Item 5. Market for Registrant’s Common Equity
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 15, 2024, we had 24,336,033 shares of Class B Common Stock outstanding held by 5,379 investors. As of March 15, 2024, 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, 2023.
Issuer Purchases of Equity Securities
There were no issuer purchases of equity securities during the year ended December 31, 2023.
Item 6. [Reserved].
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 investment trust that originates, invests in and manages a diverse portfolio of real estate and real estate-related assets. We focus primarily on commercial real estate credit investments, including first mortgage loans, subordinated loans (including B-notes, mezzanine and preferred equity) and credit facilities throughout the United States, which we collectively refer to as our targeted assets. Our loans finance the acquisition, development or recapitalization of high-quality commercial real estate in the United States. We focus on middle market loans in the approximately $10 million to $50 million range, which we believe 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 by earning high current income that allows for regular distributions, and, in certain instances, benefiting from potential capital appreciation. There can be no assurances that we will be successful in meeting our investment objective. We may also make strategic real estate equity and non-real estate-related investments that align with our investment objectives and criteria.
As of December 31, 2023, 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 $509.5 million, a weighted average coupon rate of 12.9% and a weighted average remaining term to maturity of 0.8 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, 2023, our portfolio included underlying properties located in 21 markets, across nine states and includes property types such as multifamily housing, student housing, commercial offices, medical offices, mixed-use, industrial and infrastructure 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.
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As of December 31, 2023, Terra Fund 7 and Terra Offshore REIT held approximately 8.7% and 10.1%, respectively, of our issued and outstanding Class B Common Stock.
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
Merger Agreements
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.
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 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 June 28, 2023, we announced we entered into an Agreement and Plan of Merger, dated as of June 27, 2023 (the “WMC Merger Agreement”), with Western Asset Mortgage Capital Corporation, a Delaware corporation (“WMC”). On August 8, 2023, WMC terminated the WMC Merger Agreement pursuant to its terms (the “Termination”), and we were paid a termination fee of $3.0 million.
Distribution of Class B Common Stock by Terra Fund 5
Prior to undertaking the REIT Formation Transaction, the Terra Funds distributed a consent solicitation memorandum disclosing the details of the proposed transactions and received the requisite consent of investors in each of the Terra Funds to engage in the REIT Formation Transaction. The consent solicitation memorandum disclosed that Terra Fund 5 could in the future make a distribution-in-kind to its members of shares of our company, rather than a cash distribution. The limited liability company agreement of Terra Fund 5 provides that the term of Terra Fund 5 expires on December 31, 2023.
On December 20, 2023, Terra Fund 5 announced that effective December 29, 2023, Terra Fund 5 would distribute all its shares of Class B Common Stock to its members as part of the winding up of Terra Fund 5. On the Distribution Date, each member of Terra Fund 5 received 2,252.02 shares of Class B Common Stock for each unit of membership interest in Terra Fund 5 held by such member. Because Terra Fund 5 previously owned its interests in the shares of Class B Common Stock indirectly through its ownership of interests in Terra JV, prior to the Distribution Date, Terra JV first distributed the shares of Class B Common Stock to Terra Fund 5, and Terra Fund 5 then distributed those shares to its members on the Distribution Date. On February 8, 2024, each of Terra Fund 5 and Terra JV were dissolved.
