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 13, 2025, we had 24,338,366 shares of Class B Common Stock outstanding held by 5,401 investors. As of March 13, 2025, 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, 2024. Issuer Purchases of Equity Securities There were no issuer purchases of equity securities during the year ended December 31, 2024. 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, 2024, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 13 loans in nine states with an aggregate net principal balance of $299.3 million, a weighted average coupon rate of 12.5% and a weighted average remaining term to maturity of 1.0 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, 2024, our portfolio included underlying properties located in 13 markets, across nine states and includes property types such as multifamily housing, student housing, commercial offices, medical offices, mixed-use and infill 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 38 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. On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”) merged with and into Terra Income Fund 6, LLC (“Terra LLC”), our wholly owned subsidiary, with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as our wholly owned subsidiary. Pursuant to the terms of the transactions described in the Merger Agreement, approximately 4,847,910 shares of our Class B Common Stock, $0.01 par value per share ("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 October 1, 2022. As of December 31, 2024, Terra Fund 7 and Terra Offshore REIT held approximately 8.7% and 10.1%, respectively, of our issued and outstanding Class B Common Stock. As previously disclosed, we continue to explore alternative liquidity transactions on an opportunistic basis to maximize stockholder value. Examples of the alternative liquidity transactions that, depending on market conditions, may be available to us include a listing of our shares of common stock on a national securities exchange, adoption of a share repurchase plan, a liquidation of our assets, a sale of our company or a strategic business combination, in each case, which may include the further in-kind distribution of our shares of common stock indirectly owned by certain of our affiliate funds to the ultimate investors in such affiliate funds. We cannot provide any assurance that any alternative liquidity transaction will be available or, if available, that we will pursue or be successful in completing any such alternative liquidity transaction. One of the potential future liquidity transactions that we continue to evaluate is a “direct listing” of its Class A Common Stock, $0.01 par value per share (“Class A Common Stock”), on a national securities exchange (i.e., a listing not involving a concurrent public offering of newly issued shares). If market conditions are not supportive of a direct listing that would in our view lead to a constructive trading environment for the Class A Common Stock, we will explore alternative paths to pursue our investment strategy and provide liquidity to our investors, including converting our company into a traditional “non-traded REIT.” As part of a potential conversion to a non-traded REIT, we would adopt a customary share repurchase plan pursuant to which our investors could request to have their shares of its common stock redeemed for cash. 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. Portfolio Summary Net Loan Portfolio The following tables provide a summary of our net loan portfolio as of: December 31, 2024 Fixed Rate Floating Rate (1)(2)(3) Total Gross Loans Obligations under Participation Agreements Total Net Loans Number of loans 2 11 13 1 13 Principal balance $ 12,680,463 $ 304,574,560 $ 317,255,023 $ 18,000,000 $ 299,255,023 Carrying value 12,106,695 262,542,450 274,649,145 18,177,107 256,472,038 Fair value 11,740,671 264,796,547 276,537,218 18,254,853 258,282,365 Weighted average coupon rate (4) 8.50 % 13.18 % 13.04 % 19.53 % 12.52 % Weighted-average remaining term (years) (5) 2.68 0.84 0.91 0.10 0.99 39 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 (4) 13.03 % 13.05 % 13.05 % — % 13.05 % Weighted-average remaining term (years) (5) 1.18 0.70 0.77 — 0.77 _______________ (1) These loans pay a coupon rate of Secured Overnight Financing Rate (“SOFR”), or forward-looking term rate SOFR (“Term SOFR”) plus a fixed spread. Coupon rates shown were determined using average SOFR of 4.53% and Term SOFR of 4.33% as of December 31, 2024, and average SOFR of 5.34% and Term SOFR of 5.35% as of December 31, 2023. (2) As of December 31, 2024 and 2023, amount included $208.0 million and $342.9 million of senior mortgages used as collateral for $123.2 million and $204.9 million of borrowings under credit facilities, respectively. (3) As of December 31, 2024 and 2023, 10 and 14 loans, respectively, are subject to a SOFR, or Term SOFR floor, as applicable. (4) Excludes nonperforming loans for which recovery of interest income was not probable. (5) Represents current effective maturity as of December 31, 2024 and 2023, exclusive of any extension options available. Real Estate Ownership In addition to our net loan portfolio, we