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 Class B Common Stock. As of March 10, 2023, we had 24,335,379 shares of Class B Common Stock outstanding held by 2,121 investors. As of March 10, 2023, 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, 2022. Issuer Purchases of Equity Securities There were no issuer purchases of equity securities during the year ended December 31, 2022. Item 6. [Reserved]. 36 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, 2022, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 31 loans in 10 states with an aggregate net principal balance of $633.2 million, a weighted average coupon rate of 11.5%, a weighted average loan-to-value ratio of 70.1% and a weighted average remaining term to maturity of 1.1 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, 2022, our portfolio included underlying properties located in 31 markets, across 10 states and includes property types such as multifamily housing, 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 Maryland General Corporation Law 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 certain Terra Funds to our company in exchange for all of the shares of our common stock. On March 2, 2020, we engaged in a series of transactions pursuant to which we issued an aggregate of 4,574,470.35 shares of common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by us, cash of $25.5 million and other working capital. Following the consummation of the BDC Merger and as of December 31, 2022, former Terra BDC stockholders owned approximately 19.9% of our common equity, Terra JV held 70.0% of the issued and outstanding shares of our common stock with the remainder of 10.1% held by Terra Offshore REIT; and Terra Fund 5 and Terra Fund 7 owned an 87.6% and 12.4% interest, respectively, in Terra JV. We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2016. So long as we qualify as a REIT, we generally are not subject to U.S. federal income tax on our net taxable income to the extent that we annually distribute all of our net taxable income to our stockholders. Recent Developments BDC Merger On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022, Terra BDC merged with and into Terra LLC, our wholly owned subsidiary, with Terra LLC continuing as the surviving entity of the merger and as our wholly owned subsidiary. The Certificate of Merger and Articles of Merger with respect to the BDC Merger were filed with the Secretary of State of the State of Delaware and SDAT, respectively, at the Effective Time. At the Effective Time, except for any shares of Terra BDC Common Stock held by us or any of our wholly owned subsidiaries or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of our newly designated Class B Common Stock, and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by 37 multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38. Pursuant to the terms of the transactions described in the Merger Agreement, approximately 4,847,910 shares of Class B Common Stock were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of the Closing Date. Following the consummation of the BDC Merger, former Terra BDC stockholders owned approximately 19.9% of our common equity. On the Closing Date, we filed with the SDAT the Charter Amendment. Pursuant to the Charter Amendment, (i) the authorized shares of our stock which we have authority to issue were increased from 500,000,000 to 950,000,000, consisting of 450,000,000 shares of Class A Common Stock, 450,000,000 shares of Class B Common Stock, and 50,000,000 shares of Preferred Stock, and (ii) each share of our common stock issued and outstanding immediately prior to the Effective Time was automatically changed into one issued and outstanding share of Class B Common Stock. The Class B Common Stock rank equally with and have identical preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption as each other share of our common stock, except as set forth below with respect to conversion. On the First Conversion Date of initial listing of shares of Class A Common Stock for trading on a national securities exchange or such earlier date as approved by our Board, one-third of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock. On the Second Conversion Date, one-half of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock. On the Third Conversion Date, all of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock. As of the Effective Time and in accordance with the Merger Agreement, the size of our Board was increased by three members and each of Spencer Goldenberg, Adrienne Everett and Gaurav Misra (each a “Terra BDC Designee) was elected to our Board to fill the vacancies created by such increase, with each Terra BDC Designee to serve until our next annual meeting of stockholders and until his or her successor is duly elected and qualifies. Each of the other members of our Board immediately prior to