget analysis;

construction progress reports and construction budget analysis;

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.

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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.

The fair values of the Company’s mortgage loan payable, repurchase agreement payable, term loan 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 September 30, 2020 and December 31, 2019.

The fair values of the Company’s mortgage loan payable, secured borrowing, term loan payable and revolving line of credit 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, 2021 and December 31, 2020.

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

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

Fair Value at March 31, 2021 Primary Valuation Technique Unobservable Inputs March 31, 2021

Asset Category Minimum Maximum Weighted Average

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Mortgage loan payable 40,899,901 Discounted cash flow Discount rate 6.08 % 6.08 % 6.08 %

Revolving credit facility payable 25,000,000 Discounted cash flow Discount rate 6.00 % 6.00 % 6.00 %

Secured borrowing 20,800,526 Discounted cash flow Discount rate 11.24 % 11.24 % 11.24 %

Revolving line of credit 8,030,611 Discounted cash flow Discount rate 4.00 % 4.00 % 4.00 %

Total Level 3 Liabilities $ 246,646,942

2 unchanged sentences

Loans held for investment, net $ 415,113,225 Discounted cash flow Discount rate 5.29 % 20.05 % 10.38 %

Loans held for investment acquired

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

Loans held for investment acquired through

participation, net 4,293,969 Discounted cash flow Discount rate 12.89 % 12.89 % 12.89 %

Total Level 3 Assets $ 419,407,194

Term loan payable $ 107,248,555 Discounted cash flow Discount rate 5.25 % 5.25 % 5.25 %

Obligations under Participation Agreements 70,693,207 Discounted cash flow Discount rate 9.75 % 20.05 % 12.58 %

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 %

Mortgage loan payable 44,348,689 Discounted cash flow Discount rate 6.08 % 6.08 % 6.08 %

Secured borrowing 17,037,032 Discounted cash flow Discount rate 11.25 % 11.25 % 11.25 %

Total Level 3 Liabilities $ 239,327,483

3 unchanged sentences

The Management Agreement runs co-terminus with the amended and restated operating agreement for Terra Fund 5, which is scheduled to terminate on December 31, 2023 unless Terra Fund 5 is dissolved earlier.

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:

Notes to Unaudited Consolidated Financial Statements

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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,

Origination and extension fee expense (1)

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Origination and Extension Fee Expense

Pursuant to the Management Agreement, the Manager or its affiliates receives an origination fee in the amount of 1 % of the amount used to originate, fund, acquire or structure real estate-related loans, including any third-party expenses related to such loans.

Pursuant to the Management Agreement, the Manager or its affiliates receives an origination fee in the amount of 1 % of the amount used to originate, fund, acquire or structure real estate-related investments, including any third-party expenses related to such loans.

In the event that the term of any real estate-related loan held by the Company is extended, the Manager also receives an extension fee equal to the lesser of (i) 1 % of the principal amount of the loan being extended or (ii) the amount of fee paid to the Company by the borrower in connection with such extension.

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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 September 30, 2020 and 2019, the Company has not received any breakup fees.

As of March 31, 2021 and December 31, 2020, the Company has not received any breakup fees.

Operating Expenses

2 unchanged sentences

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

debt-related loan prior to such transaction or (ii) the amount of the fee paid by the borrower in connection with such transaction.

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 and nine months ended September 30, 2020, the Company made distributions to Terra Fund 5, Terra JV and Terra Offshore Funds in the aggregate of $ 4.0 million and $ 17.3 million, respectively, of which $ 1.9 million and $ 12.0 million were returns of capital, respectively ( Note 10 ).

For the three and nine months ended September 30, 2019, the Company made distributions to Terra Fund 5 totaling $ 7.6 million and $ 22.8 million, respectively, of which $ 4.6 million and $ 15.8 million were returns of capital, respectively ( Note 10 ).

For the three months ended March 31, 2021 and 2020, the Company made distributions to Terra 5, Terra JV and Terra Offshore REIT totaling $ 3.9 million and $ 8.8 million, respectively, of which $ 2.4 million and $ 8.3 million were returns of capital, respectively ( Note 11 ).

Due to Manager

As of September 30, 2020 and December 31, 2019, approximately $ 1.5 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 Terra Offshore Funds

As of March 31, 2021 and December 31, 2020, approximately $ 1.7 million and $ 1.3 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 Terra Offshore REIT

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

In connection with the Merger, the Company issued 2,116,785.76 shares of common stock of the Company to Terra Fund 7, the sole stockholder of TPT2, as consideration in the Merger.

In addition, on March 2, 2020, Terra Offshore Funds contributed cash and released obligations under the participation agreements to the Company ( Note 3 ) in exchange for the issuance of 2,457,684.59 shares of common stock of the Company.

In addition, on March 2, 2020, Terra Offshore REIT contributed cash and released obligations under the participation agreements to the Company ( Note 3 ) in exchange for the issuance of 2,457,684.59 shares of common stock of the Company.

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.

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.

Terra Real Estate Credit Opportunities Fund, L.P.

On August 3, 2020, the Company entered into a subscription agreement with Terra Real Estate Credit Opportunities Fund, L.P.

(“Terra Opportunities Fund”) whereby the Company committed to fund up to $ 50.0 million to purchase limited partnership interests in Terra Opportunities Fund.

Terra Opportunities F und’s primary investment objective is to generate attractive risk-adjusted returns by purchasing secondary performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets.

Terra Opportunities Fund may also opportunistically originate high-yield mortgages or loans in real estate special situations including rescue financings, bridge loans, restructurings and bankruptcies (including debtor-in-possession loans).

The general partner of Terra Opportunities Fund is Terra Real Estate Credit Opportunities Fund GP, LLC , which is a subsidiary of the Company’s sponsor, Terra Capital Partners, LLC .

As of September 30, 2020, none of the commitment has been drawn.

On November 5, 2020, the Company funded $ 3.6 million of the commitment.

Mavik Real Estate Special Opportunities Fund, LP

On August 3, 2020, the Company entered into a subscription agreement with Mavik RESOF whereby the Company committed to fund up to $ 50.0 million to purchase limited partnership interests in Mavik RESOF.

For more information on this investment, please see Note 5 .

Terra International Fund 3, L.P.

On September 30, 2019, the Company entered into a Contribution and Repurchase Agreement with Terra International Fund 3, L.P.

(“Terra International 3”) and Terra Offshore Funds, a wholly-owned subsidiary of Terra International 3.

Pursuant to this agreement, Terra International 3, through Terra Offshore Funds, contributed cash in the amount of $ 3.6 million to the Company in exchange for 212,691 shares of common stock, at a price of $ 17.02 per share.

In addition, Terra International 3 agreed to contribute to the Company future cash proceeds, if any, raised from time to time by it, and the Company agreed to issue shares of common stock to International Fund 3 in exchange for any such future cash proceeds, in each case pursuant to and in accordance with the terms and conditions specified in the agreement.

The shares were issued in a private placement in reliance on Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder.

Under Cayman securities law, when there is a change in the terms of the offering, previously admitted partners have rights to rescind their subscription.

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

Notes to Unaudited Consolidated Financial Statements

commission structure and to provide for a dividend reinvestment plan.

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 Terra Offshore Funds on September 30, 2019.

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

On September 30, 2019, Terra International Fund 3, L.P.

(“Terra International 3”), through Terra Offshore REIT, a wholly-owned subsidiary of Terra International 3, contributed cash in the amount of $ 3.6 million to the Company in exchange for 212,691 shares of common stock, at a price of $ 17.02 per share.

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 Terra Offshore REIT on September 30, 2019.