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Portfolio Summary
Net Loan Portfolio
The following tables provide a summary of our net loan portfolio as of:
December 31, 2023
Fixed Rate Floating
Rate (1)(2)(3)
Total Gross Loans Obligations under Participation Agreements Total Net Loans
Number of loans 5 16 21 — 21
Principal balance $ 53,998,648 $ 455,462,178 $ 509,460,826 $ — $ 509,460,826
Carrying value 54,095,173 402,377,085 456,472,258 — 456,472,258
Fair value 53,435,742 403,904,207 457,339,949 — 457,339,949
Weighted average coupon rate 12.95 % 12.92 % 12.93 % — % 12.93 %
Weighted-average remaining term (years) 1.18 0.70 0.77 — 0.77
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
Carrying value 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
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(1) These loans pay a coupon rate of London Interbank Offered Rate (“LIBOR”), Secured Overnight Financing Rate (“SOFR”), or forward-looking term rate SOFR (“Term SOFR”) plus a fixed spread. Coupon rates shown were determined using LIBOR of 5.47%, average SOFR of 5.34% and Term SOFR of 5.35% as of December 31, 2023, and LIBOR of 4.39%, average SOFR of 4.06% and Term SOFR of 4.36% as of December 31, 2022.
(2) As of December 31, 2023 and 2022, amount included $342.9 million and $413.1 million of senior mortgages used as collateral for $204.9 million and $261.0 million of borrowings under credit facilities, respectively.
(3) As of December 31, 2023 and 2022, 14 and 21 loans, respectively, are subject to a LIBOR, SOFR, or Term SOFR floor, as applicable.
Real Estate Ownership
In addition to our net loan portfolio, as of December 31, 2023, through two investments, we owned eight industrial buildings acquired in 2023; and as of December 31, 2022, we owned a multi-tenant office building acquired pursuant to a foreclosure. As of December 31, 2023 and 2022, the real estate and related lease intangible assets and liabilities had a net carrying value of $129.8 million and $40.6 million, respectively, and the mortgage loans payable encumbering the real estate properties had an outstanding principal amount of $73.5 million and $29.3 million, respectively.
Equity Investments
Additionally, as of December 31, 2023 and 2022, we owned 14.9% and 27.9%, 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 $10.0 million mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower. We accounted for this arrangement as an equity investment. In May 2023, we purchased the underlying assets and the $10.0 million mezzanine loan was settled in connection with the purchase. In November 2023, in connection with a loan restructuring, we contributed $5.0 million to another joint venture that owns a real estate property. We account for our equity interest in the joint ventures as equity method investments because we do not have a
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controlling financial interest in the entities. As of December 31, 2023 and 2022, these equity investments had total carrying value of $37.2 million and $62.5 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, 2023 and 2022 was $9.93 and $13.23, respectively.
Portfolio Investment Activity
Net Loan Portfolio
For the years ended December 31, 2023 and 2022, we invested $19.2 million and $126.9 million in new and add-on investments and had $10.3 million and $33.3 million of repayments, resulting in net investments of $8.9 million and $93.6 million, respectively. Amounts are net of obligations under participation agreements and secured financing.
Real Estate Ownership
For the year ended December 31, 2023, we made two investments for eight industrial buildings for a total capital cost of $132.1 million. In connection with these acquisitions, we obtained mortgage financing totaling $72.6 million.
