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What changed in Chicago Atlantic Real Estate Finance, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Chicago Atlantic Real Estate Finance, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+426 added−369 removedSource: 10-K (2024-03-12) vs 10-K (2023-03-09)

Top changes in Chicago Atlantic Real Estate Finance, Inc.'s 2023 10-K

426 paragraphs added · 369 removed · 307 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

64 edited+26 added−10 removed192 unchanged
Biggest changeSee “ Risk Factors — We will not own real estate as long as it is used in cannabis-related operations due to current statutory prohibitions and exchange listing standards, which may delay or limit our remedies in the event that any of our borrowers default under the terms of their mortgage loans with us .” Loan Investment 1 Location Property Type Principal Balance as of December 31, 2022 Implied Real Estate Collateral for REIT 2 Our Real Estate Collateral Coverage as of December 31, 2022 4 1 Senior Real Estate Corporate Loan 3 Various Retail/Industrial $ 30,000,000 $ 5,236,286 0.2 x 2 Senior Real Estate Corporate Loan Michigan Retail/Industrial 37,283,861 92,361,533 2.5 x 3 Senior Real Estate Corporate Loan 3 Various Retail/Industrial 20,809,353 19,356,702 0.9 x 4 Senior Real Estate Corporate Loan 3 Arizona Industrial 12,849,490 23,900,000 1.9 x 5 Senior Real Estate Corporate Loan Massachusetts Retail/Industrial 1,856,000 900,000 0.5 x 6 Senior Real Estate Corporate Loan Pennsylvania Industrial 13,399,712 19,400,000 1.4 x 7 Senior Real Estate Corporate Loan 3 Michigan Retail/Industrial 4,359,375 14,800,000 3.4 x 8 Senior Real Estate Corporate Loan 3 Various Retail/Industrial 25,466,043 59,958,707 2.4 x 9 Senior Real Estate Corporate Loan 3 West Virginia Retail/Industrial 10,086,382 15,360,000 1.5 x 10 Senior Real Estate Corporate Loan 3 Pennsylvania Retail/Industrial 15,775,542 16,750,000 1.1 x 11 Senior Loan 3 Michigan Retail 274,406 5,400,000 19.7 x 12 Senior Real Estate Corporate Loan 3 Maryland Industrial 32,645,784 33,440,000 1.0 x 13 Senior Real Estate Corporate Loan 3 Various Retail/Industrial 20,000,000 78,140,000 3.9 x 14 Senior Real Estate Corporate Loan Michigan Retail/Industrial 13,118,014 40,703,272 3.1 x 15 Senior Real Estate Corporate Loan Various Retail/Industrial 5,194,167 - 0.0 x 16 Senior Real Estate Corporate Loan 3 Michigan Retail/Industrial 3,787,852 9,760,000 2.6 x 17 Senior Real Estate Corporate Loan 3 Various Retail/Industrial 7,387,500 - 0.0 x 18 Senior Real Estate Corporate Loan Florida Retail/Industrial 15,000,000 37,525,000 2.5 x 19 Senior Real Estate Corporate Loan Ohio Retail/Industrial 30,837,950 32,790,000 1.1 x 20 Senior Real Estate Corporate Loan Florida Retail/Industrial 20,483,947 28,000,000 1.4 x 21 Senior Real Estate Corporate Loan 3 Missouri Retail/Industrial 17,337,220 27,580,000 1.6 x 22 Senior Real Estate Corporate Loan Illinois Retail/Industrial 5,076,736 10,400,000 2.0 x $ 343,029,334 $ 571,761,500 1 .7 x (1) Senior Real Estate Corporate Loans are structured as loans to owner operators secured by real estate.
Biggest changeSee “ Risk Factors — We will not own real estate as long as it is used in cannabis-related operations due to current statutory prohibitions and exchange listing standards, which may delay or limit our remedies in the event that any of our borrowers default under the terms of their mortgage loans with us .” Loan Investment (1) Location Property Type Principal Balance as of December 31, 2023 Implied Real Estate Collateral for REIT (2) Our Real Estate Collateral Coverage as of December 31, 2023 (4) 1 Senior Real Estate Corporate Loan Multi-State Retail/Industrial $ 29,910,000 $ 5,514,857 0.2 x 2 Senior Real Estate Corporate Loan 3 Michigan Retail/Industrial 38,810,119 56,962,428 1.5 x 3 Senior Real Estate Corporate Loan 3 Multi-State Retail/Industrial 20,657,606 19,356,702 0.9 x 4 Senior Real Estate Corporate Loan Arizona Industrial 15,396,370 23,900,000 1.6 x 5 Senior Real Estate Corporate Loan 3 Massachusetts Retail/Industrial 3,194,180 900,000 0.3 x 6 Senior Real Estate Corporate Loan 3 Michigan Retail/Industrial 4,264,421 15,850,000 3.7 x 7 Senior Real Estate Corporate Loan 3 Illinois, Arizona Retail/Industrial 20,184,005 41,675,040 2.1 x 8 Senior Real Estate Corporate Loan West Virginia Retail/Industrial 11,706,059 14,255,000 1.2 x 9 Senior Real Estate Corporate Loan 3 Pennsylvania Retail/Industrial 16,402,488 17,000,000 1.0 x 11 Senior Real Estate Corporate Loan 3 Maryland Industrial 33,310,259 30,400,000 0.9 x 12 Senior Real Estate Corporate Loan 3 Multi-State Retail/Industrial 8,710,222 2,049,733 0.2 x 13 Senior Real Estate Corporate Loan 3 Michigan Retail/Industrial 13,392,094 42,064,044 3.1 x 14 Senior Loan Various None 5,253,125 — 0.0 x 16 Senior Loan Florida None 4,437,500 — 0.0 x 17 Senior Real Estate Corporate Loan 3 Florida Retail/Industrial 15,000,000 32,840,000 2.2 x 18 Senior Real Estate Corporate Loan 3 Ohio Retail/Industrial 17,155,637 40,080,000 2.3 x 19 Senior Real Estate Corporate Loan 3 Florida Retail/Industrial 20,080,084 27,700,000 1.4 x 20 Senior Real Estate Corporate Loan 3 Missouri Retail/Industrial 17,691,575 27,400,000 1.5 x 21 Senior Real Estate Corporate Loan 3 Illinois Retail/Industrial 5,353,186 9,770,000 1.8 x 23 Senior Real Estate Corporate Loan 3 Arizona Retail/Industrial 1,860,000 3,887,500 2.1 x 24 Senior Real Estate Corporate Loan 3 Oregon Retail/Industrial 820,000 3,600,000 4.4 x 25 Senior Delayed Draw Term Loan New York Retail 22,611,938 33,631,119 1.5 x 26 Senior Real Estate Corporate Loan Connecticut Industrial 5,450,000 7,699,497 1.4 x 27 Senior Real Estate Corporate Loan Nebraska Industrial 13,061,667 52,853,593 4.0 x 28 Senior Real Estate Corporate Loan Ohio Retail 2,466,705 2,000,000 0.8 x 29 Senior Real Estate Corporate Loan Illinois Retail 1,066,065 1,400,000 1.3 x 30 Senior Real Estate Corporate Loan Missouri, Arizona Retail/Industrial 7,500,000 9,217,500 1.2 x $ 355,745,305 $ 522,007,013 1.5 x (1) Senior Real Estate Corporate Loans and Senior Delayed Draw Term Loans are structured as loans to owner operators secured by real estate or loans to property owners that are leased to a third party tenant.
Notwithstanding our qualification as a REIT, we will be subject to U.S. federal income tax as follows: ● we will be taxed at normal corporate rates on any undistributed net income (including undistributed net capital gains); ● if we fail to satisfy either the 75% or the 95% gross income tests (discussed below), but nonetheless maintain our qualification as a REIT because other requirements are met, we will be subject to a 100% tax on the greater of (1) the amount by which we fail the 75% test and (2) the amount by which we fail the 95% test, in either case, multiplied by a fraction intended to reflect our profitability; ● if we should fail to satisfy the asset tests or other requirements applicable to REITs, as described below, yet nonetheless maintain our qualification as a REIT because there is reasonable cause for the failure and other applicable requirements are met, we may be subject to an excise tax; 12 ● we will be subject to a tax of 100% on net income from any “prohibited transaction”; ● we will be subject to tax, at the highest corporate rate, on net income from (1) the sale or other disposition of “foreclosure property” (generally, property acquired by us through foreclosure or after a default on a loan secured by the property or a lease of the property and for which an election is in effect) that is held primarily for sale to customers in the ordinary course of business or (2) other non-qualifying income from foreclosure property; ● if we fail to distribute during each calendar year at least the sum of (1) 85% of our REIT ordinary income for the year, (2) 95% of our REIT capital gain income for the year and (3) any undistributed taxable income from prior years, we will be subject to a 4% excise tax on the excess of the Required Distribution over the sum of (a) the amounts actually distributed plus (b) the amounts with respect to which certain taxes are imposed on us; ● if we acquire any asset from a “C corporation” (that is, a corporation generally subject to the full corporate level tax) in a transaction in which the basis of the asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and we recognize gain on the disposition of the asset during a five-year period beginning on the date that we acquired the asset, then the asset’s “built-in” gain generally will be subject to tax at the highest regular corporate rate; ● if we fail to qualify for taxation as a REIT because we failed to distribute by the end of the relevant year any earnings and profits we inherited from a taxable C corporation during the year (e.g., by tax-free merger or tax-free liquidation), and the failure is not due to fraud with intent to evade tax, we generally may retain our REIT status by paying a special distribution, but we will be required to pay an interest charge on 50% of the amount of undistributed non-REIT earnings and profits; ● a 100% tax may be imposed on certain transactions between us and our taxable REIT subsidiaries (“TRSs”) that do not reflect arm’s length terms; ● we may be required to pay monetary penalties to the IRS in certain circumstances, including if we fail to satisfy the record keeping requirements intended to monitor our compliance with rules relating to the ownership of our common stock; ● certain of our subsidiaries, if any, may be C corporations, the earnings of which could be subject to federal corporate income tax; and ● we and our subsidiaries, if any, may be subject to a variety of taxes, including state and local income taxes, property taxes and other taxes on our assets and operations and could also be subject to tax in situations and on transactions not presently contemplated.
Notwithstanding our qualification as a REIT, we will be subject to U.S. federal income tax as follows: • we will be taxed at normal corporate rates on any undistributed net income (including undistributed net capital gains); • if we fail to satisfy either the 75% or the 95% gross income tests (discussed below), but nonetheless maintain our qualification as a REIT because other requirements are met, we will be subject to a 100% tax on the greater of (1) the amount by which we fail the 75% test and (2) the amount by which we fail the 95% test, in either case, multiplied by a fraction intended to reflect our profitability; • if we should fail to satisfy the asset tests or other requirements applicable to REITs, as described below, yet nonetheless maintain our qualification as a REIT because there is reasonable cause for the failure and other applicable requirements are met, we may be subject to an excise tax; • we will be subject to a tax of 100% on net income from any “prohibited transaction”; • we will be subject to tax, at the highest corporate rate, on net income from (1) the sale or other disposition of “foreclosure property” (generally, property acquired by us through foreclosure or after a default on a loan secured by the property or a lease of the property and for which an election is in effect) that is held primarily for sale to customers in the ordinary course of business or (2) other non-qualifying income from foreclosure property; • if we fail to distribute during each calendar year at least the sum of (1) 85% of our REIT ordinary income for the year, (2) 95% of our REIT capital gain income for the year and (3) any undistributed taxable income from prior years, we will be subject to a 4% excise tax on the excess of the Required Distribution over the sum of (a) the amounts actually distributed plus (b) the amounts with respect to which certain taxes are imposed on us; • if we acquire any asset from a “C corporation” (that is, a corporation generally subject to the full corporate level tax) in a transaction in which the basis of the asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and we recognize gain on the disposition of the asset during a five-year period beginning on the date that we acquired the asset, then the asset’s “built-in” gain generally will be subject to tax at the highest regular corporate rate; • if we fail to qualify for taxation as a REIT because we failed to distribute by the end of the relevant year any earnings and profits we inherited from a taxable C corporation during the year (e.g., by tax-free merger or tax-free liquidation), and the failure is not due to fraud with intent to evade tax, we generally may retain our REIT status by paying a special distribution, but we will be required to pay an interest charge on 50% of the amount of undistributed non-REIT earnings and profits; • a 100% tax may be imposed on certain transactions between us and our taxable REIT subsidiaries (“TRSs”) that do not reflect arm’s length terms; • we may be required to pay monetary penalties to the IRS in certain circumstances, including if we fail to satisfy the record keeping requirements intended to monitor our compliance with rules relating to the ownership of our common stock; • certain of our subsidiaries, if any, may be C corporations, the earnings of which could be subject to federal corporate income tax; and • we and our subsidiaries, if any, may be subject to a variety of taxes, including state and local income taxes, property taxes and other taxes on our assets and operations and could also be subject to tax in situations and on transactions not presently contemplated.
A REIT must be organized as a corporation, trust or association: (1) that is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) that would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code; (4) that is neither a financial institution nor an insurance company subject to specified provisions of the Code; (5) the beneficial ownership of which is held by 100 or more persons; 13 (6) at all times during the last half of each taxable year, after the first taxable year, not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, or by application of certain constructive ownership rules, by five or fewer individuals (as defined in the Code to include some entities that would not ordinarily be considered “individuals”); and (7) that meets other tests, described below, regarding the nature of its income and assets.
A REIT must be organized as a corporation, trust or association: (1) that is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) that would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code; (4) that is neither a financial institution nor an insurance company subject to specified provisions of the Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) at all times during the last half of each taxable year, after the first taxable year, not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, or by application of certain constructive ownership rules, by five or fewer individuals (as defined in the Code to include some entities that would not ordinarily be considered “individuals”); and (7) that meets other tests, described below, regarding the nature of its income and assets.
(C) purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The SEC generally requires that, for the exception provided by Section 3(c)(5) to be available, at least 55% of an entity’s assets be comprised of mortgages and other liens on and interests in real estate, also known as “qualifying interests,” and at least another 25% of the entity’s assets must be comprised of additional qualifying interests or real estate-type interests (with no more than 20% of the entity’s assets comprised of miscellaneous assets).
(C) purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The SEC generally requires that, for the exception provided by Section 3(c)(5) to be available, at least 55% of an entity’s assets be comprised of mortgages and other liens on 18 and interests in real estate, also known as “qualifying interests,” and at least another 25% of the entity’s assets must be comprised of additional qualifying interests or real estate-type interests (with no more than 20% of the entity’s assets comprised of miscellaneous assets).
We must satisfy the following tests relating to the nature of our assets at the close of each quarter of our taxable year: ● at least 75% of the value of our total assets must be represented by real estate assets (including (1) our allocable share of real estate assets held by partnerships in which we own an interest, (2) stock or debt instruments held for not more than one year purchased with the proceeds of our stock offering or long-term (at least five years) debt offering, cash and government securities, (3) stock in other REITs and (4) certain mortgage-backed securities and loans); ● not more than 25% of our total assets may be represented by securities other than those in the 75% asset class; 15 ● of the investments included in the 25% asset class, the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets (unless the issuer is a TRS), and we may not own more than 10% of the vote or value of any one issuer’s outstanding securities (unless the issuer is a TRS or we can avail ourselves of the rules relating to certain securities and “straight debt” summarized below); ● not more than 20% of the value of our total assets may be represented by securities of one or more TRS; and ● not more than 25% of the value of our total assets may be represented by debt instruments of publicly offered REITs that are not secured by mortgages on real property or interests in real property.
We must satisfy the following tests relating to the nature of our assets at the close of each quarter of our taxable year: • at least 75% of the value of our total assets must be represented by real estate assets (including (1) our allocable share of real estate assets held by partnerships in which we own an interest, (2) stock or debt instruments held for not more than one year purchased with the proceeds of our stock offering or long-term (at least five years) debt offering, cash and government securities, (3) stock in other REITs and (4) certain mortgage-backed securities and loans); 16 • not more than 25% of our total assets may be represented by securities other than those in the 75% asset class; • of the investments included in the 25% asset class, the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets (unless the issuer is a TRS), and we may not own more than 10% of the vote or value of any one issuer’s outstanding securities (unless the issuer is a TRS or we can avail ourselves of the rules relating to certain securities and “straight debt” summarized below); • not more than 20% of the value of our total assets may be represented by securities of one or more TRS; and • not more than 25% of the value of our total assets may be represented by debt instruments of publicly offered REITs that are not secured by mortgages on real property or interests in real property.
Real estate mortgages are excluded from the term “investment securities.” 17 We rely on the exception set forth in Section 3(c)(5) of the Investment Company Act, which excludes from the definition of investment company “[a]ny person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in one or more of the following business . . .
Real estate mortgages are excluded from the term “investment securities.” We rely on the exception set forth in Section 3(c)(5) of the Investment Company Act, which excludes from the definition of investment company “[a]ny person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in one or more of the following business . . .
Seasonality Our business has not been, and we do not expect it to become subject to, material seasonal fluctuations. U.S. Federal Income Tax Considerations We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable period ended December 31, 2021.