Participation Agreements

6 unchanged sentences

Participation Interests Purchased by the Company

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

The below table lists the loan interests participated in by the Company via PAs as of March 31, 2021 and December 31, 2020.

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.

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

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

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

As of September 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 September 30, 2020 and December 31, 2019:

The following tables summarize the loans that were subject to PAs with affiliated entities as of March 31, 2021 and December 31, 2020:

Transfers Treated as Obligations Under Participation Agreements as of

September 30, 2020

Principal Balance Carrying Value % Transferred Principal Balance (6)

Carrying Value (6)

March 31, 2021

Principal Balance Carrying Value % Transferred Principal Balance Carrying Value

14th & Alice Street Owner, LLC (1)

2 unchanged sentences

55,327,153 55,355,545 35.00 % 19,364,504 19,364,504

City Gardens 333 LLC (2)

28,021,972 28,029,531 14.00 % 3,923,077 3,924,079

NB Private Capital, LLC (2)

20,228,730 20,402,772 16.67 % 3,371,455 3,400,462

Orange Grove Property Investors, LLC (2)

6 unchanged sentences

23,500,000 23,688,144 21.28 % 5,000,000 5,040,031

TSG-Parcel 1, LLC (2)

$ 145,636,699 $ 146,424,807 $ 71,276,756 $ 71,613,358

Windy Hill PV Five CM, LLC (5)

22,580,720 22,439,678 69.11 % 15,604,562 15,461,569

$ 222,559,730 $ 223,500,796 $ 89,029,775 $ 89,232,590

Notes to Unaudited Consolidated Financial Statements

Transfers Treated as Obligations Under Participation Agreements as of

December 31, 2020

Principal Balance Carrying Value % Transferred Principal Balance (6)

Carrying Value (6)

Principal Balance Carrying Value % Transferred Principal Balance Carrying Value

14th & Alice Street Owner, LLC (1)

$ 32,625,912 $ 32,877,544 80.00 % $ 26,100,729 $ 26,211,548

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)

53,874,507 53,912,363 35.00 % 18,856,078 18,856,077

Owner LLC (1)(7)

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

City Gardens 333 LLC (2)

28,303,628 28,307,408 14.00 % 3,962,509 3,963,010

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)

2 unchanged sentences

8,544,513 8,629,929 50.00 % 4,272,257 4,314,965

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)

2 unchanged sentences

23,500,000 23,682,536 21.28 % 5,000,000 5,038,837

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

$ 167,891,127 $ 168,649,216 $ 71,266,303 $ 71,581,897

________________

(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.

(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.

(1) Participant is a third-party.

(6) Amounts transferred may not agree to the proportionate share of the principal balance and fair value due to the rounding of percentage transferred.

(7) As discussed in Note 3 , in March 2020, the Company settled an aggregate of $ 49.8 million of participation interests in loans held by the Company with TPT2 and Terra Offshore Funds, which Terra Offshore Funds received from Terra Secured Income Fund 5 International and Terra Income Fund International.

In connection with the Merger and the Issuance of Common Stock to Terra Offshore Funds, the related participation obligations were settled.

(2) Participant is Terra Fund 6, an affiliated fund advised by Terra Income Advisors, LLC, an affiliate of the Company’s sponsor and Manager.

These investments are held in the name of the Company, but each of the Participant’s rights and obligations, including interest income and other income ( e.g.

1 unchanged sentence

, disposition fees, asset management and asset servicing fees), are based upon their respective pro rata participation interest in such participated investments, as specified in the respective PA.

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.

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).

1 unchanged sentence

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

In January 2018, the Company and Terra Fund 6 co-invested in an $ 8.9 million mezzanine loan that bears interest at an annual fixed rate of 12.75 % and matured on March 31, 2019.

In March 2019, the maturity of this loan was extended to July 1, 2019.

In June 2019, the maturity of this loan was further extended to September 30, 2019.

In August 2019, the loan was repaid in full.

Notes to Unaudited Consolidated Financial Statements

Secured Borrowing

In March 2020, the Company 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 under ASC 860 and therefore, the gross amount of the loan remains in the consolidated balance sheets and the proceeds are recorded as secured borrowing.

For the loan for which a portion is transferred, the interest earned on the entire loan balance is recorded within “ Interest income ” and the interest related to the transferred interest is recorded within “ Interest expense on secured borrowing ” in the consolidated statements of operations.

The following table summarizes the loan that was transferred to a third-party that was accounted for as secured borrowing as of March 31, 2021 and December 31, 2020:

Transfers Treated as Secured Borrowing as of March 31, 2021

Principal Balance Carrying Value % Transferred Principal Balance Carrying Value

Windy Hill PV Five CM, LLC $ 31,883,812 $ 31,936,652 69.11 % $ 22,033,529 $ 21,983,096

$ 31,883,812 $ 31,936,652 $ 22,033,529 $ 21,983,096

Transfers Treated as Secured Borrowing as of December 31, 2020

Principal Balance Carrying Value % Transferred Principal Balance Carrying Value

Windy Hill PV Five CM, LLC $ 26,454,910 $ 26,407,494 69.11 % $ 18,281,848 $ 18,187,663

$ 26,454,910 $ 26,407,494 $ 18,281,848 $ 18,187,663

Revolving Line of Credit

On March 12, 2021, Terra Mortgage Portfolio II, LLC, an indirect wholly-owned subsidiary of the Company, entered into a Business Loan and Security Agreement (the “Revolving Line of Credit”) with Western Alliance Bank (“WAB”) to provide for advances up to the lesser of $ 75.0 million or the amount determined by the borrowing base, which is based on the eligible assets pledged to the lender.

Borrowings under the Revolving Line of Credit bear interest at an annual rate of LIBOR + 3.25 % with a combined floor of 4.0 % per annum.

The Revolving Line of Credit matures on March 12, 2023 with an annual 12-month extension available at the Company’s option, which are subject to certain conditions.

In connection with the Revolving Line of Credit, the Company entered into a limited guaranty (the “Guaranty”) in favor of WAB, pursuant to which the Company will guarantee the payment of up to 25 % of the amount outstanding under the Revolving Line of Credit.

Under the Revolving Line of Credit and the Guaranty, the Company will be required to maintain (i) a minimum total net worth of $ 250.0 million;

(ii) a $ 2.0 million quarterly operating profit, as defined within the agreement;

and (iii) a ratio of total debt to total net worth of no more than 2.50 to 1.00.

As of March 31, 2021, the Company is in compliance with these covenants.

The Revolving Line of Credit contains terms, conditions, covenants, and representations and warranties that are customary and typical for a transaction of this nature.

The Revolving Line of Credit contains various affirmative and negative covenants, including maintenance of a debt to total net worth ratio and limitations on the incurrence of liens and indebtedness, loans, distributions, change of management and ownership, changes in the nature of business and transactions with affiliates.

The Revolving Line of Credit also includes customary events of default, including a cross-default provision applicable to debt obligations of Terra Mortgage Portfolio II, LLC or the Company.

The occurrence of an event of default may result in termination of the Revolving Line of Credit and acceleration of amounts due under the Revolving Line of Credit.

In connection with the closing of the Revolving Line of Credit, the Company pledged a $ 11.9 million first mortgage to the borrowing base and drew down $ 8.0 million on the Revolving Line of Credit.

The Company also incurred financing fees of $ 0.6 million in connection with the Revolving Line of Credit, to be amortized to interest expense over the life of the Revolving Line of Credit.

The following tables present detailed information with respect to each borrowing under the Revolving Line of Credit as of March 31, 2021:

March 31, 2021

Borrowing Base Borrowings Under the Revolving Line of Credit

Principal Amount Carrying Value Fair

870 Santa Cruz, LLC $ 11,867,818 $ 11,863,875 $ 11,979,443 $ 8,030,611

$ 11,867,818 $ 11,863,875 $ 11,979,443 $ 8,030,611

For the three months ended March 31, 2021, the Company received proceeds from the Revolving Line of Credit of $ 8.0 million and did not make any repayments.