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, 2023 December 31, 2022
Loan Structure Principal Balance Carrying
Value % of Total Principal Balance Carrying
Value % of Total
First mortgages $ 365,465,500 $ 368,918,890 80.9 % $ 456,408,889 $ 461,299,182 75.1 %
Preferred equity investments 126,550,969 127,105,312 27.8 % 121,231,434 122,132,177 19.9 %
Mezzanine loans 17,444,357 17,424,081 3.8 % 26,767,345 26,770,521 4.4 %
Credit facility — — — % 28,802,833 29,080,183 4.7 %
Allowance for credit losses — (56,976,025) (12.5) % — (25,471,890) (4.1) %
Total $ 509,460,826 $ 456,472,258 100.0 % $ 633,210,501 $ 613,810,173 100.0 %
December 31, 2023 December 31, 2022
Property Type Principal Balance Carrying
Value % of Total Principal Balance Carrying
Value % of Total
Office $ 144,812,619 $ 144,853,769 31.7 % $ 171,611,750 $ 172,042,063 27.9 %
Multifamily 85,660,082 86,210,868 18.9 % 104,589,464 105,570,432 17.2 %
Industrial 67,579,869 67,612,621 14.8 % 147,796,164 148,891,742 24.3 %
Mixed-use 63,096,365 63,531,806 13.9 % 64,880,450 65,838,965 10.7 %
Infill land 52,839,509 54,172,663 11.9 % 48,860,291 49,565,437 8.1 %
Hotel - full/select service 43,222,382 43,801,303 9.6 % 43,222,382 43,758,804 7.1 %
Student housing 31,000,000 31,821,832 7.0 % 31,000,000 31,774,261 5.2 %
Infrastructure 21,250,000 21,443,421 4.7 % 21,250,000 21,840,359 3.6 %
Allowance for credit losses — (56,976,025) (12.5) % — (25,471,890) (4.1) %
Total $ 509,460,826 $ 456,472,258 100.0 % $ 633,210,501 $ 613,810,173 100.0 %
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December 31, 2023 December 31, 2022
Geographic Location Principal Balance Carrying
Value % of Total Principal Balance Carrying
Value % of Total
United States
California $ 119,093,246 $ 120,296,944 26.4 % $ 151,668,387 $ 153,158,967 24.9 %
New York 90,483,672 90,483,672 19.8 % 91,845,479 91,877,084 14.9 %
New Jersey 82,419,378 83,489,049 18.3 % 62,228,622 62,958,482 10.3 %
Georgia 74,335,828 74,602,328 16.3 % 72,401,718 73,101,964 11.9 %
Utah 49,250,000 50,329,949 11.0 % 49,250,000 50,698,251 8.3 %
Washington 34,052,223 34,020,449 7.5 % 56,671,267 57,027,639 9.3 %
Arizona 31,000,000 31,296,235 6.9 % 31,000,000 31,276,468 5.1 %
North Carolina 21,826,479 21,929,657 4.8 % 43,520,028 44,041,162 7.2 %
Massachusetts 7,000,000 7,000,000 1.5 % 7,000,000 7,000,000 1.1 %
Texas — — — % 67,625,000 68,142,046 11.1 %
Allowance for credit losses — (56,976,025) (12.5) % — (25,471,890) (4.1) %
Total $ 509,460,826 $ 456,472,258 100.0 % $ 633,210,501 $ 613,810,173 100.0 %
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
Our loans and investments are subject to credit risk. The performance and value of our loans and investments depend upon the owners’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our asset management team reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.
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 and real estate-related loans. Thus, our investment 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 investments 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 and 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;
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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 and 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.
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.
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Results of Operations
The following table presents the comparative results of our operations:
Years Ended December 31,
2023 2022 Change
Revenues
Interest income $ 56,140,437 $ 42,591,972 $ 13,548,465
Real estate operating revenue 11,050,716 11,451,914 (401,198)
Prepayment fee income — 1,984,061 (1,984,061)
Other operating income 722,881 586,499 136,382
67,914,034 56,614,446 11,299,588
Operating expenses
Operating expenses reimbursed to Manager 9,234,357 8,076,321 1,158,036
Asset management fee 7,807,198 6,556,492 1,250,706
Asset servicing fee 1,857,765 1,560,044 297,721
Provision for credit losses 45,548,803 11,813,409 33,735,394
Real estate operating expenses 4,586,245 5,005,551 (419,306)
Depreciation and amortization 6,968,985 6,530,595 438,390
Impairment charge 11,765,540 1,604,989 10,160,551
Professional fees 3,741,720 3,697,792 43,928
Directors’ fees 347,714 192,497 155,217
Other 539,957 747,535 (207,578)
92,398,284 45,785,225 46,613,059
Operating (loss) income (24,484,250) 10,829,221 (35,313,471)
Other income and expenses
Interest expense on secured financing (28,113,245) (14,793,540) (13,319,705)
Interest expense on unsecured notes payable (9,643,974) (6,682,937) (2,961,037)
Interest expense on obligations under participation agreements (1,353,006) (3,180,771) 1,827,765
Gain on extinguishment of participation liability 14,079,379 3,435,902 10,643,477
Unrealized losses on investments, net (316,573) (122,299) (194,274)
(Loss) income from equity investment in unconsolidated investments (2,383,938) 2,731,477 (5,115,415)
Gain on sale of interests in unconsolidated investments — 799,827 (799,827)
Loss on disposal of real estate (4,211,153) (51,984) (4,159,169)
Realized (losses) gains on investments, net (459,279) 83,411 (542,690)
(32,401,789) (17,780,914) (14,620,875)
Net loss $ (56,886,039) $ (6,951,693) $ (49,934,346)
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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, notes payable, term loan payable, revolving credit facility and repurchase agreements payable.