Seasonality Our business has not been, and we do not expect it to become subject to, material seasonal fluctuations. 13 U.S. Federal Income Tax Considerations We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable period ended December 31, 2021.
From time to time, we may invest in mezzanine loans, preferred equity or other forms of joint venture equity. We draw upon our Manager’s expertise in sourcing, underwriting, structuring and funding capabilities to implement our growth strategy. We believe that our current growth strategy provides significant potential opportunities to our stockholders for attractive risk-adjusted returns over time.
From time to time, we may invest in mezzanine loans, preferred equity or other forms of joint venture equity. 5 We draw upon our Manager’s expertise in sourcing, underwriting, structuring and funding capabilities to implement our growth strategy. We believe that our current growth strategy provides significant potential opportunities to our stockholders for attractive risk-adjusted returns over time.
The Sessions Memo instructs federal prosecutors to enforce the laws enacted by Congress and to follow well-established principles that govern all federal prosecutors when deciding whether to pursue prosecutions related to cannabis activities. As a result, federal prosecutors could, and still can, use their prosecutorial discretion to decide to prosecute actors compliant with their state laws.
The Sessions Memo instructs federal prosecutors to enforce the laws enacted by Congress and to follow well-established principles 11 that govern all federal prosecutors when deciding whether to pursue prosecutions related to cannabis activities. As a result, federal prosecutors could, and still can, use their prosecutorial discretion to decide to prosecute actors compliant with their state laws.
The real estate collateral values in the table below were measured at the time of underwriting and based on various sources of data available at such time. In addition, the real estate that secures our loans is appraised by a third party at least once a year, or more frequently as needed.
The real estate collateral values in the table below were measured at the time of underwriting and based on various sources of data available at such time. In addition, the real estate that secures our loans is generally appraised by a third party at least once a year, or more frequently as needed.
Therefore, financial institutions that conduct transactions with money generated by cannabis-related conduct could face criminal liability under the Bank Secrecy Act for, among other things, failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the CSA. 11 Despite these laws, the U.S.
Therefore, financial institutions that conduct transactions with money generated by cannabis-related conduct could face criminal liability under the Bank Secrecy Act for, among other things, failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the CSA. Despite these laws, the U.S.
As a result, applicable state and local laws and regulations vary widely, including, but not limited to, product testing, the level of enforcement by state and local authorities on non-licensed cannabis operators, state and local taxation of regulated cannabis products, local municipality bans on operations and operator licensing processes and renewals.
As a result, applicable state and local laws and regulations vary 12 widely, including, but not limited to, product testing, the level of enforcement by state and local authorities on non-licensed cannabis operators, state and local taxation of regulated cannabis products, local municipality bans on operations and operator licensing processes and renewals.
However, structuring a mezzanine loan to meet the requirements of the safe harbor may not always be practical. To the extent that any of our mezzanine loans do not meet all of the requirements for reliance on the safe harbor, such loans might not be properly treated as qualifying loans for REIT purposes.
However, structuring a mezzanine loan to meet the requirements of the safe harbor may 15 not always be practical. To the extent that any of our mezzanine loans do not meet all of the requirements for reliance on the safe harbor, such loans might not be properly treated as qualifying loans for REIT purposes.
However, the amount of any such recovery will likely be less than the appraised value of the real estate and may not be sufficient to pay off the remaining balance on the defaulted loan. 7 We may pursue a sale of a defaulted loan if we believe that such sale would yield higher proceeds or that the sale could be accomplished more quickly than through a foreclosure proceeding while yielding proceeds comparable to what would be expected from a foreclosure sale.
However, the amount of any such recovery will likely be less than the appraised value of the real estate and may not be sufficient to pay off the remaining balance on the defaulted loan. 8 We may pursue a sale of a defaulted loan if we believe that such sale would yield higher proceeds or that the sale could be accomplished more quickly than through a foreclosure proceeding while yielding proceeds comparable to what would be expected from a foreclosure sale.
See “ Risk Factors — Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability. ” The table below represents the real estate collateral securing our loans as of December 31, 2022.
See “ Risk Factors — Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability. ” The table below represents the real estate collateral securing our loans as of December 31, 2023.
We intend to make timely distributions sufficient to satisfy all annual distribution requirements. 16 From time to time, we may experience timing differences between (1) the actual receipt of income and actual payment of deductible expenses and (2) the inclusion of that income and deduction of those expenses in arriving at our taxable income.
We intend to make timely distributions sufficient to satisfy all annual distribution requirements. 17 From time to time, we may experience timing differences between (1) the actual receipt of income and actual payment of deductible expenses and (2) the inclusion of that income and deduction of those expenses in arriving at our taxable income.
Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a memorandum on February 14, 2014 (the “2014 FinCEN Memorandum”) outlining the pathways for financial institutions to bank state-sanctioned cannabis businesses in compliance with federal enforcement priorities.
Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a memorandum on February 14, 2014 (the “FinCEN Memorandum”) outlining the pathways for financial institutions to bank state-sanctioned cannabis businesses in compliance with federal enforcement priorities.
For additional information concerning these competitive risks, see “ Risk Factors — Risks Related to Our Business and Growth Strategy .” Human Capital We are externally managed by our Manager pursuant to the Management Agreement between our Manager and us. Our officers also serve as officers or employees of our Manager and/or its affiliates.
For additional information concerning these competitive risks, see “ Risk Factors — Risks Related to Our Business and Growth Strategy .” Human Capital We are externally managed by our Manager pursuant to the Management Agreement between our Manager and us. Our officers also serve as officers or employees of our Manager and/or its affiliates. We do not have any employees.
From time to time, we may also invest in mezzanine loans, preferred equity or other forms of joint venture equity to the extent consistent with our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”) and maintaining our qualification as a real estate investment trust (“REIT”).
From time to time, we may also invest in mezzanine loans, preferred equity or other forms of joint venture equity to the extent consistent with our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”) and maintaining our qualification as a REIT.
Finally, the appraisal contains a value based on the cost for another operator to construct a similar facility, which we refer to as the “cost approach.” We believe the cost approach provides an indication of what another state-licensed operator would pay for a separate facility instead of constructing it itself.
Finally, the appraisals may contain a value based on the cost for another operator to construct a similar facility, which we refer to as the “cost approach.” We believe the cost approach provides an indication of what another state-licensed operator would pay for a separate facility instead of constructing it itself.
As of February 28, 2023, our loan portfolio had a weighted-average yield-to-maturity internal rate of return (“YTM IRR”) of 19.1% and was secured by real estate and, with respect to certain of our loans, substantially all assets in the borrowers and certain of their subsidiaries, including equipment, receivables, and licenses.
As of December 31, 2023, our loan portfolio had a weighted-average yield-to-maturity internal rate of return (“YTM IRR”) of 19.4% and was secured by real estate and, with respect to certain of our loans, substantially all assets in the borrowers and certain of their subsidiaries, including equipment, receivables, and licenses.
Additionally, the Company must comply with certain financial covenants including: (1) maximum capital expenditures of $150,000, (2) maintaining a debt service coverage ratio greater than 1.35 to 1, and (3) maintaining a leverage ratio less than 1.50 to 1.
Additionally, the Company must comply with certain financial covenants including: (1) maximum capital expenditures of $150,000, (2) maintaining a debt service coverage ratio greater than 1.35 to 1 for the applicable trailing twelve month period, and (3) maintaining a leverage ratio less than 1.50 to 1.
Chicago Atlantic Group, LLC (our “Sponsor”) and its affiliates have originated and closed 52 loans totaling approximately $1.8 billion to companies operating in the cannabis industry, making their first loan to a cannabis operator in April 2019.
Chicago Atlantic Group, LP (our “Sponsor”) and its affiliates have originated and closed more than 70 loans totaling approximately $1.8 billion to companies operating in the cannabis industry, making their first loan to a cannabis operator in April 2019.
ITEM 1. BUSINESS Overview We are a commercial real estate finance company. Our primary investment objective is to provide attractive, risk-adjusted returns for stockholders over time primarily through consistent current income dividends and other distributions and secondarily through capital appreciation.
ITEM 1. B USINESS Overview We are a commercial mortgage real estate investment trust ("REIT"). Our primary investment objective is to provide attractive, risk-adjusted returns for stockholders over time primarily through consistent current income dividends and other distributions and secondarily through capital appreciation.
We impose strict loan covenants and seek personal or corporate guarantees for additional protection. As of December 31, 2022, 13.6% of the loans held in our portfolio are backed by personal or corporate guarantees. We aim to maintain a diversified portfolio across jurisdictions and across verticals, including cultivators, processors, dispensaries, and other businesses ancillary thereto.
We impose strict loan covenants and seek personal or corporate guarantees for additional protection. As of December 31, 2023, 27.1% of the loans held in our portfolio based on outstanding principal, are backed by personal or corporate guarantees. We aim to maintain a diversified portfolio across jurisdictions and across verticals, including cultivators, processors, dispensaries, and other businesses ancillary thereto.
Interest income that we receive from a loan in which all or a portion of the interest income payable is contingent on the gross receipts or sales of the borrower will generally be qualifying income for purposes of both the 75% and 95% gross income tests. 14 We may receive fee income in a number of circumstances, including from loans that we originate.
Interest income that we receive from a loan in which all or a portion of the interest income payable is contingent on the gross receipts or sales of the borrower will generally be qualifying income for purposes of both the 75% and 95% gross income tests.
A portion or all of the fees may be paid in shares of our common stock, at the sole discretion of our Manager. 2 Type Description Payment Base Management Fees An amount equal to 0.375% (1.50% on an annualized basis) of our Equity (as defined below), determined as of the last day of each quarter, reduced by an amount equal to 50% of the pro rata amount of origination fees, structuring fees, or underwriting fees earned and paid to our Manager during the applicable quarter for loans that were originated on our behalf by our Manager.
Type Description Payment Base Management Fees An amount equal to 0.375% (1.50% on an annualized basis) of our Equity (as defined below), determined as of the last day of each quarter, reduced by an amount equal to 50% of the pro rata amount of origination fees, structuring fees, or underwriting fees earned and paid to our Manager during the applicable quarter for loans that were originated on our behalf by our Manager.
On December 27, 2020, Congress passed an omnibus spending bill that again included the Rohrabacher-Blumenauer Amendment, extending its application until September 30, 2021. The amendment was recently renewed through September 2023 as a rider to the 2022 Consolidated Appropriations Act.
On December 27, 2020, Congress passed an omnibus spending bill that again included the Rohrabacher-Blumenauer Amendment, extending its application until September 30, 2021. The amendment was renewed through September 2023 as a rider to the 2022 Consolidated Appropriations Act, and has been extended through a series of short-term spending bills.
Further, the value may also be determined using the income approach, based on market lease rates for comparable properties, whether dispensaries or cultivation facilities. It indicates the value to a third-party owner that leases to a dispensary or cultivation facility.
(4) The total real estate collateral coverage ratio represents a weighted average real estate collateral coverage ratio. Further, the value may also be determined using the income approach, based on market lease rates for comparable properties, whether dispensaries or cultivation facilities. It indicates the value to a third-party owner that leases to a dispensary or cultivation facility.
We will use the calendar year both for U.S. federal income tax purposes and for financial reporting purposes. Requirements for Qualification. To qualify as a REIT for U.S. federal income tax purposes, we must elect to be treated as a REIT and must meet various (a) organizational requirements, (b) gross income tests, (c) asset tests and (d) annual distribution requirements.
To qualify as a REIT for U.S. federal income tax purposes, we must elect to be treated as a REIT and must meet various (a) organizational requirements, (b) gross income tests, (c) asset tests and (d) annual distribution requirements. Organizational Requirements.
We do not have any employees. 18 Additional Information We file with or submit to the SEC annual, quarterly, and current periodic reports, proxy statements and other information meeting the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). This information is available on our website at www.investors.refi.reit.
Additional Information We file with or submit to the SEC annual, quarterly, and current periodic reports, proxy statements and other information meeting the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). This information is available on our website at www.refi.reit. The information on our website is not deemed incorporated by reference in this Annual Report.
To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change. Actual results could differ from those estimates and assumptions. (7) This Loan is subject to Prime Rate floor. (8) This Loan is subject to an interest rate cap.
To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change. Actual results could differ from those estimates and assumptions.
The real estate values shown in the collateral table are estimates by a third-party appraiser of the market value of the subject real property in its current physical condition, use, and zoning as of the appraisal date. The appraisals assume that the highest and best use is use as a cannabis cultivator or dispensary, as applicable.
The real estate values shown in the collateral table are estimates by a third-party appraiser of the market value of the subject real property in its current physical condition, use, and zoning as of the appraisal date.
Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without a contractual prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications. (3) Total Commitment excludes future amounts to be advanced at sole discretion of the lender.
Actual maturities may differ from contractual maturities stated herein and certain borrowers may have the right to prepay with or without a contractual prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications.
Andreas Bodmeier, and Peter Sack, advises and consults with our Manager and its investment professionals with respect to our investment strategy, portfolio construction, financing, investment guidelines, and risk management, and approves all of our investments.
Our Manager’s Investment Committee, which is comprised of John Mazarakis, Anthony Cappell, Dr. Andreas Bodmeier, and Peter Sack, advises and consults with our Manager and its investment professionals with respect to our investment strategy, portfolio construction, financing, investment guidelines, and risk management, and approves all of our investments.
As of December 31, 2022 and 2021, unamortized debt issuance costs related to the Revolving Loan and the First, Second and Third Amendments and Restatements of $805,596 and $868,022, respectively, are recorded in other receivables and assets, net on the consolidated balance sheets.
As of December 31, 2023 and 2022, unamortized debt issuance costs related to the Revolving Loan, including all amendments and amendments and restatements thereto, as applicable, of $366,592 and $805,596, respectively, are recorded in other receivables and assets, net on the consolidated balance sheets.
Our current portfolio as of February 28, 2023 has an average maturity of 2.0 years with significant prepayment protections, whereas we believe that certain competitors with typical equity REIT land ownership models have long-term leases averaging approximately 16 years.
Our current portfolio as of December 31, 2023 has a weighted average maturity of 2.1 years with significant prepayment protections, whereas we believe that certain competitors with typical equity REIT land ownership models often have long-term leases averaging 10 years or more.
The Company incurred debt issuance costs of $323,779 related to the Third Amendment and Restatement, which were capitalized and are subsequently amortized through maturity.
No other material terms of the Revolving Loan were modified as a result of the execution of the Third Amendment and Restatement. The Company incurred debt issuance costs of $323,779 related to the Third Amendment and Restatement, which were capitalized and are subsequently amortized through maturity.
Our Management Agreement may be terminated by us or our Manager under certain specified circumstances. The following table summarizes the compensation, fees and expense reimbursements that we pay to our Manager under our Management Agreement.
Our Management Agreement may be terminated by us or our Manager under certain specified circumstances. 2 The following table summarizes the compensation, fees and expense reimbursements that we pay to our Manager under our Management Agreement. A portion or all of the fees may be paid in shares of our common stock, at the sole discretion of our Manager.
(6) Estimated YTM includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features. OID is recognized as a discount to the funded loan principal and is accreted to income over the term of the loan.
(6) Estimated YTM, calculated on a weighted average principal basis, includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features.
The information on our website is not deemed incorporated by reference in this Annual Report. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system via electronic means, including on the SEC’s homepage, which can be found at www.sec.gov .
These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system via electronic means, including on the SEC’s homepage, which can be found at www.sec.gov . 19
In addition, the Audit Committee of our Board may assist our Board in its oversight of the determination of the fair value of assets that are not publicly traded or for which current market values are not readily available by evaluating various subjective and objective factors, including input provided by an independent valuation firm that we currently retain to provide input on the valuation of such assets. 5 Our Portfolio Overview As of February 28, 2023, loans to 24 different borrowers comprise our portfolio, totaling approximately $364.1 million in total principal amount, with approximately $14.9 million in potential future fundings to such borrowers.
In addition, the Audit Committee of our Board may assist our Board in its oversight of the determination of the fair value of assets, as applicable, that are not publicly traded or for which current market values are not readily available by evaluating various subjective and objective factors, including input provided by an independent valuation firm that we currently retain to provide input on the valuation of such assets.
Collateral Overview Our loans to cannabis operators are secured by various types of assets of our borrowers, including real property and certain personal property, including licenses, equipment, receivables, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers.
Loan #9 is included on the consolidated balance sheet as a loan held for investment – related party (Note 7) Collateral Overview Our loans to cannabis operators are secured by various types of assets of our borrowers, including real property and certain personal property, including licenses, equipment, receivables, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers.
The regulatory requirements related to real property used in cannabis-related operations may cause significant delays or difficulties in transferring a property to another cannabis operator, as the state regulator may require inspection and approval of the new tenant/user.
The regulatory requirements related to real property used in cannabis-related operations may cause significant delays or difficulties in transferring a property to another cannabis operator, as the state regulator may require inspection and approval of the new tenant/user. 9 (3) Certain affiliated co-lenders subordinated their interest in the real estate collateral to the Company, thus increasing the collateral coverage for the applicable loan.
On November 7, 2022, CAL entered into a third amended and restated Revolving Loan agreement (the “Third Amendment and Restatement”). The Third Amendment and Restatement increased the loan commitment from $65,000,000 to $92,500,000. No other material terms of the Revolving Loan were modified as a result of the execution of the Third Amendment and Restatement.