On September 3, 2020, Terra Mortgage Capital I, LLC (the “Issuer” or the “Seller”), a special-purpose indirect wholly-owned subsidiary of the Company, entered into an Indenture and Credit Agreement (the “Indenture and Credit Agreement”) with Goldman Sachs Bank USA, as initial lender (“Goldman”) and Wells Fargo Bank, National Association, as the trustee, custodian, collateral agent, loan agent and note administrator (“Wells Fargo”).

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Failure to satisfy such maintenance covenants would constitute an event of default under the Indenture and Credit Agreement.

As of September 30, 2020, the Company is in compliance with these covenants.

As of March 31, 2021 and December 31, 2020, the Company is in compliance with these covenants.

The Term Loan is secured by first-priority security interests in substantially all of the assets of the Issuer, including all of the Mortgage Assets (other than excluded property and subject to certain permitted liens), including specified cash accounts that include the accounts into which Mortgage Asset proceeds are or will be paid.

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Upon the occurrence of a Term Loan Principal Trigger Event (as defined below), 100% of the payment of the principal proceeds are applied to the Term Loan principal after payment of certain fees and other amounts as described in the Indenture and Credit Agreement.

A “Term Loan Principal Trigger Event” means as of any date of determination, an event that will be deemed to

Notes to Unaudited Consolidated Financial Statements

have occurred on the first date on which the aggregate principal balance of the Mortgage Assets is less than or equal to the product of (x) 75% multiplied by (y) the aggregate principal balance of the Mortgage Assets as of the closing date, plus any future advances made on such Mortgage Assets prior to such date of determination.

As of September 30, 2020, there was no Term Loan Principal Trigger Event.

A “Term Loan Principal Trigger Event” means as of any date of determination, an event that will be deemed to have occurred on the first date on which the aggregate principal balance of the Mortgage Assets is less than or equal to the product of (x) 75% multiplied by (y) the aggregate principal balance of the Mortgage Assets as of the closing date, plus any future advances made on such Mortgage Assets prior to such date of determination.

As of March 31, 2021 and December 31, 2020, there was no Term Loan Principal Trigger Event.

The Class B Notes and the Term Loan are redeemable by the Issuer upon the occurrence of certain tax events in accordance with the terms and provisions of the Indenture and Credit Agreement.

The following tables present detailed information with respect to each borrowing under the Term Loan as of September 30, 2020:

September 30, 2020

The following tables present detailed information with respect to each borrowing under the Term Loan as of March 31, 2021 and December 31, 2020:

March 31, 2021

Mortgage Assets Borrowings Under the Term Loan (1)(2)

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$ 183,688,997 $ 184,934,583 $ 184,901,271 $ 106,454,107

December 31, 2020

Mortgage Assets Borrowings Under the Term Loan (1)(2)

Principal Amount Carrying Value Fair

330 Tryon DE LLC $ 22,800,000 $ 22,901,294 $ 22,869,879 $ 13,680,000

1389 Peachtree St, LP;

1401 Peachtree St, LP;

1409 Peachtree St, LP 50,808,453 51,068,554 50,982,247 29,897,848

AGRE DCP Palm Springs, LLC 45,294,097 45,506,051 45,519,030 24,894,939

MSC Fields Peachtree Retreat, LLC 23,308,334 23,437,198 23,428,860 13,985,001

Patrick Henry Recovery Acquisition, LLC 18,000,000 18,039,456 17,994,495 10,800,000

University Park Berkeley, LLC 23,990,786 24,131,808 24,162,710 14,326,663

$ 184,201,670 $ 185,084,361 $ 184,957,221 $ 107,584,451

(1) Borrowings under the Term Loan bear interest at LIBOR plus 4.25 % with a LIBOR floor of 1.00 %, or 5.25 % as of September 30, 2020 using LIBOR of 0.15 %.

_______________

(1) Borrowings under the Term Loan bear interest at LIBOR plus 4.25 % with a LIBOR floor of 1.00 %, or 5.25 % as of both March 31, 2021 and December 31, 2020, using LIBOR of 0.11 % and 0.14 %, respectively.

(2) The maturity of the Term Loan is March 14, 2025 , however the maturity of each borrowing under the Term Loan matches the maturity of the respective Mortgage Asset.

For the three months ended March 31, 2021, the Company received proceeds from borrowings under the Term Loan of $ 1.5 million and made repayment of $ 2.6 million.

As of March 31, 2021, the remaining amount for Committed Advances and discretionary advances was $ 0.8 million and $ 8.3 million, respectively.

Repurchase Agreement

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In addition, Goldman unconditionally released the Company from, and terminated, the Guarantee Agreement in favor of Goldman, dated as of December 12, 2018, which provided for the guarantee by the Company of the obligations of the Issuer under the Master Repurchase Agreement, subject to certain exceptions and limitations.

Notes to Unaudited Consolidated Financial Statements

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

In addition, the Guarantee Agreement contained financial covenants, which required the Company to maintain:

(i) liquidity of at least 10 % of the then-current outstanding amount under the Master Repurchase Agreement;

(ii) cash liquidity of at least the greater of $ 5 million or 5 % of the then-current outstanding amount under the Master Repurchase Agreement;

(iii) tangible net worth at an amount equal to or greater than 75 % of the Company’s tangible net worth as of December 12, 2018, plus 75 % of new capital contributions thereafter;

(iv) an EBITDA to interest expense ratio of not less than 1.50 to 1.00;

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

As of December 31, 2019, the Company was 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 were being amortized to interest expense over the term of the facility.

In connection with the termination of the Master Repurchase Agreement, the remaining $ 0.5 million of unamortized deferred financing costs were carried over to the Term Loan to be amortized over the term of the Term Loan.

As of December 31, 2019, unamortized deferred financing costs were $ 1.5 million.

The following table presents summary information with respect to the Company’s outstanding borrowing under the Master Repurchase Agreement as of December 31, 2019:

December 31, 2019

Arrangement Weighted

Amount Outstanding Amount

Available Weighted

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

_______________

(1) Amount is calculated using LIBOR of 1.76 % as of December 31, 2019.

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

Each transaction under the facility has its own specific term.

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 table presents detailed information with respect to each borrowing under the Master Repurchase Agreement as of December 31, 2019:

December 31, 2019

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;

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

For the nine months ended September 30, 2020 and 2019, the Company borrowed $ 22.9 million and $ 51.3 million under the Master Repurchase Agreement, respectively, for the financing of new and follow-on investments, and made repayments of $ 104.0 million and $ 34.2 million, respectively.

Notes to Unaudited Consolidated Financial Statements

For the three months ended March 31, 2020, the Company received proceeds from borrowings under the Master Repurchase Agreement of $ 14.8 million and made repayments of $ 3.4 million.

Revolving Credit Facility

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

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

The Revolving Credit Facility was amended to extend the maturity to September 3, 2020.

The Company is currently negotiating with the lender to extend the maturity of the Revolving Credit Facility by a year and the lender has waived the maturity default.

In connection with obtaining the Revolving Credit Facility, the Company incurred deferred financing costs of $ 0.3 million, which was amortized over the original term of the facility.

As of September 30, 2020, the amount outstanding under the Revolving Credit Facility was $ 25.0 million.

The Revolving Credit Facility requires the Company to maintain:

(i) an EBITDA to interest expense ratio of not less than 1.00 ;

(ii) cash liquidity of at least $ 7.0 million;

(iii) tangible net worth of at least $ 200.0 million;

and (iii) a total indebtedness to tangible net worth ratio of not more than 1.75 to 1.00.