The following table presents a reconciliation of our loan portfolio on a weighted average basis from gross to net :
Year Ended December 31, 2023 Year Ended December 31, 2022
Weighted Average Principal Amount (1)
Weighted Average Coupon Rate (2)
Weighted Average Principal Amount (1)
Weighted Average Coupon Rate (2)
Total portfolio
Gross loans $ 569,511,789 12.7 % $ 550,062,087 10.7 %
Obligations under participation agreements
and secured borrowing (9,987,566) 17.4 % (59,931,021) 12.1 %
Promissory notes payable (13,002,573) 10.7 % — — %
Repurchase agreements payable (134,030,835) 8.3 % (167,507,961) 6.2 %
Term loan payable — — % (10,303,678) 5.3 %
Revolving line of credit payable (87,114,331) 8.7 % (47,383,467) 7.6 %
Net loans (3)
$ 325,376,484 15.5 % $ 264,935,960 14.0 %
Senior loans
Gross loans $ 443,674,795 12.2 % $ 408,607,321 9.7 %
Obligations under participation agreements
and secured borrowing (9,987,566) 17.4 % (24,800,580) 8.1 %
Promissory notes payable (13,002,573) 10.7 % — — %
Repurchase agreements payable (134,030,835) 8.3 % (167,507,962) 6.2 %
Term loan payable — — % (10,303,678) 5.3 %
Revolving line of credit payable (87,114,331) 8.7 % (47,383,467) 7.6 %
Net loans (3)
$ 199,539,490 16.2 % $ 158,611,634 14.6 %
Subordinated loans (4)
Gross loans $ 125,836,994 14.5 % $ 141,454,766 13.6 %
Obligations under participation agreements — — % (35,130,441) 13.7 %
Net loans (3)
$ 125,836,994 14.5 % $ 106,324,325 13.6 %
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(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, 2023 as compared to the year ended December 31, 2022, interest income increased by $13.5 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 loans 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, 2023 as compared to the year ended December 31, 2022, real estate operating revenue decreased by $0.4 million, primarily due to lease termination income recognized in 2022 (there was no such lease termination income recognized in 2023), partially offset by rental income contributed by the industrial buildings acquired in 2023.
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Prepayment Fee Income
For the year ended December 31, 2023, there was no early repayment of loans and we did not recognize any prepayment fee income. For the year ended December 31, 2022, we recognized prepayment fee income of $2.0 million on loans with minimum yield provisions repaid before maturity.
Other Operating Income
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, other operating income increased by $0.1 million, primarily due to an increase in dividend income recognized on marketable securities, partially offset by a decrease in application fees income on deals under application.
Operating Expenses Reimbursed to Manager
Under the terms of a management agreement (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, 2023 as compared to the year ended December 31, 2022, operating expenses reimbursed to our Manager increased by $1.2 million, primarily due to an increase in the allocation ratio resulting from an increase in total assets under management primarily due to 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, 2023 as compared to the year ended December 31, 2022, asset management fees increased by $1.3 million, primarily due to an increase in total assets under management primarily resulting from 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 the year ended December 31, 2023 as compared to the year ended December 31, 2022, asset servicing fees increased by $0.3 million, primarily due to an increase in total assets under management resulting from loans acquired in connection with the BDC Merger.
