Terra Property Trust, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information There is no established trading market for our shares of common stock. As of March 11, 2022, we had 19,487,460 shares of common stock outstanding held by two investors. As of March 11, 2022, there were no outstanding options, warrants to purchase our common stock or securities convertible into our shares of common stock. Sales of Unregistered Equity Securities There were no sales of unregistered equity securities during the year ended December 31, 2021. Issuer Purchases of Equity Securities There were no issuer purchases of equity securities during the year ended December 31, 2021. Item 6. [Reserved]. 33 Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations. The information contained in this section should be read in conjunction with our audited consolidated financial statements and related notes thereto and other financial information included elsewhere in this annual report on Form 10-K. Overview We are a real estate credit focused company that originates, structures, funds and manages commercial real estate credit investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States, which we collectively refer to as our targeted assets. Our loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. We focus on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties primarily in primary and secondary markets. We believe loans in this size range are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. Our investment objective is to provide attractive risk-adjusted returns to our stockholders, primarily through regular distributions. There can be no assurances that we will be successful in meeting our investment objective. As of December 31, 2021, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 21 loans in nine states with an aggregate net principal balance of $403.6 million, a weighted average coupon rate of 7.4%, a weighted average loan-to-value ratio of 74.1% and a weighted average remaining term to maturity of 1.7 years. Each of our loans was originated by Terra Capital Partners or its affiliates. Our portfolio is diversified based on location of the underlying properties, loan structure and property type. As of December 31, 2021, our portfolio included underlying properties located in 21 markets, across nine states and includes property types such as multifamily housing, hotels, student housing, commercial offices, medical offices, mixed-use and industrial properties. The profile of these properties ranges from stabilized and value-added properties to pre-development and construction. Our loans are structured across mezzanine debt, first mortgages, preferred equity investments and credit facilities. We were incorporated under the general corporation laws of the State of Maryland on December 31, 2015. Through December 31, 2015, our business was conducted through a series of predecessor private partnerships. At the beginning of 2016, we completed the merger of these private partnerships into a single entity as part of our plan to reorganize our business as a REIT for federal income tax purposes. Following the REIT formation transaction, Terra Fund 5 contributed the consolidated portfolio of net assets of the Terra Funds to our company in exchange for all of the shares of our common stock. On March 1, 2020, Terra Property Trust 2 merged with and into our company, and we continued as the surviving corporation. In connection with the Merger, we issued 2,116,785.76 shares of our common stock to Terra Fund 7, the sole stockholder of Terra Property Trust 2, in exchange for the settlement of $17.7 million of participation interests in loans held by us, cash of $16.9 million and other working capital. In addition, on March 2, 2020, we issued 2,457,684.59 shares of our common stock to Terra Offshore REIT in exchange for the settlement of $32.1 million of participation interests in loans also held by us, $8.6 million in cash and other net working capital. The shares of common stock were issued in private placements in reliance on Section 4(a)(2) under the Securities Act, and the rules and regulations promulgated thereunder. We consummated these transactions with the objective of increasing the size and scale of our loan portfolio, further strengthening our balance sheet and positioning us for future growth. On April 29, 2020, we repurchased the 212,691 shares of common stock we had previously sold to Terra Offshore REIT on September 30, 2019. As of December 31, 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. As previously disclosed, we continue to explore alternative liquidity transactions on an opportunistic basis to maximize stockholder value. Examples of the alternative liquidity transactions that, depending on market conditions, may be available to us include a listing of our shares of common stock on a national securities exchange, adoption of a share repurchase plan, a liquidation of our assets, a sale of our company or a strategic business combination, in each case, which may include the in-kind distribution of our shares of common stock indirectly owned by certain Terra Funds to the ultimate investors in the Terra Funds. We may pursue such a liquidity transaction as early as 2022, but we cannot provide any assurance that any alternative liquidity transaction will be available to us or, if available, that we will pursue or be successful in completing any such alternative liquidity transaction. 34 We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2016. So long as we qualify as a REIT, we generally are not subject to U.S. federal income tax on our net taxable income to the extent that we annually distribute all of our net taxable income to our stockholders. Recent Developments The COVID-19 pandemic has evolved from its emergence in early 2020, so has its global impact. Many countries have re-instituted, or strongly encouraged, varying levels of quarantines and restrictions on travel and in some cases have at times limited operations of certain businesses and taken other restrictive measures designed to help slow the spread of COVID-19 and its variants. Governments and businesses have also instituted vaccine mandates and testing requirements for employees. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries, including the collateral underlying certain of our loans. Moreover, with the potential for new strains of COVID-19 to emerge, governments and businesses may re-impose aggressive measures to help slow its spread in the future. For this reason, among others, as the COVID-19 pandemic continues, the potential global impacts are uncertain and difficult to assess. Portfolio Summary The following tables provide a summary of our net loan portfolio as of December 31, 2021 and 2020: December 31, 2021 Fixed Rate Floating Rate (1)(2)(3) Total Gross Loans Obligations under Participation Agreements and Secured Borrowing Total Net Loans Number of loans 6 15 21 4 21 Principal balance $ 74,880,728 $ 405,270,423 $ 480,151,151 $ 76,569,398 $ 403,581,753 Amortized cost 75,520,212 394,153,102 469,673,314 76,818,156 392,855,158 Fair value 75,449,410 391,752,209 467,201,619 75,900,089 391,301,530 Weighted average coupon rate 12.39 % 7.01 % 7.85 % 10.40 % 7.37 % Weighted-average remaining term (years) 1.93 1.45 1.53 0.82 1.66 December 31, 2020 Fixed Rate Floating Rate (1)(2)(3) Total Gross Loans Obligations under Participation Agreements and Secured Borrowing Total Net Loans Number of loans 6 14 20 8 20 Principal balance $ 56,335,792 $ 367,838,966 $ 424,174,758 $ 89,548,151 $ 334,626,607 Amortized cost 56,464,310 365,816,205 422,280,515 89,769,560 332,510,955 Fair value 56,284,334 363,122,860 419,407,194 87,730,239 331,676,955 Weighted average coupon rate 12.17 % 7.95 % 8.51 % 10.16 % 8.07 % Weighted-average remaining term (years) 1.78 1.44 1.48 1.08 1.59 _______________ (1) These loans pay a coupon rate of LIBOR plus a fixed spread. Coupon rate shown was determined using LIBOR of 0.10% and 0.14% as of December 31, 2021 and 2020. (2) As of December 31, 2021 and 2020, amounts included $163.1 million and $184.2 million of senior mortgages used as collateral for $93.8 million and $107.6 million of borrowings under a term loan, respectively. As of December 31, 2021, amounts also included $60.1 million of senior mortgages used as collateral for $38.6 million of borrowings under a revolving line of credit and $67.4 million of senior mortgages used as collateral for $44.6 million of borrowings under a repurchase agreement. 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%. Borrowings under the repurchase agreement bears interest at an annual rate of LIBOR plus an applicable spread which ranges from 1.60% to 1.85%. 35 (3) As of December 31, 2021 and 2020, thirteen and twelve of these loans, respectively, are subject to a LIBOR floor. In addition to our net loan portfolio, as of December 31, 2021 and 2020, we owned 4.9 acres of adjacent land acquired pursuant to a deed in lieu of foreclosure and a multi-tenant office building acquired pursuant to a foreclosure. The land and building and related lease intangible assets and liabilities had a net carrying value of $56.1 million and $62.9 million as of December 31, 2021 and 2020, respectively. The mortgage loan payable encumbering the office building had an outstanding principal amount of $32.0 million and $44.0 million as of December 31, 2021 and 2020, respectively. Additionally, as of December 31, 2021 and 2020, we owned 50.0% and 90.3%, respectively, of equity interest in a limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. During 2021, we purchased equity interests in two joint ventures. As of December 31, 2021 and 2020, these equity interests had total carrying value of $69.7 million and $36.3 million, respectively. Portfolio Investment Activity For the years ended December 31, 2021 and 2020, we invested $117.3 million and $48.2 million in new and add-on investments and had $85.1 million and $31.3 million of repayments, resulting in net investments of $32.5 million and $16.9 million, respectively. Amounts are net of obligations under participation agreements, secured borrowing, borrowings under the master repurchase agreement, the term loan, the repurchase agreement and the revolving line of credit. Net Loan Portfolio Information The tables below set forth the types of loans in our loan portfolio, as well as the property type and geographic location of the properties securing these loans, on a net loan basis, which represents our proportionate share of the loans, based on our economic ownership of these loans. December 31, 2021 December 31, 2020 Loan Structure Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total First mortgages $ 310,933,350 $ 313,515,326 79.8 % $ 209,660,270 $ 210,694,778 63.3 % Preferred equity investments 63,441,546 63,515,633 16.2 % 101,019,788 101,267,732 30.5 % Mezzanine loans 17,444,357 17,622,804 4.5 % 23,946,549 24,287,203 7.3 % Credit facility 11,762,500 11,859,876 3.0 % — — — % Allowance for loan losses — (13,658,481) (3.5) % — (3,738,758) (1.1) % Total $ 403,581,753 $ 392,855,158 100.0 % $ 334,626,607 $ 332,510,955 100.0 % December 31, 2021 December 31, 2020 Property Type Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total Office $ 166,071,342 $ 166,836,320 42.5 % $ 145,560,299 $ 146,010,011 43.9 % Multifamily 72,999,417 73,955,240 18.8 % 103,057,678 103,678,464 31.1 % Hotel - full/select service 56,847,381 57,395,682 14.6 % 49,142,809 49,393,251 14.9 % Student housing 31,000,000 31,565,670 8.0 % 3,000,000 3,204,375 1.0 % Infill land 28,960,455 28,923,827 7.4 % 5,847,837 5,901,575 1.8 % Mixed use 28,940,658 28,977,024 7.4 % 16,767,984 16,767,984 5.0 % Industrial 18,762,500 18,859,876 4.8 % 7,000,000 7,000,000 2.1 % Hotel - extended stay — — — % 4,250,000 4,294,053 1.3 % Allowance for loan losses — (13,658,481) (3.5) % — (3,738,758) (1.1) % Total $ 403,581,753 $ 392,855,158 100.0 % $ 334,626,607 $ 332,510,955 100.0 % 36 December 31, 2021 December 31, 2020 Geographic Location Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total United States California $ 187,209,547 $ 189,082,380 48.1 % $ 143,454,602 $ 144,066,584 43.3 % New York 63,441,546 63,515,633 16.2 % 56,058,669 56,139,234 16.9 % Georgia 53,289,288 53,536,884 13.6 % 74,116,787 74,505,752 22.4 % North Carolina 44,492,971 44,704,699 11.4 % 28,647,837 28,802,869 8.7 % Utah 28,000,000 28,420,056 7.2 % — — — % Texas 13,625,000 13,725,690 3.5 % 3,848,712 3,887,200 1.2 % Massachusetts 7,000,000 