On June 30, 2023, CAL entered into a Fourth Amended and Restated Loan and Security Agreement (the “Fourth Amendment and Restatement”). The Fourth Amendment and Restatement increased the loan commitment from $92.5 million to $100.0 million. No other material terms of the Revolving Loan were modified as a result of the execution of the Fourth Amendment and Restatement.
We intend to achieve this objective by originating, structuring and investing in first mortgage loans and alternative structured financings secured by commercial real estate properties. Our current portfolio is comprised primarily of senior secured loans to state-licensed operators in the cannabis industry.
We intend to achieve this objective by originating, structuring and investing in first mortgage loans and alternative structured financings secured by commercial real estate properties.
We believe that we have qualified as a REIT and that our method of operations will enable us to continue to qualify as a REIT. However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on us continuing to satisfy numerous asset, income and distribution tests described under “— U.S.
However, no assurances can be 1 given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on us continuing to satisfy numerous asset, income and distribution tests described under “— U.S. Federal Income Tax Considerations — Taxation”, which in turn depend, in part, on our operating results.
We expect cannabis lending will continue to be a principal investment strategy for the foreseeable future; however, we expect to also lend to or invest in companies or properties that are not related to the cannabis industry if they provide return characteristics consistent with our investment objective.
We also invest in companies or properties that are not related to the cannabis industry that provide return characteristics consistent with our investment objective.
In addition, we may invest in borrowers that have equity securities that are publicly traded on the Canadian Stock Exchange (“CSE”) in Canada and/or over-the-counter in the United States. 1 We are an externally managed Maryland corporation that elected to be taxed as a REIT under Section 856 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2021.
We are an externally managed Maryland corporation that elected to be taxed as a REIT under Section 856 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2021.
Certain of our loans have extension fees, which are not included in our YTM IRR calculations, but may increase YTM IRR if such extension options are exercised by borrowers. As of February 28, 2023, approximately 83.9% of our portfolio was comprised of floating rate loans, and 16.1% of our portfolio was comprised of fixed rate loans.
Certain of our loans have extension fees, which are not included in our YTM IRR calculations, but may increase YTM IRR if such extension options are exercised by borrowers.
In that same opinion, however, the Court concluded that “strict” compliance with the law is not necessary, such that technical noncompliance could not lead to prosecution.
In that same opinion, however, the Court concluded that “strict” compliance with the law is not necessary, such that technical noncompliance could not lead to prosecution. The key question, per the First Circuit, is whether a federal prosecution would limit the state’s ability to implement its laws.
The Company retained its option to extend the initial term for an additional one-year period, provided no events of default exist and the Company provides 365 days’ notice of the extension pursuant to this amendment. As of December 31, 2022, we had an outstanding balance of $58.0 million and $34.5 million available under the Revolving Loan.
The Amendment extended the contractual maturity date of the Revolving Loan until December 16, 2024 and the Company retained its option to extend the initial term for an additional one-year period, provided no events of default exist and the Company provides 365 days’ notice of the extension pursuant to the Amendment.
The Revolving Loan incurs unused fees at a rate of 0.25% per annum which began on July 1, 2022 pursuant to the Second Amendment and Restatement.
The Revolving Loan incurs unused fees at a rate of 0.25% per annum which began on July 1, 2022 pursuant to the Second Amendment and Restatement. On November 7, 2022, CAL entered into a third amended and restated Revolving Loan agreement (the “Third Amendment and Restatement”). The Third Amendment and Restatement increased the loan commitment from $65,000,000 to $92,500,000.
Federal Income Tax Considerations — Taxation,”, which in turn depend, in part, on our operating results. We also intend to operate our business in a manner that will permit us and our subsidiaries to maintain one or more exclusions or exemptions from registration under the Investment Company Act.
We also intend to operate our business in a manner that will permit us and our subsidiaries to maintain one or more exclusions or exemptions from registration under the Investment Company Act. Our Manager We are externally managed by our Manager pursuant to our Management Agreement.
Our Manager We are externally managed by our Manager pursuant to our Management Agreement. Our senior management team is provided by our Manager and includes John Mazarakis, our Executive Chairman, Anthony Cappell, our Chief Executive Officer, Dr. Andreas Bodmeier, our Co-President and Chief Investment Officer, and Peter Sack, our Co-President.
Our senior management team is provided by our Manager and includes John Mazarakis, our Executive Chairman, Anthony Cappell, our Co-Chief Executive Officer, Peter Sack, our Co-Chief Executive Officer, and Dr. Andreas Bodmeier, our President and Chief Investment Officer. Our Manager is supported by additional investment professionals with significant expertise in executing our investment strategy and accounting, operational, and legal professionals.
Senior Loans are loans to a property owner and leased to third party tenant. 8 (2) Real estate is based on appraised value as is, or on a comparable cost basis, as completed.
Senior Loans are corporate loans that are not secured by real estate collateral. (2) Real estate is based on appraised value as is, or on a comparable cost basis, as completed.
The Third Amendment and Restatement provides for certain affirmative covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course.
The Company incurred debt issuance costs of approximately $0.1 million related to the Fifth Amendment and Restatement, which were capitalized and will subsequently be amortized through maturity. The Revolving Loan provides for certain affirmative covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course.
Sizable Portfolio with Compelling Risk-Adjusted Returns That is Secured by Different Types of Collateral. We believe our current portfolio investments have attractive risk-adjusted returns. As of December 31, 2022, the yield to maturity (“YTM”) IRR on our loans is 19.7% on a weighted average basis and ranges from 14.2% to 25.9% through coupons, OID, unused fees, and exit fees.
As of December 31, 2023, the yield to maturity (“YTM”) IRR on our loans is 19.4% on a weighted average basis and ranges from 14.7% to 36.3% through coupons, OID, unused fees, exit fees, and other yield-enhancing fees, as applicable.
As of December 31, 2022, our portfolio is comprised primarily of first mortgages to established multi-state or single-state cannabis operators or property owners. We consider cannabis operators to be established if they are state-licensed and are deemed to be operational by the applicable state regulator.
We consider cannabis operators to be established if they are state-licensed and are deemed to be operational and in good standing by the applicable state regulator.
(4) “P” = Prime Rate and depicts floating rate loans that pay interest at the Prime Rate plus a specific percentage; “PIK” = paid-in-kind interest; subtotal represents weighted average interest rate. (5) P&I = principal and interest. I/O = interest only. P&I loans may include interest only periods for a portion of the loan term.
(5) P&I = principal and interest. I/O = interest only. P&I loans may include interest only periods for a portion of the loan term.
(11) The aggregate loan commitment to Loan #3 includes a $15.9 million initial commitment which has a base interest rate of 13.625%, 2.75% PIK and a second commitment of $4.2 million which has an interest rate of 15.00%, 2.00% PIK. The statistics presented reflect the weighted average of the terms under all advances for the total aggregate loan commitment.
(7) This Loan is subject to a prime rate floor of 3.25% 7 (8) This Loan is subject to a prime rate floor of 4.00% (9) This Loan is subject to a prime rate floor of 4.75% (10) This Loan is subject to a prime rate floor of 5.50% (11) This Loan is subject to a prime rate floor of 6.25% (12) This Loan is subject to a prime rate floor of 7.00% (13) This Loan is subject to a prime rate floor of 7.50% (14) This Loan is subject to a prime rate floor of 8.00% (15) This Loan is subject to a prime rate floor of 8.25% (16) This Loan is subject to a prime rate floor of 8.50% (17) This Loan is subject to a prime rate cap of 5.85% (18) The aggregate loan commitment to Loan #3 includes a $15.9 million initial commitment which has a base interest rate of 13.625% cash, 2.75% PIK and a second commitment of $4.2 million which has an interest rate of 15.00% cash, 2.00% PIK.
Our Competitive Strengths We expect demand for financing in the cannabis market to continue to rise due to recent and future state legalization of cannabis for recreational and medical use, while federal prohibition on cannabis use and commercialization hampers certain commercial and financial activities.
Upon specified termination in cash. 3 Summary Compensation Table Year ended December 31, 2023 Year ended December 31, 2022 Base Management Fees $ 4,046,398 $ 2,783,274 Incentive Fees 4,736,436 3,778,813 Expense Reimbursement 4,799,210 3,137,861 Total $ 13,582,044 $ 9,699,948 Our Competitive Strengths We expect demand for financing in the cannabis market to continue to rise due to recent and future state legalization of cannabis for recreational and medical use, while federal prohibition on cannabis use and commercialization hampers certain commercial and financial activities.
As of such date, all of our loans had prepayment penalties. The table below summarizes our loan portfolio as of February 28, 2023.
All of our loans had prepayment penalties at origination and 54% of our loans, based on outstanding principal, are still protected by prepayment penalties as of December 31, 2023. 6 The table below summarizes our loan portfolio as of December 31, 2023.
As of December 31, 2022, we were in compliance with all financial covenants with respect to the Revolving Loan. 9 On February 27, 2023, CAL entered into the First Amendment to the Third Amended and Restated Loan and Security Agreement. This amendment extended the contractual maturity date of the Revolving Loan until December 16, 2024.
As of December 31, 2023, we were in compliance with all financial covenants with respect to the Revolving Loan.
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Our Manager is supported by additional investment professionals with significant expertise in executing our investment strategy and accounting, operational, and legal professionals. Our Manager’s Investment Committee, which is comprised of John Mazarakis, Anthony Cappell, Dr.
Added
As of December 31, 2023, our portfolio is comprised primarily of first mortgage loans to established multi-state or single-state cannabis operators or property owners. In addition, we own approximately $0.8 million, at fair value, of publicly-traded corporate bonds issued by a multi-state cannabis operator.
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Summary Compensation Table Year ended December 31, 2022 For the period from May 1, 2021 to December 31, 2021(1)(2) Base Management Fees $ 2,783,274 $ 1,422,090 Incentive Fees 3,778,813 -- Expense Reimbursement 3,137,861 244,720 Total $ 9,699,948 $ 1,666,810 (1) We entered into our Management Agreement with our Manager on May 1, 2021. 3 (2) Pursuant to Fee Waiver Letter Agreements executed by our Manager, dated June 30, 2021 and September 30, 2021, all Base Management Fees that would have been payable to our Manager for the period from May 1, 2021 to September 30, 2021 were voluntarily waived and are not subject to recoupment at a later date.
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In addition, we may invest in borrowers that have equity securities that are publicly traded on the Canadian Stock Exchange (“CSE”) in Canada and/or over-the-counter in the United States.
Removed
Additionally, pursuant to a Fee Waiver Letter Agreement executed by our Manager, dated December 31, 2021, all Incentive Compensation that would have been payable to our Manager for the period from October 1, 2021 to December 31, 2021, as well as a portion of reimbursable expenses incurred during the period from October 1, 2021 to December 31, 2021, were voluntarily waived and are not subject to recoupment at a later date.
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Sizable Portfolio with Compelling Risk-Adjusted Returns That is Secured by Different Types of Collateral. We believe our current portfolio investments have attractive risk-adjusted returns.
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Loan Initial Funding Date (1) Maturity Date (2) Total Commitment (3) Principal Balance(12) Carrying Value Percentage of Our Loan Portfolio Future Fundings Interest Rate (4) Periodic Payment (5) YTM IRR (6) 1 10/27/2022 10/30/2026 $ 30,000,000 $ 30,000,000 $ 29,159,590 8.3 % - P + 6.50%(7) I/O 16.6 % 2 3/5/2021 12/31/2024 35,891,667 37,420,310 37,265,404 10.6 % - P + 6.65%(7)(8) Cash, 4.25% PIK P&I 17.8 % 3(11) 3/25/2021 11/29/2024 20,105,628 20,855,220 20,504,314 5.8 % - 13.91% Cash(7), 2.59% PIK P&I 23.1 % 4(9) 4/19/2021 12/31/2023 12,900,000 12,591,490 12,591,490 3.6 % - 18.72%(7)(9) P&I 23.0 % 5 4/19/2021 4/30/2025 3,500,000 2,006,000 2,006,000 0.6 % 1,494,000 P + 12.25%(7) P&I 24.2 % 6 5/28/2021 5/31/2025 12,900,000 13,445,867 13,445,867 3.8 % - P + 10.75%(7) Cash, 4% PIK(10) P&I 22.7 % 7 8/20/2021 2/20/2024 6,000,000 4,331,250 4,327,038 1.2 % 1,500,000 P + 9.00%(7) P&I 16.0 % 8 8/24/2021 6/30/2025 25,000,000 25,520,866 25,284,014 7.2 % - P + 6.00%(7) Cash, 2.5% PIK P&I 17.9 % 9 9/1/2021 9/1/2024 9,500,000 10,239,235 10,138,952 2.9 % - 18.75% PIK P&I 25.8 % 10 9/3/2021 6/30/2024 15,000,000 15,857,049 15,857,049 4.5 % - P + 10.75%(7) Cash, 6% PIK P&I 23.7 % 11 9/20/2021 9/30/2024 470,411 261,339 261,339 0.1 % - 11.00% P&I 21.4 % 12 9/30/2021 9/30/2024 32,000,000 32,702,007 32,107,342 9.1 % - P + 8.75%(7) Cash, 2% PIK I/O 21.5 % 13 11/8/2021 10/31/2024 20,000,000 19,800,000 19,623,805 5.6 % - P + 9.25%(7) Cash P&I 17.5 % 14 11/22/2021 11/1/2024 13,100,000 13,134,958 13,015,867 3.7 % - P + 6.00%(7) Cash, 1.5% PIK I/O 18.3 % 15 12/27/2021 12/27/2026 5,000,000 5,194,514 5,194,514 1.5 % - P + 12.25%(7) Cash, 2.5% PIK P&I 23.4 % 16 12/29/2021 12/29/2023 6,000,000 3,804,161 3,763,229 1.1 % 2,400,000 P + 7.50%(7) Cash, 5% PIK I/O 26.8 % 17 12/30/2021 12/31/2024 13,000,000 7,275,000 7,227,142 2.1 % 5,500,000 P + 9.25%(7) I/O 20.0 % 18 1/18/2022 1/31/2025 15,000,000 15,000,000 14,748,354 4.2 % - P + 4.75%(7) P&I 14.2 % 19 2/3/2022 2/28/2025 12,500,000 12,573,829 12,326,644 3.5 % - P + 8.25%(7) Cash, 3% PIK P&I 25.9 % 20 3/11/2022 8/29/2025 20,000,000 20,536,864 20,462,116 5.8 % - 11% Cash, 3% PIK P&I 15.3 % 21 5/9/2022 5/30/2025 17,000,000 17,368,524 17,239,160 4.9 % - 11% Cash, 2% PIK P&I 14.7 % 22 7/1/2022 7/26/2026 9,000,000 5,089,851 5,012,786 1.4 % 4,000,000 P + 8.50%(7) Cash, 3% PIK P&I 24.6 % 23 1/24/2023 1/24/2026 11,250,000 11,253,500 10,583,427 3.0 % - P + 5.75%(7) Cash, 1.4% PIK P&I 17.8 % 24 10/26/2022 4/28/2023 19,000,000 19,000,000 19,000,000 5.4 % - 22.00% I/O 11.8 % Subtotal $364,117,706 $355,261,834 $351,145,443 100.0 % $14,894,000 17.6% Wtd Average 19.1 % (1) All loans originated prior to April 1, 2021 were purchased from affiliated entities at fair value plus accrued interest on or subsequent to April 1, 2021. 6 (2) Certain loans are subject to contractual extension options and may be subject to performance based on other conditions as stipulated in the loan agreement.
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Our current portfolio is comprised primarily of senior loans to state-licensed operators in the cannabis industry, secured by real estate, equipment, receivables, licenses or other assets of the borrowers to the extent permitted by applicable laws and regulations governing such borrowers.
Removed
(9) The aggregate loan commitment to Loan #4 includes a $10.9 million initial commitment which has a base interest rate of 15.00% and a second commitment of $2.0 million which has an interest rate of 39%. The statistics presented reflect the weighted average of the terms under all advances for the total aggregate loan commitment.
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Our Portfolio Overview As of December 31, 2023, loans to 27 different borrowers comprise our portfolio, totaling approximately $355.7 million in total principal amount, with approximately $7.5 million in committed future fundings to such borrowers.
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(10) Subject to adjustment not below 2% if borrower receives at least two consecutive quarters of positive cash flow after the closing date.
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As of December 31, 2023, approximately 80.5% of our portfolio was comprised of floating rate loans that pay interest at the Prime Rate plus an applicable margin and were subject to a Prime Rate floor, and 19.5% of our portfolio was comprised of fixed rate loans.
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(12) Principal as of February 28, 2023 excludes any accrued PIK interest from February 1, 2023 through February 28, 2023 for loans which PIK interest is a component of interest rate.