Provision for Credit Losses
On January 1, 2023, we adopted the provisions of ASU 2016-13, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses. Prior to the adoption of ASU 2016-13, we recorded an allowance for credit 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) past due loan reserves, if any.
For the year ended December 31, 2023, provision for credit losses increased by $33.7 million, primarily related to the decline in fair value of collateral underlying three loans in the investment portfolio due to a decline in the macroeconomic outlook for commercial real estate.
Real Estate Operating Expenses
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, real estate operating expenses increased by $0.4 million, primarily due to expenses incurred on the industrial buildings that we acquired in 2023, partially offset by a reduction in expenses due to the disposal of the office building in October 2023 and a real estate tax refund related to the overpayment of real estate tax in the prior year.
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Depreciation and Amortization
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, depreciation and amortization increased by $0.4 million, primarily due to the industrial buildings that we acquired in 2023, partially offset by a reduction in depreciation and amortization due to the disposal of the office building in October 2023.
Impairment Charge
For the year ended December 31, 2023, we recognized an impairment charge of $11.8 million on the multi-tenant office building located in California in order to reduce the carrying value of the building to its estimated fair value. In October 2023, we conveyed our interest in the office building to the lender by deed-in-lieu of foreclosure and accordingly, we no longer own the office building. For the year ended December 31, 2022, we recognized an impairment charge of $1.6 million, on 4.9 acres of the development land located in Pennsylvania 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. The development land was sold in the second quarter of 2022.
Directors’ Fees
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, directors’ fees increased by $0.2 million, as a result of an increase in the size of our Board due to the BDC Merger.
Other
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, other expenses decreased by $0.2 million, primarily as a result of a fee paid in 2022 to a third-party in connection with the sale of a parcel of land in June 2022.
Interest Expense on Secured Financing
Our secured financing consists of repurchase agreements, revolving line of credit, term loan, promissory notes and property mortgages.
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, interest expense on secured financing increased by $13.3 million as a result of an increase in the weighted average principal amount outstanding as well as an increase in the index rate on secured financing agreements.
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, 2023 as compared to the year ended December 31, 2022, interest expense on unsecured notes payable increased by $3.0 million, as a result of an increase in the weighted average principal amount outstanding due to the assumption of unsecured notes payable in connection with the BDC Merger.
Interest from Obligations under Participation Agreements
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, interest expense from obligations under participation agreements decreased by $1.8 million, as a result of a decrease in the weighted average principal amount outstanding, primarily due to the release of obligations under participation agreements with Terra BDC in connection with the BDC Merger, partially offset by an increase in the index rate on the outstanding obligations under participation agreements.
Gain on Extinguishment of Participation Liability
In September 2023, the counterparty to a participation agreement conveyed its interest in the obligation under participation agreement to us and we recognized a gain on extinguishment of participation liability of $10.6 million for the year ended December 31, 2023.
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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.
Unrealized Losses on Investments, Net
For the year ended December 31, 2023, as compared to the year ended December 31, 2022, unrealized losses on investments, net increased by $0.2 million, primarily due to a decrease in the fair value of our marketable securities at period end.
(Loss) 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, 2023 and 2022, we owned 14.9% and 27.9% of the equity interest in RESOF, respectively.
W e also own 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 account for this arrangement as an equity investment. In May 2023, the mezzanine loan that was accounted for as an equity investment and five senior loans that were held for investment were settled and exchanged for five industrial buildings. In November 2023, we contributed $5.0 million to a joint venture that owns a real estate property. We account for our equity interest in the joint ventures as equity method investments because we do not have a controlling financial interest in the entities.