own eight industrial buildings. As of December 31, 2024 and 2023, the real estate and related lease intangible assets and liabilities had a net carrying value of $125.3 million and $129.8 million, respectively, and the mortgage loans payable encumbering the real estate properties had an outstanding principal amount of $74.4 million and $73.5 million, respectively. Equity Investments As of both December 31, 2024 and 2023, we owned 14.9% 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. We also beneficially own equity interests in joint ventures that invest in real estate properties, opportunistic debt and equity securities and, indirectly, together with other non-affiliated entities, non-real estate operating companies, as well as a preferred equity investment with residual profit sharing from sale of the underlying property. These investments are accounted for using the equity method of accounting. As of December 31, 2024 and 2023, these equity investments had total carrying value of $106.8 million and $37.2 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, 2024 and 2023 was $7.63 and $9.93, respectively. Portfolio Investment Activity Net Loan Portfolio For the years ended December 31, 2024 and 2023, we invested $95.8 million and $37.1 million in new and add-on investments and had $112.7 million and $29.8 million of repayments, resulting in net repayments of $16.9 million and net investments of $7.3 million, respectively. Amounts are net of obligations under participation agreements and secured financing agreements. 40 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, 2024 December 31, 2023 Loan Structure Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total First mortgages $ 207,985,740 $ 209,496,879 81.6 % $ 365,465,500 $ 354,004,530 77.5 % Preferred equity investments 76,224,551 31,937,149 12.5 % 126,550,969 85,222,201 18.7 % Mezzanine loans 15,044,732 15,038,010 5.9 % 17,444,357 17,245,527 3.8 % Total $ 299,255,023 $ 256,472,038 100.0 % $ 509,460,826 $ 456,472,258 100.0 % December 31, 2024 December 31, 2023 Property Type Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total Office $ 116,539,650 $ 72,991,791 28.4 % $ 144,812,619 $ 106,462,535 23.3 % Infill land 56,307,815 57,050,952 22.2 % 52,839,509 54,024,545 11.8 % Multifamily 60,969,051 60,662,514 23.7 % 85,660,082 84,417,184 18.5 % Mixed-use 30,438,507 29,890,548 11.7 % 63,096,365 47,362,653 10.4 % Student housing 28,000,000 28,910,000 11.3 % 31,000,000 31,758,493 7.0 % Industrial 7,000,000 6,966,233 2.7 % 67,579,869 67,543,553 14.8 % Hotel - full/select service — — — % 43,222,382 43,460,206 9.5 % Infrastructure — — — % 21,250,000 21,443,089 4.7 % Total $ 299,255,023 $ 256,472,038 100.0 % $ 509,460,826 $ 456,472,258 100.0 % December 31, 2024 December 31, 2023 Geographic Location Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total United States California $ 53,006,023 $ 53,096,008 20.6 % $ 119,093,246 $ 117,955,109 25.9 % Arizona 33,407,815 33,005,952 12.9 % 31,000,000 31,151,623 6.8 % New York 75,657,255 31,536,808 12.3 % 90,483,672 49,041,668 10.7 % Georgia 30,562,858 30,586,450 11.9 % 74,335,828 62,564,770 13.8 % Utah 28,000,000 28,910,000 11.3 % 49,250,000 50,293,850 11.0 % Washington 26,894,593 26,907,157 10.5 % 34,052,223 33,908,737 7.4 % New Jersey 22,900,000 24,045,000 9.4 % 82,419,378 83,485,543 18.3 % North Carolina 21,826,479 21,418,430 8.4 % 21,826,479 21,140,026 4.6 % Massachusetts 7,000,000 6,966,233 2.7 % 7,000,000 6,930,932 1.5 % Total $ 299,255,023 $ 256,472,038 100.0 % $ 509,460,826 $ 456,472,258 100.0 % 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. 41 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; 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 42 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. Results of Operations The following table presents the comparative results of our operations: Years Ended December 31, 2024 2023 Change Revenues Interest income $ 38,250,784 $ 56,140,437 $ (17,889,653) Real estate operating revenue 10,740,170 11,050,716 (310,546) Prepayment fee income 435,677 — 435,677 Other operating income 262,863 722,881 (460,018) 49,689,494 67,914,034 (18,224,540) Operating expenses Operating expenses reimbursed to Manager 7,468,132 9,234,357 (1,766,225) Asset management fee 6,207,231 7,807,198 (1,599,967) Asset servicing fee 1,489,674 1,857,765 (368,091) Provision for credit losses 16,627,739 45,548,803 (28,921,064) Real estate operating expenses 2,673,913 4,586,245 (1,912,332) Depreciation and amortization 7,357,295 6,968,985 388,310 Professional fees 3,012,046 3,741,720 (729,674) Directors’ fees 356,886 347,714 9,172 Other 558,638 539,957 18,681 Impairment charge — 11,765,540 (11,765,540) 45,751,554 92,398,284 (46,646,730) Operating income (loss) 3,937,940 (24,484,250) 28,422,190 Other income and expenses Interest expense on secured financing (25,052,058) (28,113,245) 3,061,187 Interest expense on unsecured notes payable (9,836,953) (9,643,974) (192,979) Interest expense on obligations under participation agreements (2,971,924) (1,353,006) (1,618,918) Unrealized gain (loss) on investments, net 100,149 (316,573) 416,722 Income (loss) from equity interest in unconsolidated investments 