the Effective Time continued as members following the Effective Time. Portfolio Summary The following tables provide a summary of our net loan portfolio as of: December 31, 2022 Fixed Rate Floating Rate (1)(2)(3) Total Gross Loans Obligations under Participation Agreements Total Net Loans Number of loans 8 23 31 1 31 Principal balance $ 90,990,183 $ 554,805,276 $ 645,795,459 $ 12,584,958 $ 633,210,501 Amortized cost 92,274,998 534,215,769 626,490,767 12,680,594 613,810,173 Fair value 90,729,098 532,416,656 623,145,754 12,680,595 610,465,159 Weighted average coupon rate 13.82 % 11.23 % 11.59 % 16.36 % 11.50 % Weighted-average remaining term (years) 1.35 1.10 1.14 1.69 1.13 38 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 _______________ (1) These loans pay a coupon rate of LIBOR or SOFR plus a fixed spread. Coupon rate shown was determined using LIBOR of 4.39%, average SOFR of 4.06% and Term SOFR of 4.36% as of December 31, 2022, and LIBOR of 0.10% as of December 31, 2021. (2) As of December 31, 2022 and 2021, amount included $413.1 million and $163.1 million of senior mortgages used as collateral for $261.0 million and $93.8 million of borrowings under credit facilities, respectively. (3) As of December 31, 2022 and 2021, twenty-one and thirteen of these loans, respectively, are subject to a LIBOR or SOFR floor, as applicable. In addition to our net loan portfolio, as of December 31, 2022, we owned a multi-tenant office building acquired pursuant to a foreclosure and as of December 31, 2021, we owned 4.9 acres of land acquired pursuant to a deed in lieu of foreclosure and the aforementioned multi-tenant office building. The parcel of land was sold in the second quarter of 2022. The real estate and related lease intangible assets and liabilities had a net carrying value of $40.6 million and $56.1 million as of December 31, 2022 and 2021, respectively. The mortgage loan payable encumbering the multi-tenant office building had an outstanding principal amount of $29.3 million and $32.0 million as of December 31, 2022 and 2021, respectively. Additionally, as of December 31, 2022 and 2021, we owned 27.9% and 50.0%, 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. W e also beneficially owned equity interests in three joint ventures that invest in real estate properties. In 2022, in connection with a mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower. We accounted for this arrangement as an equity investment. As of December 31, 2022 and 2021, these equity investments had total carrying value of $62.5 million and $69.7 million, respectively. Book Value Per Share We calculate our book value per share by dividing our net equity by the number of outstanding shares of our common stock, unless otherwise determined by our Board. Our book value per share of Class B Stock Common Stock as of December 31, 2022 was $13.23. Portfolio Investment Activity For the years ended December 31, 2022 and 2021, we invested $126.9 million and $117.3 million in new and add-on investments and had $33.3 million and $85.1 million of repayments, resulting in net investments of $93.6 million and $32.2 million, respectively. Amounts are net of obligations under participation agreements, secured borrowing, borrowings under the master repurchase agreement, the term loan, the repurchase agreements and the revolving line of credit. 39 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 as of: December 31, 2022 December 31, 2021 Loan Structure Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total First mortgages $ 456,408,889 $ 461,299,182 75.1 % $ 310,933,350 $ 313,515,326 79.8 % Preferred equity investments 121,231,434 122,132,177 19.9 % 63,441,546 63,515,633 16.2 % Credit facility 28,802,833 29,080,183 4.7 % 11,762,500 11,859,876 3.0 % Mezzanine loans 26,767,345 26,770,521 4.4 % 17,444,357 17,622,804 4.5 % Allowance for loan losses — (25,471,890) (4.1) % — (13,658,481) (3.5) % Total $ 633,210,501 $ 613,810,173 100.0 % $ 403,581,753 $ 392,855,158 100.0 % December 31, 2022 December 31, 2021 Property Type Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total Office $ 171,611,750 $ 172,042,063 27.9 % $ 166,071,342 $ 166,836,320 42.5 % Industrial 147,796,164 148,891,742 24.3 % 18,762,500 18,859,876 4.8 % Multifamily 104,589,464 105,570,432 17.2 % 72,999,417 73,955,240 18.8 % Mixed-use 64,880,450 65,838,965 10.7 % 28,940,658 28,977,024 7.4 % Infill land 48,860,291 49,565,437 8.1 % 28,960,455 28,923,827 7.4 % Hotel - full/select service 43,222,382 43,758,804 7.1 % 56,847,381 57,395,682 14.6 % Student housing 31,000,000 31,774,261 5.2 % 31,000,000 31,565,670 8.0 % Infrastructure 21,250,000 21,840,359 3.6 % — — — % Allowance for loan losses — (25,471,890) (4.1) % — (13,658,481) (3.5) % Total $ 633,210,501 $ 613,810,173 100.0 % $ 403,581,753 $ 392,855,158 100.0 % December 31, 2022 December 31, 2021 Geographic Location Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total