For the year ended December 31, 2023, we recognized loss from equity investment in unconsolidated investments of $2.4 million, which consisted of net equity loss from the joint ventures and the mezzanine loan of $3.5 million, partially offset by equity income from RESOF of $1.1 million. The equity loss from the joint ventures was the result of depreciation and amortization and interest expense recognized by the joint ventures. The equity income from RESOF included adjustments made due to the dilution of our ownership interest in RESOF as new investors were admitted in 2022 and 2023. 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, partially offset by equity loss from the joint ventures of $2.5 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, 2023.
Loss on Disposal of Real Estate
In October 2023, we conveyed our interest in an office building to the lender by deed in lieu of foreclosure and recognized a net loss on disposal of real estate of $4.2 million for the year ended December 31, 2023. In June 2022, we sold 4.9 acres of adjacent land located in Pennsylvania for net proceeds of $8.6 million, and recognized a net loss on sale of $0.1 million for the year ended December 31, 2022.
Realized (Losses) Gains On Investments, Net
For the year ended December 31, 2023, we sold a portion of our investments in common stock and recognized a net loss on sale of $0.5 million. For year ended December 31, 2022, we sold our investments in common and preferred stocks and recognized a net gain on sale of $0.1 million.
Net Loss
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, the resulting net loss increased by $49.9 million.
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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 $22.4 million of the unfunded commitments to borrowers during the next twelve months. We expect to maintain sufficient liquidity to fund such commitments through matching these commitments with principal repayments on outstanding loans or draw downs on our credit facilities. In connection with the BDC Merger, we assumed a $25.0 million term loan. The term loan currently bears interest at an annual rate of SOFR plus 7.375% with a SOFR floor of 5.0% and matures on March 31, 2024. We expect to either maintain sufficient liquidity to repay the facility or refinance the facility. Our revolving line of credit with outstanding principal balance of $47.5 million was to come due on March 12, 2024 and our Goldman Sachs Bank repurchase agreement with outstanding principal balance of $75.5 million was to come due on February 18, 2024 (see “ Summary of Financing” below). On March 7, 2024, the facility term of our revolving line of credit was extended to September 12, 2024 with an option to extend the facility term for an additional 12-month period and the facility term of the Goldman Sachs Bank facility was extended to February 18, 2025.
Summary of Financing
The table below summarizes our debt financing as of December 31, 2023:
Type of Financing Maximum Amount Available Outstanding Balance Amount Remaining Available Interest Rate Maturity Date
Fixed Rate:
Unsecured notes payable N/A $ 85,125,000 N/A 6.00% June 2026
Unsecured notes payable N/A 38,375,000 N/A 7.00% March 2026
Property mortgages N/A 40,250,000 N/A 6.25% June 2028
$ 163,750,000
Variable Rate:
Property mortgages N/A $ 33,256,885 N/A Term SOFR +3.5% (Term SOFR
Floor of 3.75%) April 2027
Term loan N/A 15,000,000 N/A SOFR + 7.375% (SOFR floor of 5.0%) March 2024
Promissory notes payable N/A 63,509,518 N/A Term SOFR plus a spread ranging from 4.75% to 5.6% with a combined floor rate ranging from 9.0% to 10.9%. March 2025 - March 2026
Revolving line of
credit (1)
$ 125,000,000 47,461,730 $ 77,538,270 Term SOFR + 3.35% (combined floor rate of 6.0%) March 2024
UBS AG repurchase
agreement (2)
195,000,000 18,480,000 176,520,000 Term SOFR + 1.965% November 2024
Goldman Sachs Bank
repurchase agreement (3)
200,000,000 75,455,624 124,544,376 Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 2.0% to 5.00%)
February 2024
$ 520,000,000 $ 253,163,757 $ 378,602,646
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(1) On March 7, 2024, we amended the facility agreement to waive the quarterly minimum net worth covenant for the purposes of the December 31, 2023 measurement date, decrease the minimum net worth covenant for future quarterly measurement dates, reduce the credit line, increase the coupon rate, revise the minimum profitability covenant and extend the facility term to September 12, 2024 with an option to extend the facility term for an additional 12-month period.