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

For the nine months ended September 30, 2020 and 2019, the Company borrowed $ 35.0 million and $ 4.0 million under the Revolving Credit Facility, respectively, and made repayments of $ 10.0 million and $ 4.0 million, respectively.

The Revolving Credit Facility was amended to extend the maturity to October 2, 2020.

On October 2, 2020, the Company amended the Revolving Credit Facility and reduced the commitment amount to $ 15.0 million.

In connection with this amendment, the interest rate was changed to prime rate plus 1 % or LIBOR plus 4 % with a floor of 4.5 % and the maturity was extended to September 2, 2021 .

On March 16, 2021, the Revolving Credit Facility was terminated.

There were no amounts outstanding under the Revolving Credit Facility at December 31, 2020.

For the three months ended March 31, 2020, the Company received proceeds $ 35.0 million from borrowings under the Revolving Credit Facility.

Mortgage Loan Payable

As of September 30, 2020, the Company had a $ 44.2 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 September 30, 2020 and December 31, 2019:

September 30, 2020 December 31, 2019

As of March 31, 2021, the Company had a $ 40.6 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, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

Lender Current

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(LIBOR Floor of 2.23%) September 27, 2022 $ 40,596,980 $ 40,728,560 $ 48,719,151 $ 44,117,293 $ 49,533,733

_______________

(1) In September 2020, the Company exercised the option to extend the maturity of the mortgage loan payable by two years.

Scheduled Debt Principal Payments

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

Scheduled debt principal payments for each of the five calendar years following March 31, 2021 are as follows:

Years Ending December 31, Total

2020 (October 1 through December 31) $ 25,000,000

2021 (April 1 through December 31) $ 596,580

2022 40,000,400

Thereafter 105,888,747

2023 8,030,611

2024 69,399,425

2025 37,054,682

Unamortized deferred financing costs ( 2,710,336 )

Total $ 152,371,362

At September 30, 2020 and December 31, 2019, the unamortized deferred financing costs were $ 2.3 million and $ 1.4 million, respectively.

Notes to Unaudited Consolidated Financial Statements

Obligations Under Participation Agreements

As discussed in Note 2 , the Company follows the guidance in ASC 860 when accounting for loan participations.

Such guidance requires participation interests meet certain criteria in order for the interest transaction to be recorded as a sale.

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 September 30, 2020 and December 31, 2019, obligations under participation agreements had a carrying value of approximately $ 89.2 million and $ 103.2 million, respectively, and the carrying value of the loans that are associated with these obligations under participation agreements was approximately $ 223.5 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 10.6 % and 11.8 % as of September 30, 2020 and December 31, 2019, respectively.

At March 31, 2021 and December 31, 2020, the unamortized deferred financing costs were $ 2.7 million and $ 2.2 million, respectively.

Obligations Under Participation Agreements and Secured Borrowing

As discussed in Note 2 , the Company follows the guidance in ASC 860 when accounting for loan participations and loans sold.

Such guidance requires the transferred interests meet certain criteria in order for the transaction to be recorded as a sale.

Loan participations and loans transferred 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 or secured borrowing, as applicable.

As of March 31, 2021 and December 31, 2020, obligations under participation agreements had a carrying value of approximately $ 71.6 million and $ 71.6 million, respectively, and the carrying value of the loans that are associated with these obligations under participation agreements was approximately $ 146.4 million and $ 168.6 million, respectively, (see “ Participation Agreements ” in Note 8 ).

Additionally, as of March 31, 2021 and December 31, 2020, secured borrowing had a

carrying value of approximately $ 22.0 million and $ 18.2 million, and the carrying value of the loan that is associated with the secured borrowing was $ 31.9 million and $ 26.4 million, respectively.

The weighted-average interest rate on the obligations under participation agreements and secured borrowing was approximately 10.0 % and 10.2 % as of March 31, 2021 and December 31, 2020, respectively.

Commitments and Contingencies

Impact of COVID-19

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 September 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.

The full extent of the impact of the COVID-19 pandemic on the global economy generally, and the Company’s business in particular, will depend on future developments, which are highly uncertain and cannot be predicted with confidence.

As of March 31, 2021, no contingencies have been recorded on the Company’s consolidated balance sheet as a result of the COVID-19 pandemic, however as the pandemic continues, 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.

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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 $ 64.2 million and $ 116.7 million as of September 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.

These fundings amounted to approximately $ 55.5 million and $ 67.9 million as of March 31, 2021 and December 31, 2020, 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.

Unfunded Investment Commitment

As discussed in N ote 7 , On August 3, 2020, the Company entered into a subscription agreement with Terra Opportunities Fund whereby the Company committed to fund up to $ 50.0 million to purchase limited partnership interests in Terra Opportunities Fund.

As of September 30, 2020, none of the commitment has been funded.

As discussed in Note 7 , On August 3, 2020, the Company entered into a subscription agreement with Mavik RESOF whereby the Company committed to fund up to $ 50.0 million to purchase limited partnership interests in Mavik RESOF.

As of March 31, 2021 and December 31, 2020, the unfunded investment commitment was $ 1.3 million and $ 14.1 million, respectively.

The Company enters into contracts that contain a variety of indemnification provisions.

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See Note 8 for a discussion of the Company’s commitments to the Manager.

Notes to Unaudited Consolidated Financial Statements

Earnings Per Share

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

The following table presents earnings per share for the three months ended March 31, 2021 and March 31, 2020:

Three Months Ended March 31,

Net income $ 1,476,096 $ 578,963

Preferred stock dividend declared ( 3,906 ) ( 3,906 ) ( 11,718 ) ( 11,718 )

Series A preferred stock dividend declared ( 3,906 ) ( 3,906 )

Net income allocable to common stock $ 1,472,190 $ 575,057

Weighted-average shares outstanding - basic

and diluted 19,487,461 14,915,302 18,586,627 14,913,769

Weighted-average shares outstanding - basic and diluted 19,487,460 16,707,279

Earnings per share - basic and diluted $ 0.08 $ 0.03

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

As of March 31, 2021 and December 31, 2020, there were no Preferred Stock issued or outstanding.

Series A Preferred Stock

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Notes to Unaudited Consolidated Financial Statements

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

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

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

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

Distributions

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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.

Additionally, for both the nine months ended September 30, 2020 and 2019, the Company made distributions to preferred stockholders of $ 11,718 .

Additionally, for both the three months ended March 31, 2021 and 2020, the Company made distributions to preferred stockholders of $ 3,906 .

Subsequent Events

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• our expected financial performance, operating results and our ability to make distributions to our stockholders in the future;

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

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

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

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

• the availability of attractive risk-adjusted investment opportunities in our target asset class and other real estate-related investments that satisfy our objectives and strategies;

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(“Terra International 3”);

Terra Offshore Funds REIT, LLC (formerly known as Terra International Fund 3 REIT, LLC) (“Terra Offshore Funds”);

Terra Real Estate Credit Opportunities Fund, L.P.

(“Terra Opportunities Fund”);

Terra Capital Advisors, LLC;

Terra Capital Advisors 2, LLC;

Terra Income Advisors 2, LLC;

Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”);

Mavik Real Estate Special Opportunities Fund, LP (“Mavik RESOF”) (formerly known as Terra Real Estate Credit Opportunities Fund, LP);

or any of their affiliates;

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

As of September 30, 2020, we held a net investment portfolio (gross investments less obligations under participation agreements) comprised of 21 investments in 10 states with an aggregate net principal balance of $348.3 million, a weighted average coupon rate of 8.7%, a weighted average loan-to-value ratio of 82.1% and a weighted average remaining term to maturity of 1.7 years.