7,000,000 1.8 % 7,000,000 7,000,000 2.1 % Washington 3,523,401 3,382,683 0.9 % 18,500,000 18,643,699 5.5 % South Carolina 3,000,000 3,145,614 0.8 % 3,000,000 3,204,375 1.0 % Allowance for loan losses — (13,658,481) (3.5) % — (3,738,758) (1.1) % Total $ 403,581,753 $ 392,855,158 100.0 % $ 334,626,607 $ 332,510,955 100.0 % Factors Impacting Operating Results Our results of operations are affected by a number of factors and primarily depend on, among other things, the level of the interest income from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business. Interest income and borrowing costs may vary as a result of changes in interest rates, which could impact the net interest we receive on our assets. Our operating results may also be impacted by conditions in the financial markets and unanticipated credit events experienced by borrowers under our loan assets. Credit Risk Credit risk represents the potential loss that we would incur if our borrowers failed to perform pursuant to the terms of their obligations to us. With respect to our loan portfolio, we seek to manage credit risk by limiting exposure to any one individual borrower and any one asset class. Additionally, our Manager employs an asset management approach and monitors the portfolio of investments through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value, debt service coverage ratio and the debt yield. Our Manager also requires certain borrowers to establish an interest reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments. The performance and value of our loans depends upon the sponsors’ ability to operate or manage the development of the respective properties that serve as collateral so that each property’s value ultimately supports the repayment of the loan balance. Mezzanine loans and preferred equity investments are subordinate to senior mortgage loans and, therefore, involve a higher degree of risk. In the event of a default, mezzanine loans and preferred equity investments will be satisfied only after the senior lender’s investment is fully recovered. As a result, in the event of a default, we may not recover all of 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. We seek to manage these risks through our Manager's underwriting and asset management processes. The COVID-19 pandemic has significantly impacted the commercial real estate markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development projects currently planned or underway. While the economy has improved significantly, macroeconomic trends associated with COVID-19 pandemic have persisted and could continue to persist and impair our borrowers’ ability to pay principal and interest due to us under our loan agreements. We maintain all of our cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. 37 Concentration Risk We hold real estate-related loans. Thus, our loan portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such loans could materially reduce our capital. Interest Rate Risk Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in the fair value of our interest-bearing financial instruments. With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to slow; and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to increase; and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease. Prepayment Risk Prepayments can either positively or adversely affect the yields on our loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If we do not collect a prepayment fee in connection with a prepayment or are unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, we may acquire assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain loans. Extension Risk Extension risk is the risk that our assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise. In which case, to the extent we have financed the acquisition of an asset, we may have to finance our asset at potentially higher costs without the ability to reinvest principal into higher yielding securities because borrowers prepay their mortgages at a slower pace than originally expected, adversely impacting our net interest spread, and thus our net interest income. Real Estate Risk The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; pandemics; natural disasters; and other acts of god. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses. Use of Leverage We deploy moderate amounts of leverage as part of our operating strategy, which may consist of borrowings under first mortgage financings, warehouse facilities, term loans, repurchase agreements and other credit facilities. While borrowing and leverage present opportunities for increasing total return, they may have the effect of potentially creating or increasing losses. 38 Market Risk Our loans are highly illiquid, and there is no assurance that we will achieve our investment objectives, including targeted returns. Due to the illiquidity of the loans, valuation of our loans may be difficult, as there generally will be no established markets for these loans. Results of Operations The following table presents the comparative results of our operations for the years ended December 31, 2021 and 2020: Years Ended December 31, 2021 2020 Change Revenues Interest income $ 36,743,470 $ 39,392,209 $ (2,648,739) Real estate operating revenue 8,894,991 10,423,563 (1,528,572) Prepayment fee income 190,997 — 190,997 Other operating income 855,799 505,116 350,683 46,685,257 50,320,888 (3,635,631) Operating expenses Operating expenses reimbursed to Manager 6,916,371 6,041,075 875,296 Asset management fee 5,134,149 4,480,706 653,443 Asset servicing fee 1,181,924 1,008,256 173,668 Provision for loan losses 10,904,163 3,738,758 7,165,405 Real estate operating expenses 5,003,893 4,505,119 498,774 Depreciation and amortization 3,989,114 4,635,980 (646,866) Impairment charge 3,395,430 — 3,395,430 Professional fees 1,795,856 1,695,876 99,980 Directors fees 145,000 190,000 (45,000) Other 448,503 371,444 77,059 38,914,403 26,667,214 12,247,189 Operating income 7,770,854 23,653,674 (15,882,820) Other income and expenses Interest expense from obligations under participation agreements (10,596,545) (8,514,804) (2,081,741) Interest expense on repurchase agreement payable (142,495) (3,727,466) 3,584,971 Interest expense on mortgage