Added
Loan (1) Location(s) Initial Funding Date (1) Maturity Date (2) Total Commitment (3) Principal Balance Original Issue Discount Carrying Value Percentage of Our Loan Portfolio Future Fundings Interest Rate (4) Periodic Payment (5) YTM IRR (6) 1 Various 10/27/2022 10/30/2026 $ 30,000,000 $ 29,910,000 $ (635,656 ) $ 29,274,344 8.3 % - P+6.5% Cash (11) I/O 17.3% 2 Michigan 1/13/2022 12/31/2024 35,891,667 38,810,119 (81,073 ) 38,729,046 11.0 % - P+6.65% Cash, 4.25% PIK (17) P&I 18.0% 3 (18) Various 3/25/2021 11/29/2024 20,105,628 20,657,606 (175,697 ) 20,481,909 5.8 % - P+10.38% Cash, 2.75% PIK (7) P&I 23.5% 4 Arizona 4/19/2021 2/14/2023 14,240,129 15,396,370 - 15,396,370 4.4 % - P+11.75% PIK (15) I/O 25.9% 5 Massachusetts 4/19/2021 4/30/2025 3,500,000 3,194,180 - 3,194,180 0.9 % - P+12.25% Cash (7) P&I 22.8% 6 (19) Michigan 8/20/2021 2/20/2024 6,000,000 4,264,421 (535 ) 4,263,886 1.2 % - P+9% Cash (7) P&I 20.8% 7 Illinois, Arizona 8/24/2021 6/30/2025 25,000,000 20,184,005 (128,551 ) 20,055,454 5.7 % - P+6% Cash, 2% PIK (12) P&I 19.5% 8 West Virginia 9/1/2021 9/1/2024 9,500,000 11,706,059 (42,473 ) 11,663,586 3.3 % - P+9.25% Cash, 2% PIK (8) P&I 25.1% 9 (20) Pennsylvania 9/3/2021 6/30/2024 15,000,000 16,402,488 - 16,402,488 4.6 % - P+10.75% Cash, 3% PIK (7) P&I 16.2% 11 Maryland 9/30/2021 9/30/2024 32,000,000 33,310,259 (267,990 ) 33,042,269 9.3 % - P+8.75% Cash, 2% PIK (7) I/O 22.0% 12 Various 11/8/2021 10/31/2024 20,000,000 8,710,222 (52,406 ) 8,657,816 2.4 % - P+7% Cash (13) P&I 19.5% 13 Michigan 11/22/2021 11/1/2024 13,600,000 13,392,094 (59,248 ) 13,332,846 3.8 % - P+6% Cash, 1.5% PIK (12) I/O 19.5% 14 Various 12/27/2021 12/27/2026 5,000,000 5,253,125 - 5,253,125 1.5 % - P+12.25% Cash, 2.5% PIK (9) P&I 22.8% 16 Florida 12/30/2021 12/31/2024 13,000,000 4,437,500 (19,058 ) 4,418,442 1.2 % - P+9.25% Cash (7) I/O 36.3% 17 Florida 1/18/2022 1/31/2025 15,000,000 15,000,000 (136,667 ) 14,863,333 4.2 % - P+4.75% Cash (11) P&I 14.8% 18 Ohio 2/3/2022 2/28/2025 11,662,050 17,155,637 (92,206 ) 17,063,431 4.8 % - P+1.75% Cash, 5% PIK (12) P&I 20.4% 19 Florida 3/11/2022 8/29/2025 20,000,000 20,080,084 (48,217 ) 20,031,867 5.7 % - 11% Cash, 3% PIK P&I 15.5% 20 Missouri 5/9/2022 5/30/2025 17,000,000 17,691,575 (78,532 ) 17,613,043 5.0 % - 11% Cash, 2% PIK P&I 14.7% 21 Illinois 7/1/2022 7/29/2026 9,000,000 5,353,186 (56,877 ) 5,296,309 1.5 % - P+8.5% Cash, 3% PIK (9) P&I 25.6% 23 Arizona 3/27/2023 3/31/2026 2,000,000 1,860,000 (37,319 ) 1,822,681 0.5 % - P+7.5% Cash (14) P&I 19.4% 24 Oregon 3/31/2023 9/27/2026 1,000,000 820,000 - 820,000 0.2 % - P+10.5% Cash (10) P&I 21.7% 25 New York 8/1/2023 6/29/2036 23,309,588 22,611,938 - 22,611,938 6.4 % - 15% Cash P&I 16.7% 26 Connecticut 8/31/2023 2/27/2026 5,450,000 5,450,000 (118,004 ) 5,331,996 1.5 % - 14% Cash P&I 19.1% 27 Nebraska 8/15/2023 6/30/2027 13,061,667 13,061,667 - 13,061,667 3.7 % - P+8.75% Cash P&I 19.0% 28 Ohio 9/13/2023 3/13/2025 2,466,705 2,466,705 - 2,466,705 0.7 % - 15% Cash P&I 17.4% 29 Illinois 10/11/2023 10/9/2026 1,062,564 1,066,065 - 1,066,065 0.3 % - 11.4% Cash, 1.5% PIK P&I 15.9% 30 Missouri, Arizona 12/20/2023 12/31/2026 15,000,000 7,500,000 (74,186 ) 7,425,814 2.1 % 7,500,000 P+7.75% Cash (16) I/O 18.4% Subtotal $ 378,849,998 $ 355,745,305 $ (2,104,695 ) $ 353,640,610 100 % $ 7,500,000 Wtd Average 19.4% (1) All loans originated prior to April 1, 2021 were purchased from affiliated entities at fair value plus accrued interest on or subsequent to April 1, 2021.
Removed
(3) Certain affiliated co-lenders subordinated their interest in the real estate collateral to the Company, thus increasing the collateral coverage for the applicable loan. (4) The real estate collateral coverage ratio represents a weighted average real estate collateral coverage ratio.
Added
Loan numbering in the table above is maintained from origination for purposes of comparability and may not be sequential due to maturities, payoffs, or refinancings. (2) Certain loans are subject to contractual extension options and may be subject to performance based on other conditions as stipulated in the loan agreement.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeTo the extent uncertainty regarding any economic recovery in Europe negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected. 43 Various social and political circumstances in the U.S. and around the world (including wars and other forms of conflict, including rising trade tensions between the United States and China, and other uncertainties regarding actual and potential shifts in the U.S. and foreign, trade, economic and other policies with other countries, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics), may also contribute to increased market volatility and economic uncertainties or deterioration in the U.S. and worldwide.
Biggest changeVarious social and political circumstances in the U.S. and around the world (including wars and other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics or outbreaks of infectious diseases), may also contribute to increased market volatility and economic uncertainties or deterioration in the U.S. and worldwide.
Such joint venture investments may involve risks not otherwise present when we originate or acquire investments without partners, including the following: ● we may not have exclusive control over the investment or the joint venture, which may prevent us from taking actions that are in our best interest; ● joint venture agreements often restrict the transfer of a partner’s interest or may otherwise restrict our ability to sell the interest when we desire and/or on advantageous terms; 50 ● any future joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate procedures requiring the other partner to choose between buying the other partner’s interest or selling its interest to that partner; ● we may not be in a position to exercise sole decision-making authority regarding the investment or joint venture, which could create the potential risk of creating impasses on decisions, such as with respect to acquisitions or dispositions; ● a partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals; ● a partner may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT and our exclusion or exemption from registration under the Investment Company Act; ● a partner may fail to fund its share of required capital contributions or may become bankrupt, which may mean that we and any other remaining partners generally would remain liable for the joint venture’s liabilities; ● our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or investments underlying such relationship or may need to purchase such interests or investments at a premium to the market price to continue ownership; ● disputes between us and a partner may result in litigation or arbitration that could increase our expenses and prevent our Manager and our officers and directors from focusing their time and efforts on our business and could result in subjecting the investments owned by the joint venture to additional risk; or ● we may, in certain circumstances, be liable for the actions of a partner, and the activities of a partner could adversely affect our ability to maintain our qualification as a REIT or our exclusion or exemption from registration under the Investment Company Act, even though we do not control the joint venture.
Such joint venture investments may involve risks not otherwise present when we originate or acquire investments without partners, including the following: • we may not have exclusive control over the investment or the joint venture, which may prevent us from taking actions that are in our best interest; • joint venture agreements often restrict the transfer of a partner’s interest or may otherwise restrict our ability to sell the interest when we desire and/or on advantageous terms; • any future joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate procedures requiring the other partner to choose between buying the other partner’s interest or selling its interest to that partner; • we may not be in a position to exercise sole decision-making authority regarding the investment or joint venture, which could create the potential risk of creating impasses on decisions, such as with respect to acquisitions or dispositions; • a partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals; • a partner may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT and our exclusion or exemption from registration under the Investment Company Act; • a partner may fail to fund its share of required capital contributions or may become bankrupt, which may mean that we and any other remaining partners generally would remain liable for the joint venture’s liabilities; • our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or investments underlying such relationship or may need to purchase such interests or investments at a premium to the market price to continue ownership; • disputes between us and a partner may result in litigation or arbitration that could increase our expenses and prevent our Manager and our officers and directors from focusing their time and efforts on our business and could result in subjecting the investments owned by the joint venture to additional risk; or • we may, in certain circumstances, be liable for the actions of a partner, and the activities of a partner could adversely affect our ability to maintain our qualification as a REIT or our exclusion or exemption from registration under the Investment Company Act, even though we do not control the joint venture.
Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include: ● our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy or prospects; ● changes in governmental policies, regulations or laws; ● loss of a major funding source or inability to obtain new favorable funding sources in the future; ● equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur; ● actual, anticipated or perceived accounting or internal control problems; ● publication of research reports about us, the real estate industry or the cannabis industry; ● our value of the properties securing our loans; ● changes in market valuations of similar companies; ● adverse market reaction to any increased indebtedness we may incur in the future; ● additions to or departures of the executive officers or key personnel supporting or assisting us from our Manager or its affiliates, including our Manager’s investment professionals; ● speculation in the press or investment community about us or other similar companies; ● our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts; ● increases in market interest rates, which may lead investors to demand a higher distribution yield for our common stock (if we have begun to make distributions to our stockholders) and which could cause the cost of our interest expenses on our debt to increase; ● failure to qualify or maintain our qualification as a REIT or exclusion from the Investment Company Act; ● price and volume fluctuations in the stock market generally; and ● general market and economic conditions, including the state of the credit and capital markets.
Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include: • our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy or prospects; • changes in governmental policies, regulations or laws; • loss of a major funding source or inability to obtain new favorable funding sources in the future; • equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur; • actual, anticipated or perceived accounting or internal control problems; • publication of research reports about us, the real estate industry or the cannabis industry; • our value of the properties securing our loans; • changes in market valuations of similar companies; • adverse market reaction to any increased indebtedness we may incur in the future; • additions to or departures of the executive officers or key personnel supporting or assisting us from our Manager or its affiliates, including our Manager’s investment professionals; • speculation in the press or investment community about us or other similar companies; • our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts; • increases in market interest rates, which may lead investors to demand a higher distribution yield for our common stock (if we have begun to make distributions to our stockholders) and which could cause the cost of our interest expenses on our debt to increase; • failure to qualify or maintain our qualification as a REIT or exclusion from the Investment Company Act; 53 • price and volume fluctuations in the stock market generally; and • general market and economic conditions, including the state of the credit and capital markets.
New laws that are adverse to our borrowers may be enacted, and current favorable state or national laws or enforcement guidelines relating to cultivation, production and distribution of cannabis may be modified or eliminated in the future, which would impede our ability to grow our business under our current business plan and could materially adversely affect our business. 19 ● We will not own real estate as long as it is used in cannabis-related operations due to current statutory prohibitions and exchange listing standards, which may delay or limit our remedies in the event that any of our borrowers default under the terms of their mortgage loans with us. ● If we foreclose on properties securing our loans, we may have difficulty selling the properties due to the nature of specialized industrial cultivation/processing cannabis properties and the potentially limited number of high-quality operators for such properties, as well as for retail/dispensary cannabis properties. ● Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability. ● As a debt investor, we are often not in a position to exert influence on borrowers, and the stockholders and management of such companies may make decisions with which we disagree that could decrease the value of loans to such borrower.
New laws that are adverse to our borrowers may be enacted, and current favorable state or national laws or enforcement guidelines relating to cultivation, production and distribution of cannabis may be modified or eliminated in the future, which would impede our ability to grow our business under our current business plan and could materially adversely affect our business. • We will not own real estate as long as it is used in cannabis-related operations due to current statutory prohibitions and exchange listing standards, which may delay or limit our remedies in the event that any of our borrowers default under the terms of their mortgage loans with us. • If we foreclose on properties securing our loans, we may have difficulty selling the properties due to the nature of specialized industrial cultivation/processing cannabis properties and the potentially limited number of high-quality operators for such properties, as well as for retail/dispensary cannabis properties. • Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability. • As a debt investor, we are often not in a position to exert influence on borrowers, and the stockholders and management of such companies may make decisions with which we disagree that could decrease the value of loans to such borrower.
Former Attorney General William Barr testified in his confirmation hearing on January 15, 2019, that he would not upset “settled expectations,” “investments,” or other “reliance interest[s]” arising as a result of the Cole Memo, and that he does not intend to use federal resources to enforce federal cannabis laws in states that have legalized cannabis “to the extent people are complying with the state laws.” He stated: “My approach to this would be not to upset settled expectations and the reliance interest that have arisen as a result of the Cole Memorandum and investments have been made and so there has been reliance on it, so I don’t think it’s appropriate to upset those interests.” He also implied that the CSA’s prohibitions of cannabis may be null in states that have legalized cannabis: “[T]he current situation … is almost like a back door nullification of federal law.” Industry observers generally have not interpreted Attorney General Barr’s comments to suggest that the DOJ would proceed with cases against participants who entered the state-legal industry after the Cole Memo had been rescinded.
Former Attorney General William Barr testified in his confirmation hearing on January 15, 2019, that he would not upset “settled expectations,” “investments,” or other “reliance interest[s]” arising as a result of the Cole Memo, and that he does not intend to use federal resources to enforce federal cannabis laws in states that have legalized cannabis “to the extent people are complying with the state laws.” He stated: “My approach to this would be not to upset settled expectations and the reliance interest that have arisen as a result of the Cole Memorandum and investments have been made and so there has been reliance on it, so I don’t think it’s appropriate to upset those interests.” He also implied that the CSA’s prohibitions of cannabis may be null in states that have legalized cannabis: 34 “[T]he current situation … is almost like a back door nullification of federal law.” Industry observers generally have not interpreted Attorney General Barr’s comments to suggest that the DOJ would proceed with cases against participants who entered the state-legal industry after the Cole Memo had been rescinded.
Unless publicly traded, these companies and their financial information are generally not subject to the regulations that govern public companies, and we may be unable to uncover all material information about these companies, which may prevent us from making a fully informed lending decision and cause us to lose money on our loans; 23 ● they generally have less predictable operating results and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; ● we, our executive officers and directors and our Manager may, in the ordinary course of business, be named as defendants in litigation arising from our loans to such borrowers and may, as a result, incur significant costs and expenses in connection with such litigation; ● changes in laws and regulations, as well as their interpretations, may have a disproportionate adverse effect on their business, financial structure or prospects compared to those of larger and more established companies; and ● they may have difficulty accessing capital from other providers on favorable terms or at all.
Unless publicly traded, these companies and their financial information are generally not subject to the regulations that govern public companies, and we may be unable to uncover all material information about these companies, which may prevent us from making a fully informed lending decision and cause us to lose money on our loans; • they generally have less predictable operating results and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; • we, our executive officers and directors and our Manager may, in the ordinary course of business, be named as defendants in litigation arising from our loans to such borrowers and may, as a result, incur significant costs and expenses in connection with such litigation; • changes in laws and regulations, as well as their interpretations, may have a disproportionate adverse effect on their business, financial structure or prospects compared to those of larger and more established companies; and • they may have difficulty accessing capital from other providers on favorable terms or at all.
To the extent that we invest in non-U.S. real estate-related assets, we may be subject to certain risks associated with international investment generally, including, among others: ● currency exchange matters, including fluctuations in currency exchange rates and costs associated with conversion of investment principal and income from one currency to another; ● less developed or efficient financial markets than in the United States, which may lead to potential price volatility and relative illiquidity; ● the burdens of complying with international regulatory requirements and prohibitions that differ between jurisdictions; ● changes in laws or clarifications to existing laws that could impact our tax treaty positions, which could adversely impact the returns on our investments; ● a less developed legal or regulatory environment, differences in the legal and regulatory environment or enhanced legal and regulatory compliance; ● political hostility to investments by foreign investors; ● higher inflation rates; ● higher transaction costs; ● difficulty enforcing contractual obligations; ● fewer investor protections; 28 ● potentially adverse tax consequences; or ● other economic and political risks.
To the extent that we invest in non-U.S. real estate-related assets, we may be subject to certain risks associated with international investment generally, including, among others: • currency exchange matters, including fluctuations in currency exchange rates and costs associated with conversion of investment principal and income from one currency to another; • less developed or efficient financial markets than in the United States, which may lead to potential price volatility and relative illiquidity; • the burdens of complying with international regulatory requirements and prohibitions that differ between jurisdictions; • changes in laws or clarifications to existing laws that could impact our tax treaty positions, which could adversely impact the returns on our investments; • a less developed legal or regulatory environment, differences in the legal and regulatory environment or enhanced legal and regulatory compliance; • political hostility to investments by foreign investors; • higher inflation rates; • higher transaction costs; • difficulty enforcing contractual obligations; • fewer investor protections; • potentially adverse tax consequences; or • other economic and political risks.
Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including, but not limited to, the risks that: ● our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt we incur or we may fail to comply with all of the other covenants contained in such debt, which is likely to result in (i) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (ii) our inability to borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, and/or (iii) the loss of some or all of our assets to foreclosure or sale; ● we may be unable to borrow additional funds as needed or on favorable terms, or at all; ● to the extent we borrow debt that bears interest at variable rates, increases in interest rates could materially increase our interest expense; ● our default under any loan with cross-default provisions could result in a default on other indebtedness; 44 ● incurring debt may increase our vulnerability to adverse economic and industry conditions with no assurance that loan yields will increase with higher financing costs; ● we may be required to dedicate a substantial portion of our cash flow from operations to payments on the debt we may incur, thereby reducing funds available for operations, future business opportunities, stockholder distributions, including distributions currently contemplated or necessary to satisfy the requirements for REIT qualification, or other purposes; and ● we are not able to refinance debt that matures prior to the loan it was used to finance on favorable terms, or at all.
Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including, but not limited to, the risks that: • our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt we incur or we may fail to comply with all of the other covenants contained in such debt, which is likely to result in (i) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (ii) our inability to borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, and/or (iii) the loss of some or all of our assets to foreclosure or sale; 40 • we may be unable to borrow additional funds as needed or on favorable terms, or at all; • to the extent we borrow debt that bears interest at variable rates, increases in interest rates could materially increase our interest expense; • our default under any loan with cross-default provisions could result in a default on other indebtedness; • incurring debt may increase our vulnerability to adverse economic and industry conditions with no assurance that loan yields will increase with higher financing costs; • we may be required to dedicate a substantial portion of our cash flow from operations to payments on the debt we may incur, thereby reducing funds available for operations, future business opportunities, stockholder distributions, including distributions currently contemplated or necessary to satisfy the requirements for REIT qualification, or other purposes; and • we are not able to refinance debt that matures prior to the loan it was used to finance on favorable terms, or at all.
Moreover, we strategically benefit from the cannabis industry’s currently constrained access to U.S. capital markets and if such access is broadened, including if the New York Stock Exchange (the “NYSE”) and/or the Nasdaq Stock Market were to permit the listing of plant-touching cannabis companies in the U.S., the demand among U.S. cannabis companies for private equity investments and debt financings, including our target loans, may materially decrease and could result in our competing with financial institutions that we otherwise would not.
Moreover, we strategically benefit from the cannabis industry’s currently constrained access to U.S. capital markets and if such access is broadened, including if the New York Stock Exchange (the “NYSE”) and/or the Nasdaq Stock Market were to permit the 21 listing of plant-touching cannabis companies in the U.S., the demand among U.S. cannabis companies for private equity investments and debt financings, including our target loans, may materially decrease and could result in our competing with financial institutions that we otherwise would not.
In addition, burdensome regulations at the state level could slow or stop further development of the medical-use and/or adult-use cannabis industry, such as limiting the medical conditions for which medical-use cannabis can be recommended, restricting the form in which medical-use or adult-use cannabis can be consumed, or imposing significant taxes on the growth, processing and/or retail sales of cannabis, each of which could have the impact of dampening growth of the cannabis industry and making it difficult for cannabis businesses, including our borrowers, to operate profitably in those states.
In addition, burdensome regulations at the state level could slow or stop further development of the medical-use and/or adult-use cannabis industry, such as 35 limiting the medical conditions for which medical-use cannabis can be recommended, restricting the form in which medical-use or adult-use cannabis can be consumed, or imposing significant taxes on the growth, processing and/or retail sales of cannabis, each of which could have the impact of dampening growth of the cannabis industry and making it difficult for cannabis businesses, including our borrowers, to operate profitably in those states.
In addition, in the event that (1) the owner of the loan participation interest does not have the benefit of a perfected security interest in the lender’s rights to payments from the borrower under the commercial mortgage loan or (2) there are substantial differences between the terms of the commercial mortgage loan and those of the applicable loan participation interest, such loan participation interest could be recharacterized as an unsecured loan to a lender that is the record holder of the loan in such lender’s bankruptcy, and the assets of such lender may not be sufficient to satisfy the terms of such loan participation interest.
In addition, in the event that (1) the owner of the loan participation interest does not have the benefit of a perfected security interest in the lender’s rights to payments from the borrower under the commercial mortgage 26 loan or (2) there are substantial differences between the terms of the commercial mortgage loan and those of the applicable loan participation interest, such loan participation interest could be recharacterized as an unsecured loan to a lender that is the record holder of the loan in such lender’s bankruptcy, and the assets of such lender may not be sufficient to satisfy the terms of such loan participation interest.
A consequence of this limited number of loans is that the aggregate returns we realize may be significantly adversely affected if a small number of loans perform poorly, if we need to write down the value of any one loan, if a loan is repaid prior to maturity and we are not able to promptly redeploy the proceeds and/or if an issuer is unable to obtain and maintain commercial success.
A consequence of this limited number of loans is that the aggregate returns we realize may be significantly adversely affected if a small number of loans perform poorly, if we need to write down the value of any one loan, if a loan is repaid prior to maturity and we are 22 not able to promptly redeploy the proceeds and/or if an issuer is unable to obtain and maintain commercial success.
In Maryland, Massachusetts and West Virginia, a trustee or appointed auctioneer sells the property at a public sale. 41 We cannot take the position of mortgagee-in-possession as long as the property is used by a cannabis operator, but we can request that the court appoint a receiver to manage and operate the subject real property until the foreclosure proceedings are completed.
In Maryland, Massachusetts and West Virginia, a trustee or appointed auctioneer sells the property at a public sale. We cannot take the position of mortgagee-in-possession as long as the property is used by a cannabis operator, but we can request that the court appoint a receiver to manage and operate the subject real property until the foreclosure proceedings are completed.
Accordingly, we may face greater risks from loan participation interests than if we had made first mortgage loans directly to the owners of real estate collateral. 26 Declines in market prices and liquidity in the capital markets can result in significant net unrealized depreciation of our portfolio, which in turn would reduce our net asset value.
Accordingly, we may face greater risks from loan participation interests than if we had made first mortgage loans directly to the owners of real estate collateral. Declines in market prices and liquidity in the capital markets can result in significant net unrealized depreciation of our portfolio, which in turn would reduce our net asset value.
We rely on the exception set forth in Section 3(c)(5) of the Investment Company Act, which excludes from the definition of investment company “[a]ny person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in one or more of the following businesses . . .
We rely on the exception set forth in Section 3(c)(5) of the Investment Company Act, which excludes from the definition of investment company “[a]ny person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the 44 installment type or periodic payment plan certificates, and who is primarily engaged in one or more of the following businesses . . .
There can be no assurance that the Internal Revenue Service (“IRS”) would not challenge our estimates of the loan values of the real property. 31 We may in the future enter into credit agreements with borrowers that may permit them to incur debt that ranks equally with, or senior to, the loans we extend to such companies under such credit agreements.
There can be no assurance that the Internal Revenue Service (“IRS”) would not challenge our estimates of the loan values of the real property. We may in the future enter into credit agreements with borrowers that may permit them to incur debt that ranks equally with, or senior to, the loans we extend to such companies under such credit agreements.
Although our intended investment strategy is to construct a portfolio of loans secured with first priority liens on certain assets of our borrowers, we may in the future enter into credit agreements that rank equally with, or are subordinated to, other debt of our borrowers or that otherwise permit our borrowers to incur other debt that ranks equally with, or senior to, our loans under such credit agreements.
Although our intended investment strategy is to construct a portfolio of loans secured with first priority liens on certain assets of our borrowers, we may in the future enter into credit agreements 30 that rank equally with, or are subordinated to, other debt of our borrowers or that otherwise permit our borrowers to incur other debt that ranks equally with, or senior to, our loans under such credit agreements.
In determining “intended use,” the FDA has traditionally looked beyond a product’s label to statements made on websites, on social media, or orally by the company’s representatives. 38 While the FDA has not yet enforced against the cannabis industry, it has sent numerous warning letters to sellers of CBD products making health claims.
In determining “intended use,” the FDA has traditionally looked beyond a product’s label to statements made on websites, on social media, or orally by the company’s representatives. While the FDA has not yet enforced against the cannabis industry, it has sent numerous warning letters to sellers of CBD products making health claims.
As a result, this may prevent us from entering into certain business sectors, may inhibit our growth, may expose us to additional risk and financial liabilities and, in the case of an uninsured loss, may result in the loss of anticipated cash flow or the value of our loan. 32 We do not currently have catastrophic insurance policies.
As a result, this may prevent us from entering into certain business sectors, may inhibit our growth, may expose us to additional risk and financial liabilities and, in the case of an uninsured loss, may result in the loss of anticipated cash flow or the value of our loan. We do not currently have catastrophic insurance policies.
While our loan agreements and related mortgages provide for foreclosure remedies, receivership remedies and/or other remedies that would allow us to cause the sale or other realization of real property collateral, the regulatory requirements and statutory prohibitions related to real property used in cannabis-related operations may cause significant delays or difficulties in realizing upon the expected value of such real property collateral.
While our loan agreements and related mortgages provide for foreclosure remedies, receivership remedies and/or other remedies that would allow us to cause the sale or other realization of real property collateral, the regulatory requirements 37 and statutory prohibitions related to real property used in cannabis-related operations may cause significant delays or difficulties in realizing upon the expected value of such real property collateral.
If we are unable to invest a sufficient amount of the net proceeds of our initial public offering in qualifying real estate assets within such one-year period, we could fail to satisfy the gross income tests and/or we could be limited to investing all or a portion of any remaining funds in cash.
If we are unable to invest a sufficient amount of the net proceeds of our initial public offering in qualifying real estate assets within such one-year period, we could fail to satisfy the gross income tests and/or we could be limited to investing all or a 51 portion of any remaining funds in cash.
Any person or entity purchasing or otherwise acquiring any interest in shares of our stock shall be deemed to have notice of and to have consented to the provisions of our Charter and Bylaws described above. Our Board may approve the issuance of stock, including preferred stock, with terms that may discourage a third party from acquiring us.
Any person or entity purchasing or otherwise acquiring any interest in shares of our stock shall be deemed to have notice of and to have consented to the provisions of our Charter and Bylaws described above. 42 Our Board may approve the issuance of stock, including preferred stock, with terms that may discourage a third party from acquiring us.
In such circumstances, the size of the investment opportunity in loans otherwise available to us may be less than it would otherwise have been, and we may participate in such opportunities on different and potentially less favorable economic terms than such other parties if our Manager deems such participation as being otherwise in our best interests.
In such 47 circumstances, the size of the investment opportunity in loans otherwise available to us may be less than it would otherwise have been, and we may participate in such opportunities on different and potentially less favorable economic terms than such other parties if our Manager deems such participation as being otherwise in our best interests.
The treatment of such taxable stock distributions is not entirely clear, and it is possible the taxable stock distribution will not count towards our distribution requirement, in which case adverse consequences could apply. 57 Complying with REIT requirements may cause us to forego otherwise attractive opportunities or to liquidate otherwise attractive loans.
The treatment of such taxable stock distributions is not entirely clear, and it is possible the taxable stock distribution will not count towards our distribution requirement, in which case adverse consequences could apply. Complying with REIT requirements may cause us to forego otherwise attractive opportunities or to liquidate otherwise attractive loans.
In addition, the exclusive forum provisions described above do not apply to any actions brought under the Exchange Act. 48 Ownership limitations contained in the Charter may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares.
In addition, the exclusive forum provisions described above do not apply to any actions brought under the Exchange Act. Ownership limitations contained in the Charter may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares.
Other investment vehicles managed by our Manager or affiliates of our Manager may co-invest with us or hold positions in a loan where we have also invested, including by means of splitting commitments, participating in loans or other means of syndicating loans. Such loans may raise potential conflicts of interest between us and such other investment vehicles.
Co-investments. Other investment vehicles managed by our Manager or affiliates of our Manager may co-invest with us or hold positions in a loan where we have also invested, including by means of splitting commitments, participating in loans or other means of syndicating loans. Such loans may raise potential conflicts of interest between us and such other investment vehicles.
Our ability to vary our portfolio in response to changes in economic, regulatory and other conditions or changes in our strategic plan may therefore be relatively limited, which could adversely affect our results of operations and financial condition. 21 Our real estate investments are subject to risks particular to real property.
Our ability to vary our portfolio in response to changes in economic, regulatory and other conditions or changes in our strategic plan may therefore be relatively limited, which could adversely affect our results of operations and financial condition. Our real estate investments are subject to risks particular to real property.
In addition, we do not currently carry directors’ and officers’ insurance. Subject to the approval of our Manager, our Board (which must include a majority of our independent directors) may change our investment strategies or guidelines, financing strategies or leverage policies without the consent of our stockholders.
In addition, we do not currently carry directors’ and officers’ insurance. 31 Subject to the approval of our Manager, our Board (which must include a majority of our independent directors) may change our investment strategies or guidelines, financing strategies or leverage policies without the consent of our stockholders.
In addition, while we do not consider our Company to be engaged in the cannabis industry, banks and other financial institutions may be reluctant to enter into lending transactions with us, particularly secured lending, because we invest in companies involved in the cultivation, manufacturing and sale of cannabis.
In addition, while we do not consider our Company to be engaged in 39 the cannabis industry, banks and other financial institutions may be reluctant to enter into lending transactions with us, particularly secured lending, because we invest in companies involved in the cultivation, manufacturing and sale of cannabis.
This provision increases the cost to us of terminating the Management Agreement and adversely affects our ability to terminate our Manager without cause. 54 Even if we terminate our Management Agreement for cause, we may be required to continue to retain our Manager for 30 days following the occurrence of events giving rise to a for-cause termination.
This provision increases the cost to us of terminating the Management Agreement and adversely affects our ability to terminate our Manager without cause. Even if we terminate our Management Agreement for cause, we may be required to continue to retain our Manager for 30 days following the occurrence of events giving rise to a for-cause termination.
Decisions made and loans entered into by our Manager may not fully reflect your best interests. Our Manager may change its investment process, or elect not to follow it, without the consent of our stockholders and at any time, which may adversely affect the performance of our portfolio.
Decisions made and loans entered into by our Manager may not fully reflect your best interests. 49 Our Manager may change its investment process, or elect not to follow it, without the consent of our stockholders and at any time, which may adversely affect the performance of our portfolio.
Prior to the IPO, we were not subject to the public company internal control framework requirements and therefore did not sufficiently design and document our control environment to be in compliance with all required public company standards contemplated by Section 404 that we will eventually be required to meet.
Prior to the IPO, we were not subject to the public company internal control framework requirements and therefore did not sufficiently design 56 and document our control environment to be in compliance with all required public company standards contemplated by Section 404 that we will eventually be required to meet.
Results of foreclosure processes may be uncertain, as claims may be asserted by the relevant borrower or by other creditors or investors in such borrower that interfere with enforcement of our rights, such as claims that challenge the validity or enforceability of our loan or the priority or perfection of our security interests.
Results of foreclosure processes may be uncertain, as claims may be asserted by the relevant borrower or by other creditors or investors in such borrower that interfere with enforcement of our rights, such as claims that challenge the validity or enforceability of our loan or 24 the priority or perfection of our security interests.
Future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners. We may in the future make investments through joint ventures.
Future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners. 45 We may in the future make investments through joint ventures.
Further, when there are turbulent conditions in the real estate markets or distress in the credit markets, the attention of our Manager’s personnel and our executive officers and the resources of our Manager may also be required by other investment vehicles managed by affiliates of our Manager.
Further, when there are turbulent conditions in the real 46 estate markets or distress in the credit markets, the attention of our Manager’s personnel and our executive officers and the resources of our Manager may also be required by other investment vehicles managed by affiliates of our Manager.
Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve significant risks. We primarily provide loans to established companies operating in the cannabis industry, but because the cannabis industry is relatively new and rapidly evolving, some of these companies may be relatively new and/or small companies.
Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve significant risks. We primarily seek to provide loans to established companies operating in the cannabis industry, but because the cannabis industry is relatively new and rapidly evolving, some of these companies may be relatively new and/or small companies.
The providers of bank credit facilities may also require us to maintain a certain amount of cash or set aside assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations.
The providers of bank credit facilities may also require us to maintain a certain 41 amount of cash or set aside assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations.
If that is the case, and if we are exposed to liability under ERISA or the Code, our performance and results of operations could be adversely affected. 64 Economic recessions or downturns could impair our borrowers and harm our operating results.
If that is the case, and if we are exposed to liability under ERISA or the Code, our performance and results of operations could be adversely affected. Economic recessions or downturns could impair our borrowers and harm our operating results.
Our portfolio of loans is concentrated in certain property types or in particular industries, such as cannabis, that are subject to higher risk of default, or secured by properties concentrated in a limited number of geographic locations, economic and business downturns relating generally to such region or type of asset which may result in defaults on a number of our loans within a short time period, which may reduce our net income and the value of our common stock and accordingly reduce our ability to pay dividends to our stockholders.