United States California $ 151,668,387 $ 153,158,967 24.9 % $ 187,209,547 $ 189,082,380 48.1 % New York 91,845,479 91,877,084 14.9 % 63,441,546 63,515,633 16.2 % Georgia 72,401,718 73,101,964 11.9 % 53,289,288 53,536,884 13.6 % Texas 67,625,000 68,142,046 11.1 % 13,625,000 13,725,690 3.5 % New Jersey 62,228,622 62,958,482 10.3 % — — — % Washington 56,671,267 57,027,639 9.3 % 3,523,401 3,382,683 0.9 % Utah 49,250,000 50,698,251 8.3 % 28,000,000 28,420,056 7.2 % North Carolina 43,520,028 44,041,162 7.2 % 44,492,971 44,704,699 11.4 % Arizona 31,000,000 31,276,468 5.1 % — — — % Massachusetts 7,000,000 7,000,000 1.1 % 7,000,000 7,000,000 1.8 % South Carolina — — — % 3,000,000 3,145,614 0.8 % Allowance for loan losses — (25,471,890) (4.1) % — (13,658,481) (3.5) % Total $ 633,210,501 $ 613,810,173 100.0 % $ 403,581,753 $ 392,855,158 100.0 % 40 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. We maintain all of our cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. Concentration Risk We hold real estate-related loans. Thus, our loan portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such loans could materially reduce our capital. Interest Rate Risk Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in the fair value of our interest-bearing financial instruments. With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to slow; and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to increase; and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease. 41 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. 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. 42 Results of Operations The following table presents the comparative results of our operations: Years Ended December 31, 2022 2021 Change Revenues Interest income $ 42,591,972 $ 36,743,470 $ 5,848,502 Real estate operating revenue 11,451,914 8,894,991 2,556,923 Prepayment fee income 1,984,061 190,997 1,793,064 Other operating income 586,499 855,799 (269,300) 56,614,446 46,685,257 9,929,189 Operating expenses Operating expenses reimbursed to Manager 8,076,321 6,916,371 1,159,950 Asset management fee 6,556,492 5,134,149 1,422,343 Asset servicing fee 1,560,044 1,181,924 378,120 Provision for loan losses 11,813,409 10,904,163 909,246 Real estate operating expenses 5,005,551 5,003,893 1,658 Depreciation and amortization 6,530,595 3,989,114 2,541,481 Impairment charge 1,604,989 3,395,430 (1,790,441) Professional fees 3,697,792 1,795,856 1,901,936 Directors fees 192,497 145,000 47,497 Other 747,535 448,503 299,032 45,785,225 38,914,403 6,870,822 Operating income 10,829,221 7,770,854 3,058,367 Other income and expenses Interest expense from obligations under participation agreements (3,180,771) (10,596,545) 7,415,774 Interest expense on repurchase agreement payable (7,913,942) (142,495) (7,771,447) Interest expense on mortgage loan payable (2,173,114) (2,449,239) 276,125 Interest expense on revolving line of credit (2,674,568) (911,811) (1,762,757) Interest expense on term loan payable (524,344) (6,835,877) 6,311,533 Interest expense on unsecured notes payable (6,682,937) (3,173,673) (3,509,264) Interest expense on secured borrowing (1,507,572) (1,576,502) 68,930 Net unrealized (losses) gains on marketable securities (122,299) 22,500 (144,799) Loss on sale of real estate (51,984) — (51,984) Income from equity investment in unconsolidated investments 2,731,477 5,925,802 (3,194,325) Gain on sale of interests in unconsolidated investments 799,827 — 799,827 Realized loss on loan repayments — (517,989) 517,989 Gain on extinguishment of obligations under participation agreements 3,435,902 — 3,435,902 Realized gains on marketable securities 83,411 129,248 (45,837) (17,780,914) (20,126,581) 2,345,667 Net loss $ (6,951,693) $ (12,355,727) $ 5,404,034 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. 43 The following table presents a reconciliation of our loan portfolio on a weighted average basis from gross to net : Year Ended December 31, 2022 Year Ended December 31, 2021 Weighted Average Principal Amount (1) Weighted Average Coupon Rate (2) Weighted Average Principal Amount (1) Weighted Average Coupon Rate (2) Total portfolio Gross loans $ 550,062,087 10.7 % $ 456,344,152 8.5 % Obligations under participation agreements and secured borrowing (59,931,021) 12.1 % (114,437,021) 11.0 % Repurchase agreement payable (167,507,961) 6.2 % (6,349,642) 2.6 % Term loan payable (10,303,678) 5.3 % (103,433,296) 5.3 % Revolving line of credit (47,383,467) 7.6 % (16,721,744) 4.0 % Net loans (3) $ 264,935,960 14.0 % $ 215,402,449 9.2 % Senior loans Gross loans 408,607,321 9.7 % 272,577,220 6.5 % Obligations under participation agreements and secured borrowing (24,800,580) 8.1 % (51,693,824) 8.9 % Repurchase agreement payable (167,507,961) 6.2 % (6,349,642) 2.6 % Term loan payable (10,303,678) 5.3 % (103,433,296) 5.3 % Revolving line of credit (47,383,467) 7.6 % (16,721,744) 4.0 % Net