2,738,410 (2,383,938) 5,122,348 Loss on repayment of loan (5,629,510) — (5,629,510) Loss on disposal of real estate — (4,211,153) 4,211,153 Gain on extinguishment of debt — 14,079,379 (14,079,379) Realized loss on investments, net (446,009) (459,279) 13,270 (41,097,895) (32,401,789) (8,696,106) Net loss $ (37,159,955) $ (56,886,039) $ 19,726,084 43 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, promissory notes payable, revolving credit facility, secured borrowing 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, 2024 Year Ended December 31, 2023 Weighted Average Principal Amount (1) Weighted Average Coupon Rate (2) Weighted Average Principal Amount (1) Weighted Average Coupon Rate (2) Total portfolio Gross loans $ 414,141,672 12.6 % $ 569,511,789 12.7 % Obligations under participation agreements (14,450,820) 18.6 % (9,987,566) 17.4 % Secured borrowing (2,311,475) 9.9 % — — % Promissory notes payable (66,170,732) 9.8 % (13,002,573) 10.7 % Repurchase agreements payable (69,518,266) 8.1 % (134,030,835) 8.3 % Revolving line of credit payable (35,411,716) 7.7 % (87,114,331) 8.7 % Net loans (3) $ 226,278,663 15.2 % $ 325,376,484 15.5 % Senior loans Gross loans $ 314,283,363 12.5 % $ 443,674,795 12.2 % Obligations under participation agreements — — % (9,987,566) 17.4 % Secured borrowing (2,311,475) 9.9 % — — % Promissory notes payable (66,170,732) 9.8 % (13,002,573) 10.7 % Repurchase agreements payable (69,518,266) 8.1 % (134,030,835) 8.3 % Revolving line of credit payable (35,411,716) 7.7 % (87,114,331) 8.7 % Net loans (3) $ 140,871,174 17.2 % $ 199,539,490 16.2 % Subordinated loans (4) Gross loans $ 99,858,309 12.8 % $ 125,836,994 14.5 % Obligations under participation agreements (14,450,820) 18.6 % — — % Net loans (3) $ 85,407,489 11.8 % $ 125,836,994 14.5 % _______________ (1) Amount is calculated based on the number of days each loan is outstanding. (2) Amount is calculated based on the underlying principal amount of each loan. (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, 2024 as compared to the year ended December 31, 2023, interest income decreased by $17.9 million, primarily due to a decrease in contractual interest income as a result of a decrease in the weighted average principal balance of performing loans as well as an increase in suspended interest income accrual on non-performing loans of $3.0 million. Real Estate Operating Revenue For the year ended December 31, 2024 as compared to the year ended December 31, 2023, real estate operating revenue decreased by $0.3 million, primarily due to a reduction in lease revenue resulting from the disposal of the office building in October 2023, partially offset by an increase in lease revenue contributed by the five industrial buildings acquired in May 2023. 44 Prepayment Fee Income For the year ended December 31, 2024 prepayment fee income was $0.4 million, related to the early repayment of one of our loans. There was no such prepayment fee income for the year ended December 31, 2023. Other Operating Income For the year ended December 31, 2024 as compared to the year ended December 31, 2023, other operating income decreased by $0.5 million, primarily due to a decline in dividend income earned on our marketable securities. 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, 2024 as compared to the year ended December 31, 2023, operating expenses reimbursed to our Manager decreased by $1.8 million, primarily due to a decrease in the allocation ratio as a result of a decrease in our total funds under management. 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, 2024 as compared to the year ended December 31, 2023, asset management fees decreased by $1.6 million, primarily due to a decrease in total assets under management resulting from repayment of loans. 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, 2024 as compared to the year ended December 31, 2023, asset servicing fees decreased by $0.4 million, primarily due to a decrease in total assets under management resulting from the repayment of loans. Provision for Credit Losses On January 1, 2023, we adopted the provisions of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses. For the year ended December 31, 2024, provision for credit losses was $16.6 million, primarily related to a decline in our estimated recoverable amount on a non-performing subordinated loan due to an increase in senior funding. For the year ended December 31, 2023, provision for credit losses was $45.5 million, primarily related to the decline in our estimated recoverable amount on three non-performing 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, 2024 as compared to the year ended December 31, 2023, real estate operating expenses decreased by $1.9 million, primarily due to the disposal of the office building in October 2023 which resulted in a reduction in rent expense of $1.5 million. 