loan payable (2,449,239) (2,976,913) 527,674 Interest expense on revolving line of credit (911,811) (1,398,103) 486,292 Interest expense on term loan payable (6,835,877) (2,137,651) (4,698,226) Interest expense on secured borrowing (1,576,502) (633,850) (942,652) Interest expense on unsecured notes payable (3,173,673) — (3,173,673) Net loss on extinguishment of obligations under participation agreements — (319,453) 319,453 Net change in unrealized gains on marketable securities 22,500 111,494 (88,994) Income from equity investment in a limited partnership 5,925,802 38,640 5,887,162 Realized loss on loan repayments (517989) — (517,989) Realized gains on marketable securities 129,248 1,160,162 (1,030,914) (20,126,581) (18,397,944) (1,728,637) Net (loss) income $ (12,355,727) $ 5,255,730 $ (17,611,457) Net Loan Portfolio In assessing the performance of our loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements, term loan payable, revolving credit facility and repurchase agreement payable. 39 The following tables presents a reconciliation of our loan portfolio from a gross basis to net basis for the years ended December 31, 2021 and 2020 : Year Ended December 31, 2021 Year Ended December 31, 2020 Weighted Average Principal Amount (1) Weighted Average Coupon Rate (2) Weighted Average Principal Amount (1) Weighted Average Coupon Rate (2) Total portfolio Gross loans $ 456,344,152 8.5 % $ 411,157,772 9.2 % Obligations under participation agreements and secured borrowing (114,437,021) 11.0 % (83,248,489) 10.9 % Repurchase agreement payable (6,349,642) 2.6 % (64,382,360) 3.9 % Term loan payable (103,433,296) 5.3 % (34,923,075) 5.3 % Revolving line of credit (16,721,744) 4.0 % — — % Net loans (3) $ 215,402,449 9.2 % $ 228,603,848 10.7 % Senior loans Gross loans 272,577,220 6.5 % 221,461,896 6.7 % Obligations under participation agreements and secured borrowing (51,693,824) 8.9 % (30,779,483) 9.1 % Repurchase agreement payable (6,349,642) 2.6 % (64,382,360) 3.9 % Term loan payable (103,433,296) 5.3 % (34,923,075) 5.3 % Revolving line of credit (16,721,744) 4.0 % — — % Net loans (3) $ 94,378,714 7.2 % $ 91,376,978 8.4 % Subordinated loans (4) Gross loans 183,766,932 11.4 % 189,695,876 12.1 % Obligations under participation agreements (62,743,197) 12.8 % (52,469,006) 12.1 % Net loans (3) $ 121,023,735 10.7 % $ 137,226,870 12.1 % _______________ (1) Amount is calculated based on the number of days each loan is outstanding. (2) Amount is calculated based on the underlying principal amount of each loan. (3) The weighted average coupon rate represents net interest income over the period calculated using the weighted average coupon rate and weighted average principal amount shown on the table (interest income on the loans less interest expense) divided by the weighted average principal amount of the net loans during the period. (4) Subordinated loans include mezzanine loans, preferred equity investments and credit facilities. For the year ended December 31, 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 year ended December 31, 2021 as compared to the same period in 2020, interest income decreased by $2.6 million, primarily due to the suspension of interest income accrual of $3.6 million on three loans, because recovery of such income was doubtful, partially offset by an increase in contractual interest income as a result an increase in the weighted average principal balance of gross loans. Real Estate Operating Revenue For the year ended December 31, 2021 as compared to the same period in 2020, real estate operating revenue decreased by $1.5 million, as a result of a lease termination in the third quarter of 2020. Prepayment Fee Income Prepayment fee income represents prepayment fees charged to borrowers for the early repayment of loans. 40 For the year ended December 31, 2021, we received a prepayment fee income of $0.2 million on a loan that the borrower repaid one year before maturity. There was no prepayment fee income for the year ended December 31, 2020. Other Operating Income For the year ended December 31, 2021 as compared to the same period in 2020, other operating income increased by $0.4 million, as a result of dividend income earned on the marketable securities we invested in. Operating Expenses Reimbursed to Manager Under the terms of the Management Agreement, we reimburse the Manager for operating expenses incurred in connection with services provided to us, including our allowable share of the Manager’s overhead, such as rent, employee costs, utilities and technology costs. For the year ended December 31, 2021 as compared to the same period in 2020, operating expenses reimbursed to the Manager increased by $0.9 million as a result of an increase in the Manager’s overhead costs. 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, net of participation interest sold to affiliates, for each real estate-related investment and cash held by us. For the year ended December 31, 2021 as compared to the same period in 2020, asset management fees increased by $0.7 million, primarily due to an increase in total assets 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 each of the year ended December 31, 2021 as compared to the same period in 2020, asset servicing fees increased by $0.2 million, primarily due to an increase in total assets under management. Provision for Loan Losses The Manager performs a quarterly evaluation for possible impairment of our portfolio of loans. We record an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) impaired loan reserves, if any. As of December 31, 2021, we had one loan with a loan risk rating of “4” and no loans with a loan risk rating of “5” and recorded general allowance for loan losses of $0.6 million for the year ended December 31, 2021. As of December 31, 2020, we had three loans with a loan risk rating of “4” and one loan with a loan risk rating of “5” and recorded general allowance for loan losses of $1.3 million for the year ended December 31, 2020. Additionally, as of December 31, 2021 and 2020, we had three and one loans, respectively, deemed impaired and recorded specific allowance for loan losses of $10.3 million and $2.5 million, respectively, as a result of a decline in the value of the respective collateral. Real Estate Operating Expenses For the year ended December 31, 2021 as compared to the same period in 2020, real estate operating expenses increased by $0.5 million, primarily due to an increase in ground rent expense on the multi-tenant office building resulting from a recent rent reset. Depreciation and Amortization For each of the year ended December 31, 2021 as compared to the same period in 2020, depreciation and amortization decreased by $0.6 million, primarily due to a lease termination in the third quarter of 2020, at which time we wrote off the related intangible assets and liabilities. 