(2) In February 2024, the outstanding balance was repaid. On March 7, 2024, we amended the side letter to the UBS AG facility agreement to reduce the maximum amount available under the facility to zero. In connection with this amendment, UBS AG waived the payment of any fees and the meeting of any representations, warranties or covenants for the period commencing on December 31, 2023 until such time as there are amounts outstanding under the UBS AG facility agreement.
(3) On March 7, 2024, we amended the Goldman Sachs Bank facility agreement to extend the maturity date to February 18, 2025 and to reduce the minimum interest coverage ratio covenant.
Cash Flows Provided by Operating Activities
For the year ended December 31, 2023, as compared to the year ended December 31, 2022, cash flows provided by operating activities increased by $8.2 million, primarily due to an increase in net contractual interest income.
Cash Flows Used in Investing Activities
For the year ended December 31, 2023, cash flows used in investing activities were $10.0 million, primarily related to origination and purchase of loans of $78.9 million, purchase of real estate properties of $52.5 million, purchase of held-to-maturity securities of $20.0 million, purchase of marketable securities of $7.9 million, purchase of equity interests in unconsolidated investments of $7.3 million, and funding for promissory note receivable of $3.8 million, partially offset by proceeds from repayments of loans of $126.1 million, proceeds from redemption of held-to-maturity securities of $20.0 million, return of capital on unconsolidated investments of $11.3 million, and proceeds from sale of marketable equity securities of $2.4 million.
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.
Cash Flows (Used in) Provided by Financing Activities
For the year ended December 31, 2023, cash flows used in financing activities were $15.5 million, primarily related to principal repayments on secured financing of $205.3 million, distributions paid of $18.6 million and payment for financing costs of $3.3 million, partially offset by proceeds from secured financing of $211.0 million.
For the year ended December 31, 2022, cash flows provided by financing activities were $34.1 million, primarily due to proceeds from secured financing of $286.6 million and proceeds from obligations under participation agreements of $29.6 million, partially offset by principal repayments on secured financing of $239.7 million, repayments of obligations under participation agreements of $22.2 million and distributions paid of $16.1 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
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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 Credit Losses
On January 1, 2023, we adopted the provisions of ASU 2016-13, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to estimating credit losses upon the occurrence of an actual loss event under the previous “incurred loss” methodology.
We use a model based approach for estimating the allowance for credit losses on performing loans on a collective basis, including future funding commitments for which we do not have the unconditional right to cancel, as these loans share similar risk characteristics. We utilize information obtained from internal and external sources relating to past events, current economic conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for our loan portfolio. We utilize a commercial mortgage based, third-party loan loss model and because we do not have a meaningful history of realized credit losses on our loan portfolio, we subscribe to a database service to provide historical proxy loan loss information. We employ logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. We have chosen to incorporate a weighted average macroeconomic forecast that encompasses baseline, optimistic and pessimistic scenarios, into our allowance for credit losses on performing loans estimate during the reasonable and supportable forecast period which is currently eight quarters. We select certain economics variables from a group of independent variables such as Commercial Real Estate Price Index, unemployment and interest rate which are included in the model as part of macroeconomic forecast and updated regularly based on current economic trends. The specific loan level information input into the model includes loan-to-value and debt service coverage ratio metrics, as well as principal balances, property type, location, coupon rate, coupon rate type, original or remaining term, expected repayment dates and contractual future funding commitments. Based on the inputs, the loan loss model determines a loan loss rate through the generation of a probability of default (PD) and loss given default (LGD) for each loan. The allowance for credit losses on performing loans is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan. These results require a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance for credit losses. Changes in such estimates can significantly affect the expected credit losses.