loans (3) $ 158,611,635 14.6 % $ 94,378,714 7.2 % Subordinated loans (4) Gross loans 141,454,766 13.6 % 183,766,932 11.4 % Obligations under participation agreements (35,130,441) 13.7 % (62,743,197) 12.8 % Net loans (3) $ 106,324,325 13.6 % $ 121,023,735 10.7 % _______________ (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. Interest Income For the year ended December 31, 2022 as compared to the same period in 2021, interest income increased by $5.8 million, primarily due to an increase in contractual interest income as a result of an increase in the weighted average principal balance of gross loans due to new loans we originated in 2022 and loans we acquired in connection with the BDC Merger, as well as an increase in the weighted average coupon rate due to increases in the underlying index rates. Real Estate Operating Revenue For the year ended December 31, 2022 as compared to the same period in 2021, real estate operating revenue increased by $2.6 million, as a result of lease termination income recognized in 2022 in connection with a termination notice received in November 2021. Prepayment Fee Income Prepayment fee income represents prepayment fees charged to borrowers for the early repayment of loans. For the year ended December 31, 2022 as compared to the same period in 2021, prepayment fee income increased by $1.8 million, as a result of an increase in loans with minimum yield provisions repaid before maturity. 44 Other Operating Income For the year ended December 31, 2022 as compared to the same period in 2021, other operating income decreased by $0.3 million, as a result of a decrease in dividend income earned on the marketable securities resulting from a decrease in the weighted average balance of the marketable securities. Operating Expenses Reimbursed to Manager Under the terms of the Management Agreement with our Manager, we reimburse our Manager for operating expenses incurred in connection with services provided to us, including our allowable share of our Manager’s overhead, such as rent, employee costs, utilities and technology costs. For the year ended December 31, 2022 as compared to the same period in 2021, operating expenses reimbursed to our Manager increased by $1.2 million, as a result of an increase in the allocation ratio resulting from an increase in total assets under management due to new loans we originated as well as loans acquired in connection with the BDC Merger. Asset Management Fee Under the terms of the Management Agreement with our Manager, we paid our 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, 2022 as compared to the same period in 2021, asset management fees increased by $1.4 million, primarily due to an increase in total assets under management resulting from new loans we originated as well as loans acquired in connection with the BDC Merger. Asset Servicing Fee Under the terms of the Management Agreement with our Manager, we paid our 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, 2022 as compared to the same period in 2021, asset servicing fees increased by $0.4 million, primarily due to an increase in total assets under management resulting from new loans we originated as well as loans acquired in connection with the BDC Merger. Provision for Loan Losses Our 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, 2022, we did not have any loans with a loan risk rating of “4” or “5”, and did not record any general allowance for loan losses for the year ended December 31, 2022. As of December 31, 2022, we had four loans deemed impaired and recorded specific allowance for loan losses of $11.8 million for the year ended December 31, 2022. 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. Additionally, as of December 31, 2021, we had three loans deemed impaired and recorded specific allowance for loan losses of $10.3 million for the year ended December 31, 2021. Depreciation and Amortization For the year ended December 31, 2022 as compared to the same period in 2021, depreciation and amortization increased by $2.5 million, primarily due to a lease termination notice received in November 2021, at which time we accelerated the amortization of lease intangibles. Impairment Charge For the years ended December 31, 2022 and 2021, we recorded an impairment charge of $1.6 million and $3.4 million, respectively, on 4.9 acres of the development land located in Pennsylvania in order to reduce the carrying value of the land to 45 its estimated fair value, which is the estimated selling price less the cost of sale. The development land was sold in the second quarter of 2022. Professional Fees For the year ended December 31, 2022 as compared to the same period in 2021, professional fees increased by $1.9 million, primarily due to legal fees incurred in connection with litigation related to the ground rent described above as well as a loan refinancing in 2022 which we accounted for as a