41 Impairment Charge For the year ended December 31, 2021, we recorded an impairment charge of $3.4 million on the development 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. There was no such impairment charge recorded for the year ended December 31, 2020. Professional Fees For the year ended December 31, 2021 as compared to the same period in 2020, professional fees increased by $0.1 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 year ended December 31, 2021 as compared to the same period in 2020, interest expense from obligations under participation agreements increased by $2.1 million, primarily due to an increase in weighted average principal amount outstanding on obligations under participation agreements. Interest Expense on Repurchase Agreement Payable On December 12, 2018, we entered into a master repurchase agreement that provided for advances of up to $150.0 million in the aggregate, which we used to finance certain secured performing commercial real estate loans. On September 3, 2020, we terminated the master repurchase agreement and replaced it with the indenture and credit agreement. On November 8, 2021, we entered into a new master repurchase agreement that provides for advances of up to $195 million which we expect to use to finance certain secured performing commercial real estate loans, including senior mortgage loans. For the year ended December 31, 2021 as compared to the same period in 2020, interest expense on repurchase agreement payable decreased by $3.6 million as a result of a decrease in the weighted average principal amount outstanding on repurchase agreement payable. Interest Expense on Mortgage Loan Payable For the year ended December 31, 2021 as compared to the same period in 2020, interest expense on mortgage loan payable decreased by $0.5 million, as a result of a decrease in the weighted average principal amount outstanding on mortgage loan payable. 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 used for short term financing needed to bridge the timing of anticipated loans repayments and funding obligations. On October 2, 2020, we amended the credit facility and reduced the commitment to $15.0 million. On March 16, 2021, the credit facility was terminated. 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. For the year ended December 31, 2021 as compared to the same period in 2020, interest expense on revolving line of credit decreased by $0.5 million, due to a decrease in weighted average principal amount outstanding on the revolving line of credit. Interest Expense on Term Loan Payable On September 3, 2020, we entered into an indenture and credit agreement that provides for a floating rate loan of $103.0 million, $3.6 million of additional future advances, and may provide up to $11.6 million of additional future discretionary advances, in connection with certain outstanding funding commitments under the mortgage assets owned by us and financed under the indenture and credit agreement. The loan currently bears interest at LIBOR plus 4.25% with a LIBOR floor of 1.0%. For the year ended December 31, 2021 as compared to the same period in 2020, interest expense on term loan payable increased by $4.7 million, as a result of an increase in the weighted average principal amount outstanding on term loan payable. 42 Interest Expense on Secured Borrowing In March 2020, we entered into a financing transaction where a third-party purchased an A-note position. However, the sale of the A-note position did not qualify for sale accounting treatment and therefore, the gross amount of the loan remains in the consolidated balance sheets. The portion that was sold is reflected as secured borrowing in the consolidated balance sheet, and the associated interest is reflected as interest expense on secured borrowing in the consolidated statements of operations. For the year ended December 31, 2021 as compared to the same period in 2020, interest expense on secured borrowing increased by $0.9 million, as a result of an increase in the weighted average principal amount outstanding. Interest Expense on Unsecured Notes Payable In June 2021, we issued $85.1 million in aggregate principal amount of 6.00% notes due 2026, for net proceeds of $82.5 million after deducting underwriting commissions of $2.7 million, but before offering expenses payable by us. For the year ended December 31, 2021, interest expense on unsecured notes payable was $3.2 million. There was no such interest expense for the year ended December 31, 2020 because the notes were not yet issued. Net Loss on Extinguishment of Obligations under Participation Agreements In March 2020, as a result of the Merger and Issuance of Common Stock to Terra Offshore REIT transactions, we settled an aggregate of $49.8 million of participation interests in loans that we owned with affiliates and recognized a net loss on extinguishment of obligations under participation agreements of $0.3 million, which was primarily related to transaction costs incurred in connection with both transactions. There was no such loss recognized for the year ended December 31, 2021. Income from Equity Investment in Unconsolidated Investments In August 2020, we entered into a subscription agreement whereby we committed to fund up to $50.0 million to purchase partnership interest in a limited partnership. In the fourth quarter of 2021, we purchased 80% equity interests in two joint ventures that own real estate properties. We account for our equity interests in these investments using the equity method of accounting. For the year ended December 31, 2021, we recognized income from equity investment in unconsolidated