45 Depreciation and Amortization For the year ended December 31, 2024 as compared to the year ended December 31, 2023, depreciation and amortization increased by $0.4 million, primarily due to the five industrial buildings that we acquired in May 2023, partially offset by a reduction in depreciation and amortization related to the disposal of the office building in October 2023. Professional Fees For the year ended December 31, 2024 as compared to the year ended December 31, 2023, professional fees decreased by $0.7 million, primarily due to legal fees incurred in connection with a review of strategic alternatives for our company in 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. There was no impairment charge for the year ended December 31, 2024. 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, 2024 as compared to the year ended December 31, 2023, interest expense on secured financing decreased by $3.1 million, as a result of a decrease in the weighted average principal amount outstanding as well as a decrease 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, 2024 as compared to the year ended December 31, 2023, interest expense on unsecured notes payable increased by $0.2 million, primarily due to an increase in the amortization of financing costs using the effective interest rate method. Interest from Obligations under Participation Agreements For the year ended December 31, 2024 as compared to the year ended December 31, 2023, interest expense from obligations under participation agreements increased by $1.6 million, primarily as a result of an increase in the weighted average principal amount outstanding as well as an increase in the weighted average interest rate on the obligations under participation agreements. Unrealized Gain (Loss) on Investments, Net For the year ended December 31, 2024, we recognized an unrealized gain on investment of $0.1 million, compared to an unrealized loss on investment of $0.3 million for the year ended December 31, 2023, primarily due to an increase in the fair value of our marketable securities as of December 31, 2024. Income (Loss) from Equity Interest in Unconsolidated Investments As of both December 31, 2024 and December 31, 2023, we owned a 14.9% equity interest in RESOF, an affiliated 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 joint ventures that invest in real estate properties, opportunistic debt and equity securities and, indirectly, together with other non-affiliated entities, non-real estate operating companies, and a preferred equity investment with residual profit-sharing. 46 Our income (loss) from equity interest in unconsolidated investments are as follows: Years Ended December 31, 2024 2023 Income from equity interest in RESOF $ 6,977,386 $ 1,125,790 Loss from equity interest in the joint ventures (5,483,997) (3,509,728) Income from other equity investment 1,245,021 — $ 2,738,410 $ (2,383,938) For the year ended December 31, 2024 as compared to the year ended December 31, 2023, equity income from RESOF increased as a result of an increase in RESOF’s net income associated with increased investments. For the year ended December 31, 2024 as compared to the year ended December 31, 2023, equity loss from the joint ventures increased primarily due to an increase in operating expenses, depreciation and amortization, and interest expense recognized by the joint ventures, partially offset by an increase in revenues and a gain on sale of real estate recognized by the joint ventures. Other equity investment relates to a preferred equity agreement in which we also share residual profit from the sale of underlying property with the borrower. There was no such investment during the year ended December 31, 2023. Loss on Repayment of Loan In August 2024, a $65.0 million senior loan was repaid, resulting in a loss on repayment of $5.6 million for the year ended December 31, 2024, which included the write-off of interest receivable of $4.8 million. There was no such loss 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. There was no such loss for the year ended December 31, 2024. Gain on Extinguishment of Participation Liability In September 2023, an unrelated counterparty to a participation agreement conveyed its interest in the obligation under participation agreement to us and we recognized a gain on debt extinguishment of $14.1 million. There was no such gain for the year ended December 31, 2024 Realized Loss On Investments, Net For the year ended December 31, 2024, we sold a portion of our investments in marketable equity securities and recognized a net loss on sale of $0.4 million. 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. Net Loss For the year ended December 31, 2024 as compared to the year ended December 31, 2023, the resulting net loss decreased by $19.7 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 47 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 $18.7 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. Obligation under participation agreement of $18.0 million will mature in the next twelve months. We use the proceeds from the repayment of the corresponding investment to repay the participation obligation. Our revolving line of credit with outstanding principal balance of $16.4 million and our Goldman Sachs Bank repurchase agreement with outstanding principal balance of $48.2 million was scheduled to mature on December 31, 2024 and February 18, 2025, respectively. In January and February 2025, the maturity of the revolving line of