loan modification. Other For the year ended December 31, 2022 as compared to the same period in 2021, other expense increased by $0.3 million, as a result of a fee paid to a third-party in connection with the sale of a parcel of land. Interest Expense from Obligations under Participation Agreements For the year ended December 31, 2022 as compared to the same period in 2021, interest expense from obligations under participation agreements decreased by $7.4 million, as a result of a decrease in the weighted average principal amount outstanding on obligations under participation agreements, partly due to the release of obligations under participation agreements with Terra BDC in connection with the BDC Merger. Interest Expense on Repurchase Agreement Payable On November 8, 2021, we entered into a 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. Additionally, on February 18, 2022, we entered into another master repurchase agreement that provides for advances of up to $200 million, which we expect to use to finance the originations of certain secured performing commercial real estate loans and the acquisitions of certain secured non-performing commercial real estate loans. For the year ended December 31, 2022, interest expense on repurchase agreement payable increased by $7.8 million, as a result of an increase in the weighted average principal amount outstanding on repurchase agreement payable. Interest Expense on Mortgage Loan Payable For the year ended December 31, 2022 as compared to the same period in 2021, interest expense on mortgage loan payable decreased by $0.3 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 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. On January 4, 2022, we amended the revolving line of credit to increase the maximum amount available to $125.0 million. For the year ended December 31, 2022 as compared to the same period in 2021, interest expense on revolving line of credit increased by $1.8 million, due to an increase 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 provided for a floating rate loan of $103.0 million, $3.6 million of additional future advances, and 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 bore interest at LIBOR plus 4.25% with a LIBOR floor of 1.0%. On February 18, 2022, we refinanced this loan with a new repurchase agreement. In connection with the BDC Merger, we assumed a delayed 46 draw term loan of $25.0 million. The delayed draw term loan bears interest at an annual rate of 5.625% and matures on July 1, 2023. For the year ended December 31, 2022 as compared to the same period in 2021, interest expense on term loan payable decreased by $6.3 million, as a result of a decrease in the weighted average principal amount outstanding on term loan payable. Additionally, in connection with the refinancing, we reversed the previously accrued step-up interest of $0.4 million during the first quarter of 2022. 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. The secured borrowing was repaid in August 2022. For the year ended December 31, 2022 as compared to the same period in 2021, interest expense on secured borrowing decreased by $0.1 million as a result of a decrease 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. In connection with the BDC Merger, we assumed $38.4 million in aggregate principal amount of 7.00% notes due in 2026. For the year ended December 31, 2022 as compared to the same periods in 2021, interest expense on unsecured notes payable increased by $3.5 million, as a result of an increase in the weighted average principal amount outstanding. Income from Equity Investment in Unconsolidated Investments In August 2020, we entered into a subscription agreement with RESOF, an affiliate managed by our Manager, whereby we committed to fund up to $50.0 million to purchase partnership interest in RESOF. 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. 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). As of December 31, 2022 and 2021, we owned 27.9% and 50.0% of the equity interest in RESOF, respectively. W e also owned beneficial equity interests in three joint ventures that invest in real estate properties. In 2022, in connection with a mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower. We accounted for this arrangement as an equity investment. For the year ended December 31, 2022, we recognized income from equity investment in unconsolidated investments of $2.7 million, which consisted of equity income from RESOF of $5.2 million and equity loss from the joint ventures of $2.5 million. 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 RESOF of $6.2 million, partially offset by equity loss from two joint ventures of $0.2 million. Gain on Sale of Interests in Unconsolidated Investments In September 2022, we sold a 53% effective interest in two joint ventures and 59% effective interest in another joint venture for a total of $33.7 million and recognized a gain on sale of $0.8 million for the year ended December 31, 2022. There was no such gain for the year ended December 31, 2021. Realized Loss on Repayment of Loans For the year ended December 31, 2022, we did not recognize any gain or 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. 