Our portfolio of loans is concentrated in certain property types or in particular industries, such as cannabis, that may be subject to higher risk of default, or secured by properties concentrated in a limited number of geographic locations, economic and business downturns relating generally to such region or type of asset which may result in defaults on a number of our loans within a short time period, which may reduce our net income and the value of our common stock and accordingly reduce our ability to pay dividends to our stockholders.
In such circumstances the trading price of our common stock may not recover and may experience a further decline. 60 In addition, broad market and industry factors could materially adversely affect the market price of our common stock, irrespective of our operating performance.
In such circumstances the trading price of our common stock may not recover and may experience a further decline. In addition, broad market and industry factors could materially adversely affect the market price of our common stock, irrespective of our operating performance.
We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting borrower. Item 1B. Unresolved Staff Comments Not applicable.
We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting borrower. Item 1B. Unresolved Staff Comments Not applicable. 57
These principal risk and uncertainties relate to, among other things: Risks Related to Our Business and Growth Strategy ● We were recently formed and have limited operating history, and may not be able to successfully operate our business, integrate new assets and/or manage our growth or to generate sufficient revenue to make or sustain distributions to our stockholders. ● Competition for the capital that we provide may reduce the return of our loans, which could adversely affect our operating results and financial condition. ● We are externally managed by our Manager and our growth and success depends on our Manager, its key personnel and investment professionals, and our Manager’s ability to make loans on favorable terms that satisfy our investment strategy and otherwise generate attractive risk-adjusted returns.
These principal risk and uncertainties relate to, among other things: Risks Related to Our Business and Growth Strategy • We have limited operating history, and may not be able to successfully operate our business, integrate new assets and/or manage our growth or to generate sufficient revenue to make or sustain distributions to our stockholders. • Competition for the capital that we provide may reduce the return of our loans, which could adversely affect our operating results and financial condition. • We are externally managed by our Manager and our growth and success depends on our Manager, its key personnel and investment professionals, and our Manager’s ability to make loans on favorable terms that satisfy our investment strategy and otherwise generate attractive risk-adjusted returns.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.
Any of the foregoing 23 could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.
If any of the foregoing risks were to materialize, they could adversely affect our results of operations and financial condition. While our investment guidelines permit investments in non-U.S. real estate assets, as of December 31, 2022, none of our loans were made to non-U.S. borrowers. We may not have control over certain of our loans and investments.
If any of the foregoing risks were to materialize, they could adversely affect our results of operations and financial condition. While our investment guidelines permit investments in non-U.S. real estate assets, as of December 31, 2023, none of our loans were made to non-U.S. borrowers. We may not have control over certain of our loans and investments.
Further, to the extent distributions exceed our earnings and profits, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder will be required to recognize capital gain. 61 There is a risk that you may not receive distributions as holders of our common stock or that such dividends may not grow over time.
Further, to the extent distributions exceed our earnings and profits, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder will be required to recognize capital gain. 54 There is a risk that you may not receive distributions as holders of our common stock or that such dividends may not grow over time.
If we fail to comply with the relevant laws and regulations, we could suffer financial losses, a disruption of our business, liability to investors, regulatory intervention or reputational damage. 62 We could be subject to litigation filed by or against us, including class action litigation.
If we fail to comply with the relevant laws and regulations, we could suffer financial losses, a disruption of our business, liability to investors, regulatory intervention or reputational damage. 55 We could be subject to litigation filed by or against us, including class action litigation.
To the extent OID or PIK-interest constitutes a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following: ● The higher interest rates of OID and PIK instruments reflect the payment deferral, which results in a higher principal amount at the maturity of the instrument as compared to the original principal amount of the instrument, and increased credit risk associated with these instruments, and OID and PIK instruments generally represent a significantly higher credit risk than coupon loans. ● Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the maturity of the obligation. ● OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral.
To the extent OID or PIK-interest constitutes a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following: • The higher interest rates of OID and PIK instruments reflect the payment deferral, which may result in a higher principal amount at the maturity of the instrument as compared to the original principal amount of the instrument, and increased credit risk associated with these instruments, and OID and PIK instruments generally represent a higher credit risk than traditional coupon-only loans. • Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the maturity of the obligation. • OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral.
As of December 31, 2022, none of our loans were rated by ratings agencies. 27 Mezzanine loans, B-Notes and other investments that are subordinated or otherwise junior in an issuer’s capital structure, such as preferred equity, and that involve privately negotiated structures will expose us to greater risk of loss.
As of December 31, 2023, none of our loans were rated by ratings agencies. Mezzanine loans, B-Notes and other investments that are subordinated or otherwise junior in an issuer’s capital structure, such as preferred equity, and that involve privately negotiated structures will expose us to greater risk of loss.
Our Charter and Bylaws include, among others, provisions that: ● authorize our Board, without stockholder approval, to cause us to issue additional shares of our common stock or to raise capital through the creation and issuance of our preferred stock, debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our Board in its sole discretion may determine; ● authorize “blank check” preferred stock, which could be issued by our Board without stockholder approval, subject to certain specified limitations, and may contain voting, liquidation, dividend and other rights senior to our common stock; ● specify that only our Board, the chairman of our Board, our chief executive officer or president or, upon the written request of stockholders entitled to cast not less than a majority of the votes entitled to be cast, our secretary can call special meetings of our stockholders; ● establish advance notice procedures for stockholder proposals to be brought before an annual or special meeting of our stockholders, including proposed nominations of individuals for election to our Board; ● provide that a majority of directors then in office, even though less than a quorum, may fill any vacancy on our Board, whether resulting from an increase in the number of directors or otherwise; and ● provide our Board the exclusive power to adopt, alter or repeal any provision of our Bylaws and to make new Bylaws. 46 These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
Our Charter and Bylaws include, among others, provisions that: • authorize our Board, without stockholder approval, to cause us to issue additional shares of our common stock or to raise capital through the creation and issuance of our preferred stock, debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our Board in its sole discretion may determine; • authorize “blank check” preferred stock, which could be issued by our Board without stockholder approval, subject to certain specified limitations, and may contain voting, liquidation, dividend and other rights senior to our common stock; • specify that only our Board, the chairman of our Board, our chief executive officer or president or, upon the written request of stockholders entitled to cast not less than a majority of the votes entitled to be cast, our secretary can call special meetings of our stockholders; • establish advance notice procedures for stockholder proposals to be brought before an annual or special meeting of our stockholders, including proposed nominations of individuals for election to our Board; • provide that a majority of directors then in office, even though less than a quorum, may fill any vacancy on our Board, whether resulting from an increase in the number of directors or otherwise; and • provide our Board the exclusive power to adopt, alter or repeal any provision of our Bylaws and to make new Bylaws.
While none of the loans in our portfolio have defaulted as of the date of this annual report on Form 10-K, there can be no assurance that we will not experience defaults in the future. If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer.
While one of the loans in our portfolio has defaulted as of the date of this annual report on Form 10-K, there can be no assurance that we will not experience other defaults in the future. If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer.
Although we intend to implement processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, such measures will not guarantee that a cyber-incident will not occur and/or that our financial results, operations or confidential information will not be negatively impacted by such an incident.
Although we have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, such measures will not guarantee that a cyber-incident will not occur and/or that our financial results, operations or confidential information will not be negatively impacted by such an incident.
Our existing portfolio contains loans to companies with operations that are geographically concentrated in Arkansas, Arizona, Florida, Illinois, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, Ohio, Pennsylvania, and West Virginia.
Our existing portfolio contains loans to companies with operations that are geographically concentrated in Arkansas, Arizona, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Missouri, Nebraska, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, and West Virginia.
As of December 31, 2022, all but one of our borrowers were restricted from incurring any debt that ranks equally with, or senior to, our loans. We have invested in one position with a principal balance of approximately $25.5 million that is subordinated to other indebtedness of the borrowers, which comprises 7.5% of our total assets.
As of December 31, 2023, all but one of our borrowers were restricted from incurring any debt that ranks equally with, or senior to, our loans. We have invested in one position with a principal balance of approximately $20.2 million that is subordinated to other indebtedness of the borrowers, which comprises 5.6% of our total assets.
Our founders, Mr. Mazarakis, our Executive Chairman, Mr. Cappell, our Chief Executive Officer, and Dr. Bodmeier, our Co-President, beneficially own approximately 4.1% of our outstanding equity. Our founders also own 100% of the outstanding equity of our Manager.
Our founders, Mr. Mazarakis, our Executive Chairman, Mr. Cappell, our Co-Chief Executive Officer, and Dr. Bodmeier, our President, beneficially own approximately 5.7% of our outstanding equity. Our founders also own 100% of the outstanding equity of our Manager.
As a result of this arrangement, our Manager’s interests may be less aligned with our interests. 53 Our Management Agreement with our Manager was not negotiated on an arm’s-length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party, and the manner of determining the Base Management Fees may not provide sufficient incentive to our Manager to maximize risk-adjusted returns for our portfolio since it is based on the book value of our equity per annum and not on our performance.
Our Management Agreement with our Manager was not negotiated on an arm’s-length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party, and the manner of determining the Base Management Fees may not provide sufficient incentive to our Manager to maximize risk-adjusted returns for our portfolio since it is based on the book value of our equity per annum and not on our performance.
These developments, along with the United States government’s credit and deficit concerns, global economic uncertainties and market volatility and the impacts of COVID-19, could cause interest rates to be volatile, which may negatively impact our ability to access the capital markets on favorable terms .
These developments, along with the United States government’s credit and deficit concerns, global economic uncertainties and market volatility and the impacts of any current or future global health pandemics, could cause interest rates to be volatile, which may negatively impact our ability to access the capital markets on favorable terms .
The Federal Reserve has raised interest rates multiple times in 2022 to combat inflation and restore price stability and rates may continue to rise in 2023. To the extent our borrowing costs increase faster than the interest income earned from our floating-rate loans, such increases may adversely affect our cash flows.
The Federal Reserve has raised interest rates multiple times since March 2022 to combat inflation and restore price stability and interest rates may remain elevated in 2024. To the extent our borrowing costs increase faster than the interest income earned from our floating-rate loans, such increases may adversely affect our cash flows.
Net operating income of an income-producing property can be affected by, among other things: ● tenant mix and tenant bankruptcies; ● success of tenant businesses; ● property management decisions, including with respect to capital improvements, particularly in older building structures; ● property location and condition; ● competition from other properties offering the same or similar services; ● changes in laws that increase operating expenses or limit rents that may be charged; ● any liabilities relating to environmental matters at the property; ● changes in national, regional or local economic conditions and/or specific industry segments; ● declines in national, regional or local real estate values; ● declines in national, regional or local rental or occupancy rates; ● changes in interest rates and in the state of the debt and equity capital markets, including diminished availability or lack of debt financing for commercial real estate; ● changes in real estate tax rates and other operating expenses; ● changes in governmental rules, regulations and fiscal policies, including environmental legislation; ● acts of God, terrorism, social unrest and civil disturbances, which may decrease the availability of or increase the cost of insurance or result in uninsured losses; and ● adverse changes in zoning laws. 25 In addition, we are exposed to the risk of judicial proceedings with our borrowers and entities in which we invest, including bankruptcy or other litigation, as a strategy to avoid foreclosure or enforcement of other rights by us as a lender or investor.
Net operating income of an income-producing property can be affected by, among other things: • tenant mix and tenant bankruptcies; • success of tenant businesses; • property management decisions, including with respect to capital improvements, particularly in older building structures; • property location and condition; • competition from other properties offering the same or similar services; • changes in laws that increase operating expenses or limit rents that may be charged; • any liabilities relating to environmental matters at the property; • changes in national, regional or local economic conditions and/or specific industry segments; 25 • declines in national, regional or local real estate values; • declines in national, regional or local rental or occupancy rates; • changes in interest rates and in the state of the debt and equity capital markets, including diminished availability or lack of debt financing for commercial real estate; • changes in real estate tax rates and other operating expenses; • changes in governmental rules, regulations and fiscal policies, including environmental legislation; • acts of God, terrorism, social unrest and civil disturbances, which may decrease the availability of or increase the cost of insurance or result in uninsured losses; and • adverse changes in zoning laws.
Accordingly, any change in these laws or regulations, changes in their interpretation, or newly enacted laws or regulations and any failure by us to comply with these laws or regulations, could require changes to certain of our business practices, negatively impact our operations, cash flow or financial condition, impose additional costs on us or otherwise adversely affect our business. 39 Applicable state laws may prevent us from maximizing our potential income.
Accordingly, any change in these laws or regulations, changes in their interpretation, or newly enacted laws or regulations and any failure by us to comply with these laws or regulations, could require changes to certain of our business practices, negatively impact our operations, cash flow or financial condition, impose additional costs on us or otherwise adversely affect our business.
As a result, investors in our common stock will invest on a “gross” basis and receive any distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct loans.
As a result, investors in our common stock will invest on a “gross” basis and receive any distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct loans. As a result of this arrangement, our Manager’s interests may be less aligned with our interests.
Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the U.S. federal income tax requirement to distribute generally an amount equal to at least 90% of our REIT taxable income to maintain our status as a REIT.
Such market discount may be included in income before we receive any corresponding cash payments. 32 Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the U.S. federal income tax requirement to distribute generally an amount equal to at least 90% of our REIT taxable income to maintain our status as a REIT.
Any assets used in conjunction with the violation of federal law are potentially subject to federal forfeiture, even in states that have legalized cannabis.
Loans to cannabis businesses may be forfeited to the federal government. Any assets used in conjunction with the violation of federal law are potentially subject to federal forfeiture, even in states that have legalized cannabis.
This concentration of ownership may discourage, delay or prevent a change in control which could have the dual effect of depriving our stockholders from an opportunity to receive a premium for their equity as part of a sale of our Company and otherwise reducing the price of such equity. 59 The market price for our common stock may be volatile, which could contribute to the loss of all or part of your investment.
This concentration of ownership may discourage, delay or prevent a change in control which could have the dual effect of depriving our stockholders from an opportunity to receive a premium for their equity as part of a sale of our Company and otherwise reducing the price of such equity.
Recent macroeconomic trends, including inflation and rising interest rates, may adversely affect our business, financial condition and results of operations. During the year ended December 31, 2022, inflation in the United States has accelerated and is currently expected to continue at an elevated level in the near-term.
Recent macroeconomic trends, including inflation and rising interest rates, may adversely affect our business, financial condition and results of operations. During the year ended December 31, 2023, inflation in the United States has remained at an elevated level and may remain at an elevated level in the near-term.
Because this debt generally allows the borrower to make a large lump-sum payment of principal at the end of the loan term, there is a risk of loss if the borrower is unable to pay the lump sum or refinance the amount owed at maturity. ● For accounting purposes, any cash distributions to stockholders representing OID and PIK-income are not treated as coming from paid-in capital, even though the cash to pay them comes from the offering proceeds. ● In certain cases, our taxable income may exceed our net cash provided by operating activities, as a result, we may have difficulty meeting the annual distribution requirement necessary to maintain our tax treatment as a REIT. 33 We may pay our Manager an incentive fee on certain investments that include a deferred interest feature.
Because this debt generally allows the borrower to make a large lump-sum payment of principal at the end of the loan term, there is a risk of loss if the borrower is unable to pay the lump sum or refinance the amount owed at maturity. • For accounting purposes, any cash distributions to stockholders representing OID and PIK-income are not treated as coming from paid-in capital, but rather retained earnings derived from REIT taxable income. • In certain cases, our taxable income may exceed our net cash provided by operating activities, as a result, we may have difficulty meeting the annual distribution requirement necessary to maintain our tax treatment as a REIT.
While the loans we invest in are often secured, such security does not guarantee that we will receive principal and interest payments according to the terms of the loan, or that the value of any collateral will be sufficient to allow us to recover all or a portion of the outstanding amount of such loan should we be forced to enforce our remedies.
While the loans we invest in are often secured, such security does not guarantee that we will receive principal and interest payments according to the terms of the loan, or that the value of any collateral will be sufficient to allow us to recover all or a portion of the outstanding amount of such loan should we be forced to enforce our remedies. 29 Any distressed loans or investments we make, or loans and investments that later become distressed, may subject us to losses and other risks relating to bankruptcy proceedings.
The market price and liquidity of the market for our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance.
The market price for our common stock may be volatile, which could contribute to the loss of all or part of your investment. The market price and liquidity of the market for our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance.
A partner or co-venturer may have financial difficulties resulting in a negative impact on such asset, may have economic or business interests or goals that are inconsistent with ours, or may be in a position to take action contrary to our investment objective. In addition, we may, in certain circumstances, be liable for the actions of our partners or co-venturers.
A partner or co-venturer may have financial difficulties resulting in a negative impact on such asset, may have economic or business interests or goals that are inconsistent with ours, or may be in a position to take action contrary to our investment objective.
Investment in the loans or securities of financially or operationally troubled borrowers or issuers involves a high degree of credit and market risk. 30 In certain limited cases (e.g., in connection with a workout, restructuring and/or foreclosing proceedings involving one or more of our investments), the success of our investment strategy with respect thereto will depend, in part, on our ability to effectuate loan modifications and/or restructure and improve the operations of the borrower entities.