As of March 31, 2021, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 19 loans in eight states with an aggregate net principal balance of $314.4 million, a weighted average coupon rate of 7.8%, a weighted average loan-to-value ratio of 77.0% and a weighted average remaining term to maturity of 1.6 years.

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

Our portfolio is diversified geographically with underlying properties located in 21 markets across 10 states and by loan structure and property type.

Our portfolio is diversified geographically with underlying properties located in 19 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.

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.

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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 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 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, Inc.

(“Terra Property Trust 2”) merged with and into us and we continued as the surviving corporation (the “Merger”).

(“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.

In addition, on March 2, 2020, we issued 2,457,684.59 shares of our common stock to Terra Offshore Funds 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 Funds”).

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”).

The shares of common stock were issued in private placements in reliance on Section 4(a)(2) under the U.S.

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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.

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

As of September 30, 2020, Terra JV held 87.4% of the issued and outstanding shares of our common stock with the remainder held by Terra Offshore Funds, 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 Terra Offshore REIT on September 30, 2019.

As of March 31, 2021, 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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Recent Developments

As of September 30, 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 outbreak 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 outbreak 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.

The coronavirus (COVID-19) pandemic has had, and is expected to continue to have, a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown.

While certain economies have exhibited growth of late when compared to earlier months of 2020, the amount of economic recovery will continue to be impacted by reductions and restrictions in economic activity resulting from increased coronavirus cases.

We continue to closely monitor the impact of the coronavirus pandemic on all aspects of our investments and operations.

The extent to which the coronavirus pandemic may impact our investments and operations going forward will depend on future developments, which are highly uncertain and cannot be predicted with confidence.

These developments include the duration of the outbreak, the impact of the global vaccination effort, any new strains of the virus that are resistant to available vaccines, the impact of government stimulus, new information that may emerge concerning the severity of the coronavirus, and actions taken by federal, state and local agencies as well as the general public to contain the coronavirus or treat its impact, among others.

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

While it has had a demonstrable effect on employment, the economy and the national psyche, the impact of the pandemic on property values has yet to be fully realized because property values are the result of slow moving forces, including consumer behavior, supply and demand for space, availability and pricing of mortgage financing and investor demand for property.

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

Portfolio Summary

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

September 30, 2020

The following tables provide a summary of our net loan portfolio as of March 31, 2021 and December 31, 2020:

March 31, 2021

Fixed Rate Floating

Rate (1)(2)(3)

Total Gross Loans Obligations under Participation Agreements Total Net Loans

Total Gross Loans Obligations under Participation Agreements and Secured Borrowing Total Net Loans

Number of loans 6 13 19 7 19

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Rate (1)(2)(3)

Total Gross Loans Obligations under Participation Agreements Total Net Loans

Total Gross Loans Obligations under Participation Agreements and Secured Borrowing Total Net Loans

Number of loans 6 14 20 8 20

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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 0.15% and 1.76% as of September 30, 2020 and December 31, 2019.

(2) As of September 30, 2020, amounts included $181.0 million of senior mortgages used as collateral for $105.9 million of borrowings under a term loan ( Note 8 ).

These borrowings bear interest at an annual rate of LIBOR plus 4.25% with a LIBOR floor of 1.00% as of September 30, 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 8 ).

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 September 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 September 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 $63.7 million and $66.2 million as of September 30, 2020 and December 31, 2019, respectively.

The mortgage loan payable encumbering the office building had an outstanding principal amount of $44.2 million and $44.6 million as of September 30, 2020 and December 31, 2019, respectively.

Coupon rate shown was determined using LIBOR of 0.11% and 0.14% as of March 31, 2021 and December 31, 2020.

(2) As of March 31, 2021 and December 31, 2020, amounts included $183.7 million and $184.2 million of senior mortgages used as collateral for $106.5 million and $107.6 million of borrowings under a term loan, respectively.

As of March 31, 2021, amounts also included $11.9 million of senior mortgages used as collateral for $8.0 million of borrowings under a revolving line of credit.

Borrowings under the term loan bear interest at an annual rate of LIBOR plus 4.25% with a LIBOR floor of 1.00%.

Borrowings under the revolving line of credit bear interest at a minimum rate of 4.0%.

(3) As of March 31, 2021 and December 31, 2020, eleven and twelve of these loans, respectively, are subject to a LIBOR floor.

In addition to our net loan portfolio, as of March 31, 2021 and December 31, 2020, we owned 4.9 acres of adjacent land acquired via deed in lieu of foreclosure and a multi-tenant office building acquired via foreclosure.

The land and building and related lease intangible assets and liabilities had a net carrying value of $62.1 million and $62.9 million as of March 31, 2021 and December 31, 2020, respectively.

The mortgage loan payable encumbering the office building had an outstanding principal amount of $40.6 million and $44.0 million as of March 31, 2021 and December 31, 2020, respectively.

Additionally, as of March 31, 2021 and December 31, 2020, we owned 83.5% and 90.3%, respectively, of equity interest in a limited partnership that invests in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets.

As of March 31, 2021 and December 31, 2020, the equity interest had a carrying value of $50.5 million and $36.3 million, respectively.

Portfolio Investment Activity

For the three months ended September 30, 2020 and 2019, we invested $10.3 million and $20.2 million in new and/or add-on loans, respectively, and had $9.6 million and $37.2 million of repayments, respectively, resulting in net investments of $0.7 million and repayments of $17.0 million, respectively.

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

For the nine months ended September 30, 2020 and 2019, we invested $22.2 million and $48.5 million in new and/or add-on loans, respectively, and had $24.7 million and $82.4 million of repayments, respectively, resulting in net repayments of $2.5 million and $33.9 million, respectively.

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

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 Terra Offshore Funds, the related participation obligations were settled.

For the three and nine months ended September 30, 2020, we sold $0.2 million and $6.0 million of marketable securities, respectively, and recognized net gains on sale of marketable securities of $0.1 million and $1.2 million, respectively.

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.

Portfolio Information

For the three months ended March 31, 2021 and 2020, we invested $15.5 million and $12.6 million in new investments and had $25.0 million and $10.0 million of repayments, resulting in net repayments of $9.4 million and net investments of $2.6 million, respectively.

Amounts are net of obligations under participation agreements, secured borrowing, borrowings under the master repurchase agreement, the term loan and the revolving line of credit.

In addition, in March 2020, 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 above.

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.

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Loan Structure Principal Balance Carrying

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Total $ 314,420,023 $ 312,472,417 100.0 % $ 334,626,607 $ 332,510,955 100.0 %

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Property Type Principal Balance Carrying

3 unchanged sentences

Multifamily 80,440,026 81,087,592 26.0 % 103,057,678 103,678,464 31.1 %

Hotel 57,841,452 58,186,134 16.7 % 41,239,194 41,327,772 15.0 %

Student housing 43,599,269 43,995,342 12.6 % 26,470,740 26,725,148 9.7 %

Infill land 30,961,605 31,112,716 8.9 % 29,644,375 29,756,375 10.8 %

Hotel - full/select service 47,112,522 47,704,223 15.3 % 49,142,809 49,393,251 14.9 %

Mixed use 16,333,304 16,333,304 5.2 % 16,767,984 16,767,984 5.0 %

Industrial 7,000,000 7,000,000 2.2 % 7,000,000 7,000,000 2.1 %

Condominium 2,120,000 2,140,121 0.6 % 2,120,000 2,139,382 0.8 %

Infill land 5,974,734 6,030,824 1.9 % 5,847,837 5901575 5,901,575 1.8 %

Hotel - extended stay 4,250,000 4,292,148 1.4 % 4,250,000 4,294,053 1.3 %

Student housing 3,000,000 3,189,700 1.0 % 3,000,000 3,204,375 1.0 %

Allowance for loan losses — (4,014,778) (1.3) % — (3,738,758) (1.1) %

Total $ 314,240,485 $ 312,292,879 100.0 % $ 334,626,607 $ 332,510,955 100.0 %

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Geographic Location Principal Balance Carrying

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Texas 3,890,140 3,929,042 1.3 % 3,848,712 3,887,200 1.2 %

Illinois 2,837,397 2,861,810 0.9 % 2,209,189 2,227,593 0.8 %

13,103,211 13,409,207 3.8 % 3,897,311 4,076,208 1.5 %

South Carolina 3,000,000 3,189,700 1.0 % 3,000,000 3,204,375 1.0 %

Allowance for loan losses — (4,014,778) (1.3) % — (3,738,758) (1.1) %

Total $ 314,420,023 $ 312,472,417 100.0 % $ 334,626,607 $ 332,510,955 100.0 %

_______________

(1) Other includes $7.5 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 September 30, 2020 and December 31, 2019, respectively.