investments of $5.9 million, which consisted of equity income from the limited partnership of $6.2 million, partially offset by equity loss from two joint ventures of $0.2 million. For the year ended December 31, 2020, we recognized income from equity investment in unconsolidated investments of $0.04 million due to operations of the limited partnership that began in December 2020. Realized Loss on Repayment of Loans For the year ended December 31, 2021, two previously defaulted loans were repaid at a discount and we recognized a net loss on loan repayment of $0.5 million, excluding previously accrued allowance for loan losses of $1.0 million. There was no such loss recognized during the same period in 2020. Realized Gains on Marketable Securities For the year ended December 31, 2021, we sold marketable securities and recognized realized gains on marketable securities of $0.1 million. For the year ended December 31, 2020, we sold marketable securities and recognized realized gains on marketable securities of $1.2 million. Net (Loss) Income For the year ended December 31, 2021, the resulting net loss was $12.4 million, compared to the resulting net income of $5.3 million for the same period in 2020. Financial Condition, Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, funding and maintaining our assets and operations, making distributions to our stockholders and other general business needs. We use significant cash to purchase our target assets, repay principal and interest on our borrowings, make 43 distributions to our investors and fund our operations. Our primary sources of cash generally consist of payments of principal and interest we receive on our portfolio of investments, cash generated from our operating results and unused borrowing capacity under our financing sources. We deploy moderate amounts of leverage as part of our operating strategy and use a number of sources to finance our target assets, including our senior notes, term loan, repurchase agreement and 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. In addition, we may divide the loans we originate into senior and junior tranches and dispose of the more senior tranches as an additional means of providing financing to our business. We may also issue additional equity, equity-related and debt securities to fund our investment strategies. We may issue these securities to unaffiliated third parties or to vehicles advised by affiliates of Terra Capital Partners or third parties. As part of our capital raising transactions, we may grant to one or more of these vehicles certain control rights over our activities including rights to approve major decisions we take as part of our business. In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for our business. Obligations under participation agreements totaling $7.8 million and secured borrowing of $34.5 million will mature in the next twelve months. We expect to use the proceeds from the repayment of the corresponding investments to repay the participation obligations. Additionally, we expect to fund approximately $53.0 million of the unfunded commitments to borrowers during the next twelve months. We expect to maintain sufficient cash on hand to fund such commitments through matching these commitments with principal repayments on outstanding loans. Additionally, we had $32.0 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBOR plus 3.85% with a LIBOR floor of 2.23%, that is collateralized by an office building. The mortgage loan payable matures on September 27, 2022. We expect to refinance the mortgage loan payable before it matures. On September 3, 2020, we entered into an indenture and credit agreement that provides for a floating rate term loan of $103.0 million, $3.6 million of additional future advances, and may provide up to $11.6 million of additional future discretionary advances, in connection with certain outstanding funding commitments under mortgage assets owned by us and financed under the indenture and credit agreement. The floating rate term loan bears interest at a rate equal to LIBOR plus 4.25% with a LIBOR floor of 1.0%, and was scheduled to mature on March 14, 2025. On February 18, 2022, we refinanced the term loan with a new repurchase agreement that provides for advances up to $200.0 million with an initial term of two years. As of December 31, 2021, the amount outstanding under the indenture and credit agreement was $93.8 million. On March 12, 2021, we entered into 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 was scheduled to mature on March 12, 2023. On January 4, 2022, we amended the revolving line of credit to increase the maximum amount available to $125.0 million and extended the maturity date of the facility to March 12, 2024 with an annual 12-month extension available at our option, which are subject to certain conditions. As of December 31, 2021, the revolving line of credit had an outstanding balance of $38.6 million. In June 2021, we issued $85.1 million in aggregate principal amount of 6.00% notes due 2026, for net proceeds of $82.5 million after deducting underwriting commissions of $2.7 million, but before offering expenses payable by us. Net proceeds from the notes issuance were used to make new investments as well as for general corporate purposes. On November 8, 2021, we entered into a master repurchase agreement that provides for advances of up to $195.0 million in the aggregate, which we expect to use to finance certain secured performing commercial real estate loans, including senior mortgage loans. Advances under the master repurchase agreement accrue interest at an annual rate equal to the sum of LIBOR plus an applicable spread, which ranges from 1.60% to 1.85%, and have a maturity date of November 7, 2024. As of December 31, 2021, the master repurchase agreement had an outstanding balance of $44.6 million. Cash Flows From Operating Activities For the year ended December 31, 2021 as compared to the same period in 2020, cash flows from operating activities decreased by $3.8 million, primarily due to a decrease in contractual interest income, payment for real estate tax on our operating real estate as well as payment for additional ground rent as a result of the rent reset. 