47 Gain on Extinguishment of Obligations Under Participation Agreements In connection with the BDC Merger, the obligations under participation agreements with Terra BDC totaling $37.0 million were effectively extinguished and we recognized a net gain of $3.4 million for the year ended December 31, 2022, representing the difference between the carrying value of the Company’s obligations under participation agreements and the fair value of Terra BDC’s investments acquired through participation agreements. The was no such gain for the year ended December 31, 2021. Net Loss For the year ended December 31, 2022 as compared to the same period in 2021, net loss decreased by $5.4 million. Financial Condition, Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, funding and maintaining our assets and operations, making distributions to our stockholders and other general business needs. We use significant cash to purchase our target assets, repay principal and interest on our borrowings, make distributions to our investors and fund our operations. Our primary sources of cash generally consist of payments of principal and interest we receive on our portfolio of investments, cash generated from our operating results and unused borrowing capacity under our financing sources. We deploy moderate amounts of leverage as part of our operating strategy and use a number of sources to finance our target assets, including our 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, dividends equal to 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. We expect to fund approximately $44.1 million of the unfunded commitments to borrowers during the next twelve months. We expect to maintain sufficient cash on hand to fund such commitments through matching these commitments with principal repayments on outstanding loans or draw downs on our credit facilities. Additionally, we had $29.3 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 May 31, 2023. We expect to refinance the mortgage loan payable before it matures. In connection with the BDC Merger, we assumed a $25.0 million delayed draw term loan. This term loan bears interest at an annual rate of 5.625% and matures on July 1, 2023. We expect to either maintain sufficient cash on hand to repay the facility or refinance the facility. 48 Summary of Financing The table below summarizes our debt financing as of December 31, 2022: Type of Financing Maximum Amount Available Outstanding Balance Amount Remaining Available Interest Rate Maturity Date Fixed Rate: Senior unsecured notes N/A $ 85,125,000 N/A 6.00% 6/30/2026 Senior unsecured notes N/A 38,375,000 N/A 7.00% 3/31/2026 Delayed draw term loan $ 25,000,000 25,000,000 — 5.625% 7/1/2023 $ 25,000,000 $ 148,500,000 $ — Variable Rate: Mortgage loan payable N/A $ 29,252,308 N/A LIBOR plus 3.85% with a LIBOR floor of 2.23% 5/31/2023 Line of credit $ 125,000,000 90,135,865 $ 34,864,135 LIBOR plus 3.25% with a combined floor of 4.00% 3/12/2024 UBS repurchase agreement 195,000,000 51,050,000 143,950,000 LIBOR or Term SOFR depending on repurchased asset index plus a spread ranging from 1.60% to 2.25% 11/7/2024 GS repurchase agreement 200,000,000 119,826,606 80,173,394 Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 1.75% to 3.00%) 2/18/2024 $ 520,000,000 $ 290,264,779 $ 258,987,529 Cash Flows Provided by Operating Activities For the year ended December 31, 2022 as compared to the same period in 2021, cash flows provided by operating activities decreased by $3.7 million, primarily due to payment for a deposit for a potential investment partially offset by an increase in net contractual interest income. Cash Flows Used in Investing Activities For the year ended December 31, 2022, cash flows used in investing activities were $49.1 million, primarily related to origination and purchase of loans of $290.0 million and purchase of equity interests in unconsolidated investments of $25.5 million, partially offset by proceeds from repayments of loans of $197.5 million, proceeds from sale of interests in joint ventures of $33.7 million, cash and restricted cash acquired in connection with the BDC Merger of $24.6 million, proceeds from sale of real estate of $8.6 million and proceeds from sale of marketable securities of $1.3 million. 