Factors Impacting Operating Results

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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.

As a result, in the event of a default, we may not recover all of our 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.

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(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.

(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

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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 loan, repurchase agreements and other credit facilities.

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.

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Results of Operations

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 Change 2020 2019 Change

The following table presents the comparative results of our operations for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

2021 2020 Change

Interest income $ 8,120,949 $ 9,651,865 $ (1,530,916)

Real estate operating revenue 2,011,641 2,313,051 (301,410)

Prepayment fee income — — — — 98,775 (98,775)

Other operating income 156,662 112,655 44,007

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Operating expenses

Operating expenses reimbursed to

Manager 1,719,767 1,308,453 411,314 4,781,831 3,636,971 1,144,860

Operating expenses reimbursed to Manager 1,342,758 1,367,189 (24,431)

Asset management fee 1,156,543 1,029,533 127,010

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Depreciation and amortization 931,725 946,494 (14,769)

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

Professional fees 520,419 294,761 225,658

3 unchanged sentences

Operating income 4,709,527 5,967,175 (1,257,648)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 Change 2020 2019 Change

Other income and expenses

Interest expense from obligations

under participation agreements (2,211,901) (3,022,202) 810,301 (6,805,402) (8,921,349) 2,115,947

Interest expense on repurchase

agreement payable (706,527) (1,407,889) 701,362 (3,727,466) (3,708,424) (19,042)

Interest expense on mortgage

loan payable (756,509) (770,446) 13,937 (2,256,898) (2,333,067) 76,169

Interest expense on revolving

credit facility (463,333) (74,794) (388,539) (1,238,311) (74,794) (1,163,517)

Interest expense on term loan

payable (476,411) — (476,411) (476,411) — (476,411)

Net loss on extinguishment of

obligations under participation

Interest expense from obligations under participation agreements (1,880,081) (2,560,267) 680,186

Interest expense on repurchase agreement payable — (1,551,270) 1,551,270

Interest expense on mortgage loan payable (686,150) (750,636) 64,486

Interest expense on revolving line of credit (17,846) (174,989) 157,143

Interest expense on term loan payable (1,672,768) — (1,672,768)

Interest expense on secured borrowing (299,805) (40,491) (259,314)

Net loss on extinguishment of obligations under participation

agreements — (319,453) 319,453

Realized gains on marketable

securities 75,055 — 75,055 1,160,162 — 1,160,162

Unrealized (losses) gains on

marketable securities (38,527) — (38,527) 28,995 — 28,995

Unrealized losses on marketable securities (14,608) — (14,608)

Income from equity investment in a limited partnership 1,337,827 — 1,337,827

Realized gains on marketable securities — 8,894 (8,894)

(3,233,431) (5,388,212) 2,154,781

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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 three and nine months ended September 30, 2020 and 2019 :

Three Months Ended September 30, 2020 Three Months Ended September 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 $ 422,999,516 9.1% $ 374,934,899 10.5%

Obligations under participation agreements (81,547,833) 10.7% (96,876,184) 12.1%

Repurchase agreement payable (68,952,665) 3.9% (72,591,206) 4.5%

Term loan payable (31,997,627) 5.3% — —%

Revolving credit facility — —% (347,826) 6.4%

Net loans (3)

$ 240,501,391 10.5% $ 205,119,683 11.8%

Gross loans $ 238,098,881 6.7% $ 143,834,648 7.6%

Obligations under participation agreements (34,709,039) 9.0% (6,800,000) 12.0%

Repurchase agreement payable (68,952,665) 3.9% (72,591,206) 4.5%

Term loan payable (31,997,627) 5.3% — —%

Net loans (3)

$ 102,439,550 8.3% $ 64,443,442 10.7%

Subordinated loans (4)

Gross loans $ 184,900,635 12.2% $ 231,100,251 12.3%

Obligations under participation agreements (46,838,794) 12.0% (90,076,184) 12.1%

Revolving credit facility — — (347,826) 0.1

Net loans (3)

$ 138,061,841 12.2% $ 140,676,241 12.4%

Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019

The following tables presents a reconciliation of our loan portfolio from a gross basis to net basis for the three months ended March 31, 2021 and 2020 :

Three Months Ended March 31, 2021 Three Months Ended March 31, 2020

Weighted Average Principal Amount (1)

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Obligations under participation agreements

and secured borrowing (88,594,532) 10.1 % (88,056,951) 11.7 %

Repurchase agreement payable — — % (94,465,741) 4.0 %

Term loan payable (107,776,898) 5.3 % — — %

Revolving credit facility — — % (117,216) 6.4 %

Revolving line of credit (1,745,785) 4.0 % — — %

Net loans (3)

2 unchanged sentences

Obligations under participation agreements

and secured borrowing (45,478,823) 8.6 % (17,680,599) 10.6 %

Repurchase agreement payable — — % (94,465,741) 4.0 %

Term loan payable (107,776,898) 5.3 % — — %

Revolving line of credit (1,745,785) 4.0 % — — %

Net loans (3)

3 unchanged sentences

Obligations under participation agreements (43,115,709) 11.6 % (70,376,352) 12.0 %

Revolving credit facility — — % (117,216) 6.4 %

Net loans (3)

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

For the three and nine months ended September 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.

For the three months ended March 31, 2021 as compared to the same period in 2020, the decrease in weighted average coupon rate was primarily due to a higher volume of loan originations with lower coupon rates.

Interest Income

For the three and nine months ended September 30, 2020 as compared to the same periods in 2019, interest income decreased by $0.7 million and $2.5 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.

For the three months ended March 31, 2021 as compared to the same period in 2020, interest income decreased by $1.5 million, 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 the three and nine months ended September 30, 2020 as compared to the same periods in 2019, real estate operating revenue increased by $0.6 million and $0.3 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 nine months ended September 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 September 30, 2020 and 2019 and the nine months ended September 30, 2020.

Other Operating Income

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

For the three months ended September 30, 2020 as compared to the same period in 2019, other operating income was substantially the same.

For the nine months ended September 30, 2020 as compared to the same period in 2019, other operating income increased by $0.3 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 and nine months ended September 30, 2020 as compared to the same periods in 2019, operating expenses reimbursed to Manager increased by $0.4 million and $1.1 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 Terra Offshore Funds transactions.

For the three months ended March 31, 2021 as compared to the same period in 2020, real estate operating revenue decreased by $0.3 million, primarily due to a lease terminated in the third quarter of 2020 and a decrease in parking income.

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 and nine months ended September 30, 2020 as compared to the same periods in 2019, asset management fee increased by $0.2 million and $0.5 million, respectively, primarily due to an increase in total funds under management.