44 Cash Flows Used In Investing Activities For the year ended December 31, 2021, cash flows used in investing activities were $87.7 million, primarily related to origination and purchase of loans of $252.4 million, purchase of equity interests in unconsolidated investments of $32.2 million and purchase of marketable securities of $6.5 million, partially offset by proceeds from repayments of loans of $196.8 million and proceeds from sale of marketable securities of $6.6 million. For the year ended December 31, 2020, cash flows used in investing activities were $78.2 million, primarily related to payments for investments of $150.4 million, partially offset by proceeds from sales and repayments of investments of $72.2 million. Cash Flows From Financing Activities For the year ended December 31, 2021, cash flows from financing activities were $101.8 million, primarily due to proceeds from issuance of unsecured notes payable, net of discount, of $82.5 million, proceeds from obligations under participation agreements and secured borrowing of $87.9 million and proceeds from borrowings under the term loan, revolving line of credit and repurchase agreement of $85.9 million. These cash inflows were partially offset by repayments on obligations under participation agreements of $101.7 million, distributions paid of $17.1 million, payment of mortgage principal of $12.1 million, repayment on borrowings under the term loan of $16.6 million, a decrease in interest reserve and other deposits hold on investments of $4.7 million and payment for deferred financing costs of $2.3 million. For the year ended December 31, 2020, cash flows from financing activities were $52.7 million, primarily due to proceeds from obligations under participation agreements of $22.5 million, proceeds from borrowings under our repurchase agreement of $22.9 million, cash acquired from Terra Property Trust 2 of $16.9 million and cash contributed by Terra Offshore REIT of $8.6 million, partially offset by distributions paid of $21.2 million, a decrease in interest reserve and other deposits held on investments of $6.4 million, payment for repurchase of common stock of $3.6 million and repayments on obligations under participation agreements of $5.9 million. Additionally, we replaced the repurchase agreement with an indenture and credit agreement, and received proceeds from borrowings under the indenture and credit agreement of $107.6 million and made repayments for borrowings under the repurchase agreement of $104.0 million, and made payments for financing costs of $2.4 million. We also received proceeds of $35.0 million from borrowings under revolving credit facility which we repaid in the same period. Critical Accounting Policies and Use of Estimates Our consolidated financial statements are prepared in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our expected operating plans, we will describe additional critical accounting policies in the notes to our future consolidated financial statements in addition to those discussed below. Allowance for Loan Losses Our loans are typically collateralized by either the sponsors’ equity interest in the real estate properties or the underlying real estate properties. As a result, we regularly evaluate the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan-by-loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations and/or reserve balances are sufficient to cover the debt service requirements currently and into the future; (ii) the ability of the borrower to refinance the loan; and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of the sponsor as well as its competency in managing and operating the real estate property. In addition, we consider the overall economic environment, real estate sector, and geographic submarket in which the borrower operates. Such analyses are completed and reviewed by asset management and finance personnel, who utilize various data 45 sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, the capitalization and discount rates; (ii) site inspections; and (iii) current credit spreads and discussions with market participants. Our Manager performs a quarterly evaluation for possible impairment of our portfolio of loans. A loan is impaired if it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Impairment is measured based on the present value of expected future cash flows or the fair value of the collateral if the loan is collateral dependent. Upon measurement of impairment, we record an allowance to reduce the carrying value of the loan with a corresponding charge to net income. In conjunction with the quarterly evaluation of loans not considered impaired, our Manager assesses the risk factors of each loan and assigns each loan a risk rating between 1 (very low risk) and 5 (highest risk), which is an average of the numerical ratings in the following categories: (i) sponsor capability and financial conditions; (ii) loan and collateral performance relative to underwriting; (iii) quality and stability of collateral cash flows and/or reserve balances; and (iv) loan to value. We record an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) impaired loan reserves, if any. There may be circumstances where we modify a loan by granting the borrower a concession that we might not otherwise consider when a borrower is experiencing financial difficulty or is expected to experience financial difficulty in the foreseeable future. Such concessionary modifications are classified as troubled debt restructurings (“TDRs”), unless the modification solely results in a delay in a payment that is insignificant. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes. Management Agreement with Terra REIT Advisors We currently pay the following fees to Terra REIT Advisors pursuant to the Management Agreement: Origination and Extension Fee . An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund or structure real estate-related investments, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, our Manager also receives an origination fee equal to the lesser of (i) 1.0% of the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension. Asset Management Fee . A monthly asset management fee at an annual rate equal to 1.0% of the aggregate funds under management, which includes the loan origination amount or aggregate gross acquisition cost, as applicable, for each real estate-related loan and cash held by us. Asset Servicing Fee . A monthly asset servicing fee at an annual rate equal to 0.25% of the aggregate gross origination price or aggregate gross acquisition price for each real estate related loan then held by us (inclusive of closing costs and expenses). Disposition Fee . A disposition fee in the amount of 1.0% of the gross sale price received by our company from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and (ii) the amount of the fee paid by the borrower in connection with such transaction. If we take ownership of a property as a result of a workout or foreclosure of a loan, we will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price. Transaction Breakup Fee . In the event that we receive any “breakup fees,” “busted-deal fees,” termination fees, or similar fees or liquidated damages from a third-party in connection with the termination or non-consummation of any loan or disposition transaction, our Manager will be entitled to receive one-half of such amounts, in addition to the reimbursement of all out-of-pocket fees and expenses incurred by our Manager with respect to its evaluation and pursuit of such transactions. In addition to the fees described above, we reimburse our Manager for operating expenses incurred in connection with services provided to the operations of our company, including our allocable share of our Manager’s overhead, such as rent, employee costs, utilities, and technology costs. 46 The following table presents a summary of fees paid and costs reimbursed to our Manager in connection with providing services to us: Years Ended December 31, 2021 2020 Origination and extension fee expense (1)(2) $ 2,729,598 $ 1,383,960 Asset management fee 5,134,149 4,480,706 Asset servicing fee 1,181,924 1,008,256 Operating expenses reimbursed to Manager 6,916,371 6,041,075 Disposition fee (3) 1,006,302 504,611 Total $ 16,968,344 $ 13,418,608 _______________ (1) Origination and extension fee expense is generally offset with origination and extension fee income. Any excess is deferred and amortized to interest income over the term of the loan. (2) Amount for the years ended December 31, 2021 and 2020 excluded $0.3 million and $0.5 million of origination fee, respectively, paid to the Manager in connection with our equity investment in unconsolidated investments. These origination fees were capitalized to the carrying value of the unconsolidated investments as transaction costs. (3) Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations. Participation Agreements and Secured Borrowing We have further diversified our exposure to loans and borrowers by entering into participation agreements whereby we transferred a portion of certain of our loans on a pari passu basis to related parties, primarily other affiliated funds managed by our Manager or its affiliates, and to a lesser extent, unrelated parties. We have also sold a portion of a loan to a third-party that did not qualify for sale accounting. In March 2020, we settled an aggregate of $49.8 million of participation interests in loans held by us with affiliates. In connection with the Merger and Issuance of Common Stock to Terra Offshore REIT, the related participation obligations were settled. As of December 31, 2021, the principal balance of our participation obligations totaled $42.0 million, all of which were participation obligations to Terra Fund 6. Additionally, as of December 31, 2021, the principal balance of our secured borrowing was $34.5 million. Terra Fund 6 is managed by Terra Income Advisors, LLC, an affiliate of our Manager. If we enter into participation agreements in the future, we generally expect to enter into such agreements only at the time of origination of the investment. Our Manager may experience conflicts in allocating investments as a result of differing compensation arrangements of the Manager and its affiliates and Terra Fund 6. The loans that are subject to participation agreements are held in our name, but each of the participant’s rights and obligations, including with respect to interest income and other income (e.g., exit fee, prepayment income) and related fees/expenses (e.g., disposition fees, asset management and asset servicing fees), are based upon their respective pro rata participation interest in such participated investments, as specified in the respective participation agreements. We do not have direct liability to a participant with respect to the underlying loan and the participants’ share of the investments is repayable only from the proceeds received from the related borrower/issuer of the investments and, therefore, the participants also are subject to credit risk (i.e., risk of default by the underlying borrower/issuer). Pursuant to the participation agreement with these entities, we receive and allocate the interest income and other related investment income to the participants based on their respective pro rata participation interest. The affiliated fund participant pays related expenses also based on their respective pro rata participation interest (i.e., asset management and asset servicing fees, disposition fees) directly to our Manager, as per the terms of each respective affiliate’s management agreement. Other than for U.S. federal income tax purposes, our loan participations do not qualify for sale treatment. As such, the investments remain on our combined consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. Similarly, interest earned on the entire loan balance is recorded within “Interest income” and the 47 interest related to the participation interest is recorded within “Interest expense from obligations under participation agreements” in the consolidated statements of operations. For the year ended December 31, 2021, the weighted average outstanding principal balance on obligations under participation agreements was approximately $114.4 million and the weighted average interest rate was approximately 11.0%, compared to weighted average outstanding principal balance of approximately $83.2 million and weighted average interest rate of approximately 10.9% for the year ended December 31, 2020.