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
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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,
2023 2022
Origination and extension fee expense (1)
$ 2,312,656 $ 3,189,291
Asset management fee 7,807,198 6,556,492
Asset servicing fee 1,857,765 1,560,044
Operating expenses reimbursed to Manager 9,234,357 8,076,321
Disposition fee (2)
1,451,063 890,194
Total $ 22,663,039 $ 20,272,342
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(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) Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.
Management Agreement Amendment
On March 11, 2024, we and our Manager entered into an amendment to the Management Agreement, effective as of January 1, 2024 (the “Amendment”), in order to extend the term of the Management Agreement and modify the terms upon which the Management Agreement may be terminated. Except as discussed below, the terms of the Management Agreement remain unchanged by the Amendment. Except where the context requires otherwise, all references herein to the “Management Agreement” are to the Management Agreement as modified by the Amendment.
The term of the Management Agreement will expire on December 31, 2027 (the “Initial Term”) and will automatically renew for an unlimited number of additional one-year terms upon each anniversary date of the last day of the Initial Term (each, a “Renewal Term”), unless terminated by us or the Manager during the Initial Term or a Renewal Term in accordance with the terms of the Management Agreement (as described below).
The Management Agreement may be terminated by us during the Initial Term or any Renewal Term upon a finding by either (i) at least two-thirds of the independent directors on our Board or (ii) the holders of a majority of the outstanding shares of our common stock (other than those shares held by members of the our senior management team or affiliates of our Manager) that either (a) there has been unsatisfactory performance by our Manager that is materially detrimental to us, or (b) the compensation payable to our Manager pursuant to the Management Agreement is unfair; provided, however, that we will not have the right to terminate the Management Agreement on the basis of unfair compensation to our Manager if our Manager agrees to continue to provide its services under the Management Agreement in exchange for reduced fees that at least two-thirds of the independent directors on our Board determine to be fair pursuant to the procedures set forth in the Management Agreement. We must deliver prior written notice of any such termination to our Manager at least 180 days prior to the last calendar day of the Initial Term or the then-current Renewal Term, as applicable, and the Management Agreement will terminate effective as of the last calendar day of the Initial Term or the then-current Renewal Term, as applicable.
Upon any termination of the Management Agreement by us as discussed above, we will pay our Manager, on the date on which such termination is effective, a termination fee in an amount equal to three times the average annual fees of all types and expense reimbursements received by or owed to our Manager pursuant to the Management Agreement during the 24-month
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period immediately preceding such termination (the “Termination Fee”), calculated as of the end of the most recently completed monthly prior to the date of such termination.
We may also terminate the Management Agreement, effective upon 30 calendar days’ prior written notice from our Board to our Manager, without payment of any Termination Fees or other penalties, upon (i) the material breach of the Management Agreement by our Manager or its affiliates that continues for 30 days after written notice thereof to our Manager (or 45 days after delivery of written notice thereof if our Manager takes diligent steps to cure such breach within 30 days of delivery of the written notice), (ii) any fraud or other criminal conduct, gross negligence or breach of fiduciary duty by our Manager or its affiliates in connection with the Management Agreement, as determined by a final, non-appealable judgment of a court of competent jurisdiction, (iii) our Manager’s bankruptcy, insolvency or dissolution, or (iv) an Internalization Event (as defined in the Management Agreement). No Termination Fee or other penalty is payable upon such a termination by us.
Our Manager may terminate the Management Agreement, effective upon 60 days’ prior written from our Manager to us, if we breach the Management Agreement and such breach continues for 30 days after written notice thereof. We will pay our Manager the Termination Fee upon such termination by our Manager.
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 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, 2023, there was no participation obligation.
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, 2023, the weighted average outstanding principal balance on obligations under participation agreements was approximately $10.0 million and the weighted average interest rate was approximately 17.4%, compared to the weighted average outstanding principal balance on obligations under participation agreements and secured borrowing of approximately $59.9 million and the weighted average interest rate was approximately 12.1% for the year ended December 31, 2022. The secured borrowing was repaid in August 2022.
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