For the three months ended March 31, 2021 as compared to the same period in 2020, asset management fee increased by $0.1 million, primarily due to an increase in total funds under management.

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 three months ended March 31, 2021 as compared to the same period in 2020, asset servicing fee increased by $0.04 million, 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 September 30, 2020, we had five loans with a loan risk rating of “4” and recorded a provision for loan losses of $1.4 million for the nine months ended September 30, 2020.

For the three months ended September 30, 2020, we recorded a provision for loan losses of $0.04 million as a result of an increase in the principal balance on loans with a risk rating of “4” in the third quarter of 2020.

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

For the three and nine months ended September 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 September 30, 2020 as compared to the same period in 2019, real estate operating expenses were substantially the same.

For the nine months ended September 30, 2020 as compared to the same period in 2019, real estate operating expenses increased by $0.3 million, primarily due to an increase in real estate taxes, partially offset by a decrease in repairs and maintenances.

Depreciation and Amortization

For both the three and nine months ended September 30, 2020, 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 three and nine months ended September 30, 2020 and the three months ended September 30, 2019.

For the nine months ended September 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.

As of both March 31, 2021 and December 31, 2020, we had three loans with a loan risk rating of “4”, one loan with a loan risk rating of “5” and one loan that was deemed impaired.

For the three months ended March 31, 2021, we recorded allowance of loan losses of $0.28 million, including $0.24 million of specific allowance for loan losses and $0.04 million of general allowance for loan losses, as a result of an increase in the principal balance of the loans we reserved for.

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

There was no specific allowance for loan losses recorded for the three months ended March 31, 2020.

Professional Fees

For the three months ended September 30, 2020 as compared to the same period in 2019, professional fees were substantially the same.

For the nine months ended September 30, 2020 as compared to the same period in 2019, professional fees decreased by $2.0 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 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 the three months ended September 30, 2020 as compared to the same period in 2019, other operating expenses were substantially the same.

For the nine months ended September 30, 2020 as compared to the same period in 2019, other operating expenses increased by $0.3 million, primarily due to an increase in un-reimbursed transaction-related costs.

For the three months ended March 31, 2021 as compared to the same period in 2020, professional fees increased by $0.2 million, primarily due to legal fees incurred in connection with a financing transaction that was terminated.

Interest Expense from Obligations under Participation Agreements

For the three and nine months ended September 30, 2020 as compared to the same periods in 2019, interest expense from obligations under participation agreements decreased by $0.8 million and $2.1 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 Terra Offshore Funds as well as a decrease in the weighted average coupon rate on obligations under participation agreements.

For the three months ended March 31, 2021 as compared to the same period in 2020, interest expense from obligations under participation agreements decreased by $0.7 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 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

2 unchanged sentences

On September 3, 2020, we terminated the master repurchase agreement and replaced it with the indenture and credit agreement.

For the three months ended September 30, 2020 as compared to the same period in 2019, interest expense on repurchase agreement payable decreased by $0.7 million, primarily due to the termination of the master repurchase agreement on September 3, 2020.

For the nine months ended September 30, 2020 as compared to the same period in 2019, interest expense on repurchase agreement payable was the same because the increase in the weighted average amount outstanding was substantially offset by a decrease in the weighted average interest rate.

Interest Expense on Revolving Credit Facility

For the three months ended March 31, 2021, there was no interest expense on repurchase agreement payable because the repurchase agreement was terminated on September 3, 2020.

For the three months ended March 31, 2020, interest expense on repurchase agreement payable was $1.6 million.

Interest Expense on Mortgage Loan Payable

For the three months ended March 31, 2021 as compared to the same period in 2020, interest expense on mortgage loan payable decreased by $0.1 million as a result of a decrease in the weighted average amount outstanding.

Interest Expense on Revolving Line of Credit

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 nine months ended September 30, 2020 as compared to the same periods in 2019, interest expense on revolving credit facility increased by $0.4 million and $1.2 million, as a result of an increase in outstanding principal balance.

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.

On March 12, 2021, we entered into a business loan and security agreement to provide for advances up to the lesser of $75.0 million or the amount determined by the borrowing base, which is based on the eligible assets pledged to the lender.

For the three months ended March 31, 2021, interest expense on the new revolving line of credit was $0.02 million.

For the three months ended March 31, 2020, interest expense on the old revolving line of credit was $0.2 million.

The decrease in interest expense on revolving line of credit was due to a decrease in 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 both the three and nine months ended September 30, 2020, interest expense on term loan payable was $0.5 million.

There was no interest expense on term loan payable for the three and nine months ended September 30, 2019 because the indenture and credit agreement was entered into on September 3, 2020.

For the three months ended March 31, 2021, interest expense on term loan payable was $1.7 million.

There was no interest expense on term loan payable for the three months ended March 31, 2020 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 three months ended March 31, 2021, interest expense on secured borrowing increased by $0.3 million as a result of an increase in the weighted average amount outstanding.

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 Funds, 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.

Realized Gains on Marketable Securities

For the three and nine months ended September 30, 2020, we sold $0.2 million and $6.0 million of marketable securities, respectively, and recognized realized gains on marketable securities of $0.1 million and $1.2 million, respectively.

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

For the three and nine months ended September 30, 2020 as compared to the same periods in 2019, the resulting net income decreased by $1.0 million and $1.5 million, respectively.

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.

There was no such loss recognized for the three months ended March 31, 2021.

Income from Equity Investment in a Limited Partnership

In August 2020, we entered into a subscription agreement whereby the Company committed to fund up to $50.0 million to purchase partnership interest in a limited partnership.

As of March 31, 2021, we owned an 83.5% interest in limited partnership and our investment in the limited partnership had a carrying value of $50.5 million.

For the three months ended March 31, 2021, we recognized income from equity investment in a limited partnership of $1.3 million.

There was no such income for the three months ended March 31, 2020 because the investment was entered into in August 2020.

For the three months ended March 31, 2021 as compared to the same period in 2020, the resulting net income increased by $0.9 million.

Financial Condition, Liquidity and Capital Resources

2 unchanged sentences

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, the master repurchase agreement and the revolving credit facility.

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 line of credit.

We may use other sources to finance our target assets, including bank financing and arranged financing facilities with domestic or international financing providers.

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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 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 $26.3 million will mature in the next twelve months.

Obligations under participation agreements totaling $66.3 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.

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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 September 30, 2020, the amount outstanding under the indenture and credit agreement was $105.9 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.

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%.

We amended the revolving credit facility to extend the maturity to September 3, 2020.

We are currently negotiating with the lender to extend the maturity of the revolving credit facility by a year and the lender has waived the maturity default.

As of September 30, 2020, the revolving credit facility had an outstanding balance of $25.0 million.

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

Cash Flows From Operating Activities

For the nine months ended September 30, 2020 as compared to the same period in 2019, cash flows from operating activities decreased by $6.7 million, primarily due to a decrease in contractual interest income.

Cash Flows (Used In) From Investing Activities

For the nine months ended September 30, 2020, cash flows used in investing activities were $57.1 million, primarily related to origination and purchase of loans of $85.8 million and the purchase of marketable securities of $6.0 million, partially offset by proceeds from repayments of loans of $28.7 million and proceeds from sale of marketable securities of $6.0 million.

For the nine months ended September 30, 2019, cash flows from investing activities were $32.8 million, primarily related to proceeds from repayments of loans of $147.9 million, partially offset by origination and purchase of loans of $114.8 million.