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 partnership interest in a limited partnership 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. Cash Flows Provided by Financing Activities For the year ended December 31, 2022, cash flows provided by financing activities were $34.1 million, primarily due to proceeds from borrowings under the repurchase agreements of $151.9 million, proceeds from borrowings under the revolving line of credit of $130.5 million, and proceeds from obligations under participation agreements of $29.6 million, partially offset by repayments of borrowings under the term loan of $93.8 million, repayments on borrowings under the revolving line of credit of $79.0 million, repayment of secured borrowing of $38.7 million, repayments of borrowings under repurchase agreements of $25.6 million, repayments of obligations under participation agreements of $22.2 million and distributions paid of $16.1 million. For the year ended December 31, 2021, cash flows provided by 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 49 investments of $4.7 million and payment for deferred financing costs of $2.3 million. Distribution Reinvestment Plan On January 20, 2023, our Board adopted a distribution reinvestment plan (the “Plan”), pursuant to which our stockholders may elect to reinvest cash distributions payable by us in additional shares of Class A Common Stock and Class B Common Stock, at the price per share determined pursuant to the Plan. Critical Accounting Policies and Use of Estimates Our consolidated financial statements are prepared in conformity with United States generally accepted accounting principles, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our expected operating plans, we will describe additional critical accounting policies in the notes to our future consolidated financial statements in addition to those discussed below. Allowance for Loan Losses Our loans are typically collateralized by either the sponsors’ equity interest in the real estate properties or the underlying real estate properties. As a result, we regularly evaluate the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan-by-loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations and/or reserve balances are sufficient to cover the debt service requirements currently and into the future; (ii) the ability of the borrower to refinance the loan; and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of the sponsor as well as its competency in managing and operating the real estate property. In addition, we consider the overall economic environment, real estate sector, and geographic submarket in which the borrower operates. Such analyses are completed and reviewed by asset management and finance personnel, who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, 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,” (Higher risk), plus (ii) 5% of the aggregate carrying amount of loans rated as a “5,” (Highest risk) 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. 50 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. 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, 2022 2021 Origination and extension fee expense (1)(2) $ 2,967,291 $ 2,729,598 Asset management fee 6,556,492 5,134,149 Asset servicing fee 1,560,044 1,181,924 Operating expenses reimbursed to Manager 8,076,321 6,916,371 Disposition fee (3) 890,194 1,006,302 Total $ 20,050,342 $ 16,968,344 _______________ (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) Amounts for the years ended December 31, 2022 and 2021, excluded $0.2 million and $0.3 million, respectively, of origination fees paid to our Manager in connection with our equity investment in an unconsolidated investment. These origination fees were capitalized to the carrying value of the unconsolidated investment as a transaction cost. (3) Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations. Cost Sharing and Reimbursement Agreement with Terra LLC We have entered into a cost sharing and reimbursement agreement with Terra LLC, effective October 1, 2022 pursuant to which Terra LLC will be responsible for its allocable share of our expenses, including fees paid by us to our Manager based on 51 relative assets under management. These fees are eliminated in consolidation and therefore have no impact on our consolidated financial statements. Participation Agreements 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 connection with the BDC Merger, the obligations under participation agreements with Terra BDC totaling $37.0 million were effectively extinguished. As of December 31, 2022, the principal balance of our participation obligation was $12.6 million, which was a participation obligation to a third party. 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 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, 2022, the weighted average outstanding principal balance on obligations under participation agreements and secured borrowing was approximately $59.9 million, and the weighted average interest rate was approximately 12.1%, compared to weighted average outstanding principal balance of approximately $114.4 million, and weighted average interest rate of approximately 11.0% for the year ended December 31, 2021.