credit and the Goldman Sachs Bank repurchase agreement was extended to June 30, 2025 and February 18, 2027, respectively. We expect to use proceeds from repayment of the underlying loan to repay the outstanding principal or refinance with another lender. Additionally, two promissory notes payable with a total outstanding principal balance of $22.3 million that is collateralized by senior loans with aggregate principal balance of $50.9 million will mature within the next twelve months. We expect to use proceeds from the repayment of the underlying loans to repay the promissory notes payable. Summary of Financing The table below summarizes our debt financing as of December 31, 2024: 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 Term loan payable N/A 10,000,000 N/A Interest free until 6/30/2025, after that 9.00% December 2027 $ 173,750,000 Variable Rate: Property mortgages N/A $ 34,100,000 N/A Term SOFR +3.5% (Term SOFR Floor of 3.75%) April 2027 Promissory notes payable N/A 40,694,390 N/A Term SOFR plus a spread ranging from 4.75% to 5.98% with a combined floor rate ranging from 9.0% to 11.28% March 2025 - March 2026 Secured borrowing N/A 18,000,000 N/A Term SOFR + 5%, (combined floor rate of 9.85% November 2026 Revolving line of credit (1) 16,361,111 16,361,111 — Term SOFR + 3.5% (combined floor rate of 7.0%) December 2024 Goldman Sachs Bank repurchase agreement (2) 48,188,441 48,188,441 — Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 2.0% to 5.00%) February 2025 $ 64,549,552 $ 157,343,942 $ — _______________ (1) In January 2025, the maturity of the facility was extended to June 30, 2025. (2) In February 2025, the maturity of the facility was extended to February 18, 2027. 48 Cash Flows (Used in) Provided by Operating Activities For the year ended December 31, 2024, cash flows used in operating activities was $3.3 million, compared to cash flow from operating activities of $8.6 million for the year ended December 31, 2023. The decrease in operating cash flows was primarily due to a decrease in net contractual interest income. Cash Flows Provided by (Used in) Investing Activities For the year ended December 31, 2024, cash flows provided by investing activities were $101.6 million, primarily related to proceeds from repayment of loans of $215.1 million and promissory note receivable of $9.6 million, partially offset by origination and purchase of loans of $57.2 million, purchase of equity interests in unconsolidated investments of $65.6 million and funding for promissory note receivable of $5.0 million. 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. Cash Flows Used in Financing Activities For the year ended December 31, 2024, cash flows used in financing activities were $99.0 million, primarily related to principal repayments on secured financing of $177.5 million, distributions paid of $18.6 million and payment for financing costs of $1.1 million, partially offset by proceeds from secured financing of $81.3 million and proceeds from obligations under participation agreements of $18.0 million. 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. 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 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 49 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, upside and downside 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 our Manager We currently pay the following fees to our Manager 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. 50 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, 2024 2023 Origination and extension fee expense (1) $ 1,334,709 $ 2,312,656 Asset management fee 6,207,231 7,807,198 Asset servicing fee 1,489,674 1,857,765 Operating expenses reimbursed to Manager 7,468,132 9,234,357 Disposition fee (2) 907,224 1,451,063 Total $ 17,406,970 $ 22,663,039 _______________ (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. 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 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. 51 Promissory Note Payable with Terra LLC On January 24, 2024, we, as borrower, entered into a revolving promissory note payable with Terra LLC. The promissory note payable bears interest at the Prime Rate, as such Prime Rate is published in the Wall Street Journal, computed on the basis of the actual number of days elapsed and a year of 365 days. The promissory note matures on March 31, 2027. As of December 31, 2024, amount outstanding under the promissory note payable was $45.1 million. The activity associated with this agreement is eliminated in consolidation and therefore has no impact on our consolidated financial statements. 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. As of December 31, 2024, the principal balance of our participation obligation was $18.0 million, which was a participation obligation to a related-party managed by the Manager. 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 years ended December 31, 2024 and 2023, the weighted average outstanding principal balance on obligations under participation agreements was approximately $14.5 million and $10.0 million, respectively, and the weighted average interest rate was approximately 18.6% and 17.4%, respectively.