Cash Flows From (Used In) Financing Activities

For the nine months ended September 30, 2020, cash flows from financing activities were $93.9 million, primarily due to proceeds from borrowings under revolving credit facility of $35.0 million, proceeds from obligations under participation agreements of $35.4 million, proceeds from borrowings under our repurchase agreement of $22.9 million, cash acquired from Terra Property Trust 2 of $16.9 million, cash contributed by Terra Offshore Funds of $8.6 million and an increase in interest reserve and other deposits held on investments of $7.5 million, partially offset by distributions paid of $17.3 million, repayment of borrowings under revolving credit facility of $10.0 million, payment for repurchase of common stock of $3.6 million and repayments on obligations under participation agreements of $0.6 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 $105.9 million and made repayments for borrowings under the repurchase agreement of $104.0 million, and made payments for financing costs of $2.3 million.

For the nine months ended September 30, 2019, cash flows used in financing activities were $13.7 million, primarily due to repayments of borrowings under our repurchase agreement of $34.2 million, repayments on obligations under participation agreements of $31.3 million and distributions paid of $22.8 million, partially offset by proceeds from borrowings under repurchase agreement of $51.3 million, proceeds from obligations under participation agreements of $15.0 million, an increase in interest reserve and other deposits held on investments of $5.2 million and proceeds from issuance of common stock of $3.6 million.

Additionally, we received proceeds of $4.0 million from borrowings under revolving credit facility which we repaid in the same period.

As of March 31, 2021, the amount outstanding under the indenture and credit agreement was $106.5 million.

On March 12, 2021, we entered into a Business Loan and Security Agreement (the “Revolving Line of Credit”) to provide for advances up to the lesser of $75.0 million or the amount determined by the borrowing base, which is based on the eligible assets pledged to the lender.

Borrowings under the Revolving Line of Credit bear interest at an annual rate of LIBOR + 3.25% with a combined floor of 4.0% per annum.

The Revolving Line of Credit matures on March 12, 2023 with an annual 12-month extension available at the Company’s option, which are subject to certain conditions.

As of March 31, 2021, the Revolving Line of Credit had an outstanding balance of $8.0 million.

Cash Flows (Used in) From Operating Activities

For the three months ended March 31, 2021 as compared to the same period in 2020, cash flows from operating activities decreased by $5.1 million, primarily due to a decrease in contractual interest income and payment for real estate tax on our operating real estate.

Cash Flows Used In Investing Activities

For the three months ended March 31, 2021, cash flows used in investing activities were $0.8 million, primarily related to origination and purchase of loans of $14.4 million, purchase of partnership interest in a limited partnership of $12.9 million and purchase of marketable securities of $5.0 million, partially offset by proceeds from repayments of loans of $31.5 million.

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.

Cash Flows (Used In) From Financing Activities

For the three months ended March 31, 2021, cash flows used in financing activities were $2.8 million, primarily due to repayments on obligations under participation agreements of $4.0 million, distributions paid of $3.9 million, payment of mortgage principal of $3.4 million and a decrease in interest reserve and other deposits hold on investments of $5.0 million, partially offset by proceeds from borrowing under the revolving line of credit of $8.0 million, proceeds from obligations under participation agreements and secured borrowing of $7.3 million.

Additionally, we received proceeds of borrowings under the term loan of $1.5 million and made repayment on borrowings under the term loan of $2.6 million.

We also made payment for deferred financing costs of $0.6 million in connection with obtaining the revolving line of credit.

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 Terra Offset REIT of $8.6 million and proceeds from obligations under participation agreements and secured borrowing 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.

Critical Accounting Policies and Use of Estimates

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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.

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.

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and (iv) loan to value.

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.

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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 nine months ended September 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.

For the three months ended March 31, 2021 and 2020, we did not incur any interest or penalties.

Our 2017-2019 federal tax returns remain 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.

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Contractual Obligations

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

The following table provides a summary of our contractual obligations at March 31, 2021:

Total Less than

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$ 71,276,756 $ 66,276,756 $ 5,000,000 $ — $ —

Secured borrowing — principal (1)

22,033,529 — 22,033,529 — —

Mortgage loan payable — principal (2)

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106,454,107 — 44,614,424 61,839,683 —

Revolving credit facility payable —

Revolving Line of Credit payable —

principal (4)

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(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.

These loan participations 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.

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.

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

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.

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(3) Amount excludes unamortized deferred financing costs of $2.2 million.

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

We amended the credit agreement to extend the maturity to September 3, 2020.

We are currently negotiating with the lender to extend the maturity of the revolving credit facility by a year and the lender has waived the maturity default.

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

(5) Interest was calculated using the applicable annual variable interest rate and balance outstanding at September 30, 2020.

Amount represents interest expense through maturity plus exit fee as application.

(4) Amount excludes unamortized deferred financing costs of $0.6 million.

(5) Interest was calculated using the applicable annual variable interest rate and balance outstanding at March 31, 2021.

Amount represents interest expense through maturity plus exit fee as applicable.

(6) Certain of our loans provide for a commitment to fund the borrower at a future date.

As of September 30, 2020, we had seven of such loans with total funding commitments of $262.1 million, of which $197.9 million had been funded.

As of March 31, 2021, we had seven of such loans with total funding commitments of $256.0 million, of which $200.5 million had been funded.

(7) Represents rental obligation under the ground lease, inclusive of imputed interest, for our office building that it acquired through foreclosure.

The table above does not include our commitment under a subscription agreement with Terra Opportunities Fund to fund up to $50.0 million to purchase the limited partnership interests in Terra Opportunities Fund as the subscription agreement does not have fixed or determinable payments.

On November 5, 2020, we funded $3.6 million of the commitment.

The table above does not include our commitment under a subscription agreement with Mavik RESOF to fund up to $50.0 million to purchase the limited partnership interests in Mavik RESOF as the subscription agreement does not have fixed or determinable payments.

As of March 31, 2021, the unfunded commitment was $1.3 million.

Management Agreement with Terra REIT Advisors

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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 loans, including any third-party expenses related to such loan.

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.

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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 September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Origination and extension fee expense (1)

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(2) Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.

Participation Agreements

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 Funds, the related participation obligations were settled.

As of September 30, 2020, the principal balance of our participation obligations totaled $89.0 million, consisting of $44.6 million in participation obligations to Terra Fund 6 and $44.4 million in participation obligations to third-parties.

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

As of March 31, 2021, the principal balance of our participation obligations totaled $71.3 million, consisting of $37.0 million in participation obligations to Terra Fund 6 and $34.3 million in participation obligations to third-parties.

Additionally, as of March 31, 2021, the principal balance of our secured borrowing was $22.0 million.

Terra Fund 6 is managed by Terra Income Advisors, LLC, an affiliate of our Manager.

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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 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 our Manager, as per the terms of each respective affiliate’s management agreement.

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.

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For the three months ended September 30, 2020, the weighted average outstanding principal balance on obligations under participation agreements was approximately $81.5 million, and the weighted average interest rate was approximately 10.7%, compared to weighted average outstanding principal balance of approximately $96.9 million, and weighted average interest rate of approximately 12.1% for the three months ended September 30, 2019.

For the nine months ended September 30, 2020, the weighted average outstanding principal balance on obligations under participation agreements was approximately $81.3 million, and the weighted average interest rate was approximately 11.1%, compared to weighted average outstanding principal balance of approximately $96.6 million, and weighted average interest rate of approximately 12.2% for the nine months ended September 30, 2019.

For the three months ended March 31, 2021, the weighted average outstanding principal balance on obligations under participation agreements was approximately $88.6 million, and the weighted average interest rate was approximately 10.1%, compared to weighted average outstanding principal balance of approximately $88.1 million, and weighted average interest rate of approximately 11.7% for the three months ended March 31, 2020.

Off-Balance Sheet Arrangements

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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-Q

Item 1. Financial Statements