In certain limited cases (e.g., in connection with a workout, restructuring and/or foreclosing proceedings involving one or more of our investments), the success of our investment strategy with respect thereto will depend, in part, on our ability to effectuate loan modifications and/or restructure and improve the operations of the borrower entities.
Furthermore, future legislation, new regulations, administrative interpretations or court decisions may significantly change the U.S. tax laws or the application of the U.S. tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification. 56 If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because: ● we would not be allowed a deduction for distributions paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates; ● we could be subject to increased state and local taxes; and ● unless we are entitled to relief under statutory provisions, we would not be able to re-elect to be taxed as a REIT for four taxable years following the year in which we were disqualified.
If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because: • we would not be allowed a deduction for distributions paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates; • we could be subject to increased state and local taxes; and 50 • unless we are entitled to relief under statutory provisions, we would not be able to re-elect to be taxed as a REIT for four taxable years following the year in which we were disqualified.
We may incur significant debt, which may subject us to restrictive covenants and increased risk of loss and may reduce cash available for distributions to our stockholders, and our governing documents contain no limit on the amount of debt we may incur.
These market and economic disruptions could also negatively impact the operating results of our borrowers. We may incur significant debt, which may subject us to restrictive covenants and increased risk of loss and may reduce cash available for distributions to our stockholders, and our governing documents contain no limit on the amount of debt we may incur.
Cannabis, other than hemp, is a Schedule I controlled substance under the CSA. Even in states or territories that have legalized cannabis to some extent, the cultivation, possession and sale of cannabis all remain violations of federal law that are punishable by imprisonment, substantial fines and forfeiture.
Even in states or territories that have legalized cannabis to some extent, the cultivation, possession and sale of cannabis all remain violations of federal law that are punishable by imprisonment, substantial fines and forfeiture.
We may face greater credit risk to the extent a large portion of our portfolio is concentrated in loans to multiple borrowers that share the same sponsor. 22 Our existing portfolio contains loans to companies with operations that are geographically concentrated in Arkansas, Arizona, Florida, Illinois, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, Ohio, Pennsylvania, and West Virginia, and we will be subject to social, political and economic risks of doing business in those states and any other state in which we in the future have lending exposure.
Our existing portfolio contains loans to companies with operations that are geographically concentrated in Arkansas, Arizona, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Missouri, Nebraska, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, and West Virginia, and we will be subject to social, political and economic risks of doing business in those states and any other state in which we in the future have lending exposure.
We underwrite our loans to generally include an end-of-term payment, a PIK interest payment and/or OID. Our end-of-term payments are contractual and fixed interest payments due at the maturity date of the loan, including upon prepayment, and are generally a fixed percentage of the original principal balance of the loan.
Our end-of-term payments are contractual and fixed interest payments due at the maturity date of the loan, including upon prepayment, and are generally a fixed percentage of the original principal balance of the loan.
We make no assurance that existing regulatory policies will not materially and adversely affect the value of such collateral, or that additional regulations will not be adopted that would increase such potential material adverse effect.
We make no assurance that existing regulatory policies will not materially and adversely affect the value of such collateral, or that additional regulations will not be adopted that would increase such potential material adverse effect. The negative effect on such collateral could have a material adverse effect on our business, financial condition, liquidity and results of operations.
The negative effect on such collateral could have a material adverse effect on our business, financial condition, liquidity and results of operations. 40 If we foreclose on properties securing our loans, we may have difficulty selling the properties due to the nature of specialized industrial cultivation/processing cannabis properties and the potentially limited number of high-quality operators for such properties, as well as for retail/dispensary cannabis properties.
If we foreclose on properties securing our loans, we may have difficulty selling the properties due to the nature of specialized industrial cultivation/processing cannabis properties and the potentially limited number of high-quality operators for such properties, as well as for retail/dispensary cannabis properties.
Nevertheless, it is possible that we may not be given the opportunity to participate in certain loans made by investment vehicles managed by our Manager or affiliates of our Manager.
Nevertheless, it is possible that we may not be given the opportunity to participate in certain loans made by investment vehicles managed by our Manager or affiliates of our Manager. In addition, there may be conflicts in the allocation of loan opportunities among us and the investment vehicles that our Manager or affiliates of our Manager manage in the future.
If we are unable to sell a property securing our loans to a licensed cannabis company for similar use and we, therefore, must foreclose on such property, we may recover significantly less than the expected value of the foreclosed property, thereby having a material adverse effect on our business, financial condition, liquidity and results of operations. 42 Risks Related to Sources of Financing Our Business Our growth depends on external sources of capital, which may not be available on favorable terms or at all.
If we are unable to sell a property securing our loans to a licensed cannabis company for similar use and we, therefore, must foreclose on such property, we may recover significantly less than the expected value of the foreclosed property, thereby having a material adverse effect on our business, financial condition, liquidity and results of operations.
Any failure to obtain, maintain or renew required licenses and authorizations or failure to comply with regulatory requirements that are applicable to our business could result in material fines and disruption to our business and could have a material adverse effect on our business, financial condition, operating results and our ability to make distributions to our stockholders. 35 The long-term macroeconomic effects of any current or future global health pandemics could have an adverse impact on our financial performance and results of operations.
Any failure to obtain, maintain or renew required licenses and authorizations or failure to comply with regulatory requirements that are applicable to our business could result in material fines and disruption to our business and could have a material adverse effect on our business, financial condition, operating results and our ability to make distributions to our stockholders.
In addition, we intend to seek debt investments in the secondary market that represent attractive risk-adjusted returns, taking into account both stated interest rates and current market discounts to par value. Such market discount may be included in income before we receive any corresponding cash payments.
In addition, we intend to seek debt investments in the secondary market that represent attractive risk-adjusted returns, taking into account both stated interest rates and current market discounts to par value.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties We do not own any real estate or other physical properties materially important to our operation. Our principal executive offices are currently located at 1680 Michigan Avenue, Suite 700, Miami Beach, FL 33139. All locations are provided to us by the Manager pursuant to the Management Agreement.
Biggest changeItem 2. Pr operties We do not own any real estate or other physical properties materially important to our operation. Our principal executive offices are currently located at 1680 Michigan Avenue, Suite 700, Miami Beach, FL 33139. All locations are provided to us by the Manager pursuant to the Management Agreement.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeFurthermore, third-parties may try to seek to impose liability on us in connection with our loans. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Item 4. Mine Safety Disclosures Not applicable. 65 PART II
Biggest changeFurthermore, third-parties may try to seek to impose liability on us in connection with our loans. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Item 4. Mi ne Safety Disclosures Not applicable. 58 PA RT II
Item 3. Legal Proceedings We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may become involved in litigation or other legal proceedings relating to claims arising from the ordinary course of business.
Item 3. Leg al Proceedings We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may become involved in litigation or other legal proceedings relating to claims arising from the ordinary course of business.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed for trading on the Nasdaq Global Market under the symbol “REFI.” On February 28, 2023, the closing price of our common stock, as reported on the Nasdaq Global Market, was $14.66 per share.
Biggest changeItem 5. Ma rket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed for trading on the Nasdaq Global Market under the symbol “REFI.” On March 8, 2024, the closing price of our common stock, as reported on the Nasdaq Global Market, was $16.18 per share.
Distribution Information We intend to make regular quarterly distributions to our stockholders, consistent with our intention to qualify as a REIT for U.S. federal income tax purposes.
Distribution Information We intend to make regular quarterly distributions to our stockholders, consistent with our intention to maintain our qualification as a REIT for U.S. federal income tax purposes.
There were 74 holders of record of our common stock as of February 28, 2023. This number does not include beneficial owners who hold shares of our common stock in street name. There were no unregistered sales of equity securities during the year ended December 31, 2022.
There were 63 holders of record of our common stock as of March 8, 2024. This number does not include beneficial owners who hold shares of our common stock in street name. There were no unregistered sales of equity securities during the year ended December 31, 2023.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe payment of these dividends is not indicative of our ability to pay such dividends in the future. 72 Results of Operations Comparison of the Year Ended December 31, 2022 and period from March 30, 2021 (inception) to December 31, 2021 Year Ended Period Ended Increase / (Decrease) December 31, December 31, 2022 vs. 2022 2021 2021 Revenue Interest income $ 51,471,766 $ 11,075,116 $ 40,396,650 Interest expense (2,614,138 ) (75,861 ) (2,538,277 ) Net interest income 48,857,628 10,999,255 37,858,373 Expenses: Management and incentive fees, net 6,562,087 802,294 5,759,793 Provision for current expected credit losses 3,887,405 147,949 3,739,456 General and administrative expense 3,528,322 297,916 3,230,406 Professional fees 2,151,714 57,458 2,094,256 Stock based compensation 435,623 29,611 406,012 Organizational expense - 167,591 (167,591 ) Total expenses $ 16,565,151 1,502,819 15,062,332 Net Income before income taxes 32,292,477 9,496,436 22,796,041 Income tax expense - - - Net Income $ 32,292,477 $ 9,496,436 $ 22,796,041 We commenced operations on March 30, 2021 and, therefore, the comparative period for the year ended December 31, 2022 is from March 30, 2021 (inception) to December 31, 2021 (the “Prior Period” or “period ended December 31, 2021”).
Biggest changeThe payment of these dividends is not indicative of our ability to pay such dividends in the future. 66 Results of Operations Comparison of the years ended December 31, 2023 and 2022 For the year ended December 31, Variance 2023 2022 Amount % Revenues Interest income $ 62,900,004 $ 51,471,766 $ 11,428,238 22 % Interest expense (5,752,908 ) (2,614,138 ) (3,138,770 ) 120 % Net interest income 57,147,096 48,857,628 8,289,468 17 % Expenses Management and incentive fees, net 8,782,834 6,562,087 2,220,747 34 % General and administrative expense 5,260,287 3,528,322 1,731,965 49 % Professional fees 2,153,999 2,151,714 2,285 0 % Stock based compensation 1,479,736 435,623 1,044,113 240 % Provision for current expected credit losses 940,385 3,887,405 (2,947,020 ) -76 % Total expenses 18,617,241 16,565,151 2,052,090 12 % Change in unrealized gain on debt securities, at fair value 75,604 - 75,604 100 % Realized gain on debt securities, at fair value 104,789 - 104,789 100 % Net Income before income taxes 38,710,248 32,292,477 6,417,771 20 % Income tax expense - - - - Net Income $ 38,710,248 $ 32,292,477 $ 6,417,771 20 % • The increase in interest income was driven by the $12.7 million increase in principal outstanding, as well as the increase in the Prime rate of 100 basis points during the year.
The terms and conditions of each modification vary based on individual circumstances and will be determined on a case by case basis. Our Manager monitors and evaluates each of our loans held for investment and has maintained regular communications with borrowers regarding the potential impacts on our loans.
The terms and conditions of each modification vary based on individual circumstances and will be determined on a case by case basis. Our Manager monitors and evaluates each of our loans held for investment and has maintained regular communications with borrowers regarding potential impacts on our loans.
To the extent that we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Code), we will pay tax at regular corporate rates on that undistributed portion.
To the extent that we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Code), we will pay tax at regular corporate rates on that undistributed portion.
The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT’s tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax.
The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT’s tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax.
We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period; provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) provision for current expected credit losses and (v) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors.
We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) 71 depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period; provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) provision for current expected credit losses and (v) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors.
Furthermore, if we distribute less than the sum of 1) 85% of our ordinary income for the calendar year, 2) 95% of its capital gain net income for the calendar year, and 3) any undistributed shortfall from its prior calendar year (the “Required Distribution”) to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay a non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed.
Furthermore, if we distribute less than the sum of 1) 85% of our ordinary income for the calendar year, 2) 95% of our capital gain net income for the calendar year, and 3) any undistributed shortfall from our prior calendar year (the “Required Distribution”) to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay a non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed.
Market Conditions We believe that favorable market conditions, including an imbalance in supply and demand of credit to cannabis operating companies, have provided attractive opportunities for non-bank lenders, such as us, to finance commercial real estate loans and other loans that exhibit strong fundamentals but also require more customized financing structures and loan products than regulated financial institutions can presently provide.
Market Conditions We believe that favorable market conditions, including an imbalance in supply and demand of credit to cannabis operating companies, have provided attractive opportunities for non-bank lenders, such as us, to finance commercial real estate loans and other loans that exhibit strong fundamentals but also require more customized financing structures and loan products than regulated 63 financial institutions can presently provide.
We believe that our method of operation will enable us to continue to qualify as a REIT. However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on us satisfying numerous asset, income and distribution tests which depends, in part, on our operating results.
We believe that our method of operation will enable us to continue to qualify as a REIT. However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on us satisfying numerous asset, income and distribution tests which depend, in part, on our operating results.
We will be subject to interest rate risk in connection with our assets and our related financing obligations. Our operating results will depend in large part on differences between the income earned on our assets and our cost of borrowing. The cost of our borrowings generally will be based on prevailing market interest rates.
We will be subject to interest rate risk in connection with our assets and our related financing obligations. 62 Our operating results will depend in large part on differences between the income earned on our assets and our cost of borrowing. The cost of our borrowings generally will be based on prevailing market interest rates.
If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned.
If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend 75 distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned.
Record Date Payment Date Common Share Distribution Amount Taxable Ordinary Income Return of Capital Section 199A Dividends Regular cash dividend 3/31/2022 4/14/2022 $ 0.40 $ 0.40 $ - $ 0.40 Regular cash dividend 6/30/2022 7/15/2022 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 9/30/2022 10/14/2022 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 12/30/2022 1/13/2023 $ 0.47 $ 0.47 $ - $ 0.47 Special cash dividend 12/30/2022 1/13/2023 $ 0.29 $ 0.29 $ - $ 0.29 Total cash dividend $ 2.10 $ 2.10 $ - $ 2.10 Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with GAAP which requires the use of estimates and assumptions that involve the exercise of judgment as to future uncertainties.
Record Date Payment Date Common Share Distribution Amount Taxable Ordinary Income Return of Capital Section 199A Dividends Regular cash dividend 3/31/2023 4/14/2023 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 6/30/2023 7/14/2023 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 9/29/2023 10/13/2023 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 12/29/2023 1/12/2024 $ 0.47 $ 0.47 $ - $ 0.47 Special cash dividend 12/29/2023 1/12/2024 $ 0.29 $ 0.29 $ - $ 0.29 Total cash dividend $ 2.17 $ 2.17 $ - $ 2.17 Record Date Payment Date Common Share Distribution Amount Taxable Ordinary Income Return of Capital Section 199A Dividends Regular cash dividend 3/31/2022 4/14/2022 $ 0.40 $ 0.40 $ - $ 0.40 Regular cash dividend 6/30/2022 7/15/2022 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 9/30/2022 10/14/2022 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 12/30/2022 1/13/2023 $ 0.47 $ 0.47 $ - $ 0.47 Special cash dividend 12/30/2022 1/13/2023 $ 0.29 $ 0.29 $ - $ 0.29 Total cash dividend $ 2.10 $ 2.10 $ - $ 2.10 Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with GAAP which requires the use of estimates and assumptions that involve the exercise of judgment as to future uncertainties.
The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain.
The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any 79 of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain.
As we acquire new loans and our Manager monitors loan and borrower performance, these estimates will be revised each period. 84 Risk Ratings We assess the risk factors of each loan, and assign a risk rating based on a variety of factors, including, without limitation, payment history, real estate collateral coverage, property type, geographic and local market dynamics, financial performance, enterprise value of the portfolio company, loan structure and exit strategy, and project sponsorship.
As we acquire new loans and our Manager monitors loan and borrower performance, these estimates will be revised each period. 77 Risk Ratings We assess the risk factors of each loan, and assign a risk rating based on a variety of factors, including, without limitation, payment history, real estate collateral coverage, property type, geographic and local market dynamics, financial performance, enterprise value of the portfolio company, loan structure and exit strategy, and project sponsorship.
As the cannabis industry continues to evolve and to the extent that additional states legalize cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets.
As the cannabis industry continues to evolve and to the extent that additional states legalize 72 cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets.
In addition, we may invest in borrowers that have equity securities that are publicly traded on the Canadian Stock Exchange (“CSE”) in Canada and/or over-the-counter in the United States. As of December 31, 2022, our portfolio is comprised primarily of first mortgages to established multi-state or single-state cannabis operators or property owners.
In addition, we may invest in borrowers that have equity securities that are publicly traded on the Canadian Stock Exchange (“CSE”) in Canada and/or over-the-counter in the United States. As of December 31, 2023, our portfolio is comprised primarily of first mortgages to established multi-state or single-state cannabis operators or property owners.
We consider multiple datapoints and methodologies that may include likelihood of default and expected loss given default for each individual loans, valuations derived from discount cash flows (“DCF”), and other inputs including the risk rating of the loan, how recently the loan was originated compared to the measurement date, and expected prepayment, if applicable.
We consider multiple datapoints and methodologies that may include likelihood of default and expected loss given default for each individual loans, valuations derived from discounted cash flows (“DCF”), and other inputs including the risk rating of the loan, how recently the loan was originated compared to the measurement date, and expected prepayment, if applicable.
ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have analyzed our various federal and state filing positions and believe that our income tax filing positions and deductions are well documented and supported as of December 31, 2022.
ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have analyzed our various federal and state filing positions and believe that our income tax filing positions and deductions are documented and supported as of December 31, 2023 and 2022.
The Company incurred debt issuance costs of $100,000 related to the origination of the Revolving Loan, which were capitalized and are subsequently being amortized through maturity. The maturity date of the Revolving Loan was the earlier of (i) February 12, 2023 and (ii) the date on which the Revolving Loan is terminated pursuant to terms in the Revolving Loan Agreement.
We incurred debt issuance costs of $100,000 related to the origination of the Revolving Loan, which were capitalized and are subsequently being amortized through maturity. The maturity date of the Revolving Loan was the earlier of (i) February 12, 2023 and (ii) the date on which the Revolving Loan is terminated pursuant to terms in the Revolving Loan Agreement.
However, our Sponsor has had operations for the past two fiscal years and has made investments in similar loans that have similar characteristics, including interest rate, collateral coverage, guarantees, and prepayment/make whole provisions, which fall into the pools identified above.
However, our Sponsor has had operations for the past three fiscal years and has made investments in similar loans that have similar characteristics, including interest rate, collateral coverage, guarantees, and prepayment/make whole provisions, which fall into the pools identified above.
The year ended December 31, 2022 was impacted by cash outflows primarily related to $149.7 million used for the origination and funding of loans held for investment, partially offset by $6.7 million received from the sales of loans and $17.7 million of cash received from the principal repayment of loans held for investment.
For the year ended December 31, 2022, cash outflows primarily related to $149.6 million used for the origination and funding of loans held for investment, partially offset by $6.7 million of cash received from the sales of loans and $17.7 million of cash received from the principal repayment of loans held for investment.
The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, and off-balance sheet credit exposures such as unfunded loan commitments. We evaluate our loans on a collective (pool) basis by aggregating on the basis of similar risk characteristics as explained below.
The 76 measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, and off-balance sheet credit exposures such as unfunded loan commitments. We evaluate our loans on a collective (pool) basis by aggregating on the basis of similar risk characteristics as explained above.
ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have analyzed our various federal and state filing positions and believe that our income tax filing positions and deductions are well documented and supported as of December 31, 2022 and 2021.
ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have analyzed our various federal and state filing positions and believe that our income tax filing positions and deductions are well documented and supported as of December 31, 2023.
On January 24, 2023, we also purchased a senior secured loan from an affiliate under common control. The purchase price of approximately $19.0 million was approved by the Audit Committee of the Board. The fair value approximated the carrying value of the loan plus accrued and unpaid interest through January 24, 2023.
In January 2023, we purchased a senior secured loan from an affiliate under common control. The purchase price of approximately $19.0 million was approved by the Audit Committee of the Board. The fair value approximated the carrying value of the loan plus accrued and unpaid interest through January 24, 2023.
(4) “P” = Prime Rate and depicts floating rate loans that pay interest at the Prime Rate plus a specific percentage; “PIK” = paid-in-kind interest; subtotal represents weighted average interest rate. (5) P&I = principal and interest. I/O = interest only. P&I loans may include interest only periods for a portion of the loan term.
(4) "P" = prime rate and depicts floating rate loans that pay interest at the prime rate plus a specific percentage; "PIK" = paid-in-kind interest; subtotal represents weighted average interest rate. (5) P&I = principal and interest. I/O = interest only. P&I loans may include interest only periods for a portion of the loan term.
These loans are generally held for investment and are secured by real estate, equipment, licenses and other assets of the borrowers to the extent permitted by the applicable laws and the regulations governing such borrowers. 67 We generate revenue primarily in the form of interest income on loans.
These loans are generally held for investment and are substantially secured by real estate, equipment, licenses and other assets of the borrowers to the extent permitted by the applicable laws and the regulations governing such borrowers. 60 We generate revenue primarily in the form of interest income on loans.
Income Taxes We are a Maryland corporation that elected to be taxed as a REIT under the Code, commencing with our taxable period ended December 31, 2021. We believe that our method of operation will enable us to continue to qualify as a REIT.
Income Taxes We are a Maryland corporation that elected to be taxed as a REIT under the Code, commencing with the taxable period ended December 31, 2021. We believe that we have qualified as a REIT and that our method of operation will enable us to continue to qualify as a REIT.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and related notes that are included elsewhere in this annual report on Form 10-K.
Item 7. Managem ent’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and related notes that are included elsewhere in this annual report on Form 10-K.
We may also serve as co-lenders in loans originated by third parties and, in the future, we may also acquire loans or loan participations. Loans that have a one to two year maturity are generally interest only loans.
We may also serve as co-lenders in loans originated by third parties and, in the future, we may also acquire loans or loan participations. Loans that have one to two year maturities are generally interest only loans.
The year ended December 31, 2022 was impacted by cash inflows of approximately $58.0 million related to draw downs on our Revolving Loan and approximately $4.5 million received from the underwriters’ partial exercise of their over-allotment option, partially offset by approximately $28.2 million in dividends paid, approximately $0.5 million in debt issuance costs paid, and approximately $0.1 million related to offering costs associated with our initial public offering.
For the year ended December 31, 2022, cash inflows of approximately $4.5 million related to proceeds received from the underwriters’ partial exercise of their over-allotment option in connection with our initial public offering and $58.0 million related to draw downs on our Revolving Loan, partially offset by approximately $28.2 million in dividends paid, approximately $0.5 million in debt issuance costs paid, and approximately $0.1 million related to offering costs associated with our initial public offering.
As of December 31, 2022 and 2021, our loan portfolio had a weighted-average yield-to-maturity internal rate of return (“YTM IRR”) of 19.7% and 18.6%, respectively, and was substantially secured by real estate and, with respect to certain of our loans, substantially all assets of the borrowers and certain of their subsidiaries, including equipment, receivables, and licenses.
As of December 31, 2023 and 2022, our loan portfolio had a weighted-average yield-to-maturity internal rate of return (“YTM IRR”) of 19.4% and 19.7%, respectively, and was substantially secured by real estate and, with respect to certain of our loans, substantially all assets of the borrowers and certain of their subsidiaries, including equipment, receivables, and licenses.
The principal amount of our loans and any accrued but unpaid interest thereon generally become due at the applicable maturity date. In some cases, our interest income includes a paid-in-kind (“PIK”) component for a portion of the total interest.
Interest on our loans is generally payable monthly. The principal amount of our loans and any accrued but unpaid interest thereon generally become due at the applicable maturity date. In some cases, our interest income includes a paid-in-kind (“PIK”) component for a portion of the total interest.
In accordance with SEC guidance, the following discussion addresses the accounting estimates that we believe apply to us based on the nature of our operations. Our most critical accounting estimates involve a significant level of estimation uncertainty that have had or are reasonably likely to have a material impact on our financial conditions and results of operations.
The following discussion addresses the accounting estimates that we believe apply to us based on the nature of our operations. Our most critical accounting estimates involve a significant level of estimation uncertainty that have had or are reasonably likely to have a material impact on our financial conditions and results of operations.
We are an externally managed Maryland corporation that elected to be taxed as a REIT under Section 856 of the Code, commencing with our taxable period ended December 31, 2021. We believe that our method of operation will enable us to continue to qualify as a REIT.
We are an externally managed Maryland corporation that elected to be taxed as a REIT under Section 856 of the Code, commencing with our taxable year ended December 31, 2021. We believe that we have qualified as a REIT and that our method of operation will enable us to continue to qualify as a REIT.
Factors that could cause or contribute to those differences include, but are not limited to, those discussed above in “Risk Factors” and those identified below and elsewhere in this annual report on Form 10-K. See “Forward-Looking Statements.” 66 Overview We are a commercial real estate finance company.
Factors that could cause or contribute to those differences include, but are not limited to, those discussed above in “Risk Factors” and those identified below and elsewhere in this annual report on Form 10-K. See “Forward-Looking Statements.” Overview We are a commercial mortgage real estate investment trust.
Excise tax expense is included in the line item income tax expense. FASB ASC Topic 740, Income Taxes (“ASC 740”), prescribes a recognition threshold and measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
Excise tax expense is included in the line item income tax expense. ASC 740, prescribes a recognition threshold and measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The total amount of the special cash dividend payment was approximately $5.1 million.
The total amount of the special cash dividend payment was approximately $5.2 million.
This amendment extended the contractual maturity date of the Revolving Loan until December 16, 2024. The Company retained its option to extend the initial term for an additional one-year period, provided no events of default exist and the Company provides 365 days’ notice of the extension pursuant to this amendment.
The Amendment extended the contractual maturity date of the Revolving Loan until December 16, 2024 and we retained the option to extend the initial term for an additional one-year period, provided no events of default exist and we provide 365 days’ notice of the extension pursuant to the Amendment.
Recent Accounting Pronouncements Refer to footnote 2 to our consolidated financial statements for the year ended December 31, 2022, titled “ Significant Accounting Policies ” for information on recent accounting pronouncements. 87
Recent Accounting Pronouncements Refer to footnote 2 to our consolidated financial statements for the year ended December 31, 2023, titled “ Significant Accounting Policies ” for information on recent accounting pronouncements. 80
Non-GAAP Measures and Key Financial Measures and Indicators As a commercial real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Adjusted Distributable Earnings, book value per share and dividends declared per share.
Non-GAAP Measures and Key Financial Measures and Indicators As a commercial mortgage real estate investment trust, we believe the key financial measures and indicators for our business are Distributable Earnings, Adjusted Distributable Earnings, book value per share, and dividends declared per share.
The total amount of the cash dividend payment was approximately $8.3 million.
The total amount of the cash dividend payment was approximately $8.5 million.
The total amount of the cash dividend payment was approximately $8.3 million.
The total amount of the cash dividend payment was approximately $8.5 million.
The following tables present changes in loans held for investment at carrying value as of and for the year ended December 31, 2022 and the period ended December 31, 2021: Principal Original Issue Discount Current Expected Credit Loss Reserve Carrying Value Balance at December 31, 2021 $ 200,632,056 $ (3,647,490 ) $ (134,542 ) $ 196,850,024 New fundings 160,163,120 (3,243,735 ) - 156,919,385 Principal repayment of loans (17,728,730 ) - - (17,728,730 ) Accretion of original issue discount - 2,874,706 - 2,874,706 Proceeds from sale of loans (6,957,500 ) 260,723 - (6,696,777 ) PIK Interest 6,920,388 - - 6,920,388 Current expected credit loss reserve - - (3,806,397 ) (3,806,397 ) Balance at December 31, 2022 $ 343,029,334 $ (3,755,796 ) $ (3,940,939 ) $ 335,332,599 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount, deferred loan fees and other upfront fees.
Principal Original Issue Discount Current Expected Credit Loss Reserve Carrying Value (1) Balance at January 1, 2022 $ 200,632,056 $ (3,647,490 ) $ (134,542 ) $ 196,850,024 New fundings 160,163,120 (3,243,735 ) - 156,919,385 Principal repayment of loans (17,728,730 ) - - (17,728,730 ) Accretion of original issue discount - 2,874,706 - 2,874,706 Sale of loans (6,957,500 ) 260,723 - (6,696,777 ) PIK Interest 6,920,388 - - 6,920,388 Current expected credit loss reserve - - (3,806,397 ) (3,806,397 ) Balance at December 31, 2022 $ 343,029,334 $ (3,755,796 ) $ (3,940,939 ) $ 335,332,599 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount, deferred loan fees and other upfront fees.
For approximately 82% of the portfolio, the fair value of the underlying real estate collateral exceeded the amounts outstanding under the loans as of December 31, 2022.
For approximately 70% and 82% of the portfolio, the fair value of the underlying real estate collateral exceeded the amounts outstanding under the loans as of December 31, 2023 and 2022, respectively.
As of December 31, 2022, 13.6% of the loans held in our portfolio are backed by personal or corporate guarantees. We aim to maintain a portfolio diversified across jurisdictions and across verticals, including cultivators, processors, dispensaries, as well as ancillary businesses.
As of December 31, 2023 and 2022, 27.1% and 13.6%, respectively, of the loan principal held in our portfolio are backed by personal or corporate guarantees. We aim to maintain a portfolio diversified across jurisdictions and across verticals, including cultivators, processors, dispensaries, as well as ancillary businesses.
Dividends Declared Per Share For the period from January 1, 2022 through March 31, 2022, we declared a cash dividend of $0.40 per share of our common stock, relating to the first quarter of 2022, which was paid on April 14, 2022 to stockholders of record as of the close of business on March 31, 2022.
Dividends Declared Per Share For the period from January 1, 2023 through March 31, 2023, we declared an ordinary cash dividend of $0.47 per share of our common stock, relating to the first quarter of 2023, which was paid on April 14, 2023 to stockholders of record as of the close of business on March 31, 2023.
The total amount of the cash dividend payment was approximately $8.3 million. In addition, we declared a special cash dividend of $0.29 per share of our common stock, which was paid on January 13, 2023 to stockholders of record as of the close of business on December 30, 2022.
The total amount of the cash dividend payment was approximately $8.5 million. In addition, we declared a special cash dividend of $0.29 per share of our common stock, which was paid on January 12, 2024 to stockholders of record as of the close of business on December 29, 2023.
For the period from April 1, 2022 through June 30, 2022, we declared a cash dividend of $0.47 per share of our common stock, relating to the second quarter of 2022, which was paid on July 15, 2022 to stockholders of record as of the close of business on June 30, 2022.
For the period from April 1, 2023 through June 30, 2023, we declared an ordinary cash dividend of $0.47 per share of our common stock, relating to the second quarter of 2023, which was paid on July 14, 2023 to stockholders of record as of the close of business on June 30, 2023.
The remaining approximately 18% of the portfolio, while not fully collateralized by real estate, was secured by other forms of collateral including equipment, receivables, licenses and/or other assets of the borrowers to the extent permitted by applicable laws and regulations governing such borrowers.
The remaining approximately 30% and 18% of the portfolio, respectively, while not fully collateralized by real estate, may be partially collateralized by real estate and is secured by other forms of collateral including equipment, receivables, licenses and/or other assets of the borrowers to the extent permitted by applicable laws and regulations governing such borrowers.
Our loan portfolio as of December 31, 2022 and 2021 was concentrated with the top three borrowers representing approximately 29.4% and 34.6% of the funded principal and approximately 27.9% and 9.7% of the total commitments to borrowers, respectively. As of December 31, 2022 and 2021, the top three borrowers represented approximately 29.3% and 15.3% of interest income, respectively.
Our loan portfolio as of December 31, 2023 and 2022 was concentrated with the top three borrowers representing approximately 28.7% and 29.4% of the funded principal and approximately 26.4% and 27.9% of the total commitments to borrowers, respectively. As of December 31, 2023 and 2022, the top three borrowers represented approximately 28.4% and 29.3% of interest income, respectively.
To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured, or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities. 82 The following table summarizes the Company’s dividends declared during the year ended December 31, 2022.
To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured, or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities.
The Third Amendment and Restatement provides for certain affirmative covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course.
The Revolving Loan provides for certain affirmative covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course.
For the period from July 1, 2022 through September 30, 2022, we declared a cash dividend of $0.47 per share of our common stock, relating to the third quarter of 2022, which was paid on October 14, 2022 to stockholders of record as of the close of business on September 30, 2022.
For the period from July 1, 2023 through September 30, 2023, we declared an ordinary cash dividend of $0.47 per share of our common stock, relating to the third quarter of 2023, which was paid on October 13, 2023 to stockholders of record as of the close of business on September 29, 2023.
We intend to continue our track record of capitalizing on these opportunities and growing the size of our portfolio. 70 Risk Management To the extent consistent with maintaining our REIT qualification and our exemption from registration under the Investment Company Act, we seek to manage risk exposure by closely monitoring our portfolio and actively managing the financing, interest rate, credit, prepayment and convexity (a measure of the sensitivity of the duration of a loan to changes in interest rates) risks associated with holding our portfolio of loans.
Risk Management To the extent consistent with maintaining our REIT qualification and our exemption from registration under the Investment Company Act, we seek to manage risk exposure by closely monitoring our portfolio and actively managing the financing, interest rate, credit, prepayment and convexity (a measure of the sensitivity of the duration of a loan to changes in interest rates) risks associated with holding our portfolio of loans.
As of December 31, 2022 and 2021, approximately 83.1% and 53.2%, respectively, of our portfolio was comprised of floating rate loans, and 16.9% and 46.8% of our portfolio was comprised of fixed rate loans, respectively. The floating rate loans described above are variable based upon the Prime Rate plus an applicable margin, and in many cases, a Prime Rate floor.
As of December 31, 2023 and 2022, approximately 80.5% and 83.1%, respectively, of our portfolio was comprised of floating rate loans, and 19.5% and 16.9% of our portfolio was comprised of fixed rate loans, respectively. The floating rate loans described above are variable based upon the Prime Rate plus an applicable margin, and in many cases, a Prime Rate floor.
For the period from October 1, 2022 through December 31, 2022, we declared a cash dividend of $0.47 per share of our common stock, relating to the fourth quarter of 2022, which was paid on January 13, 2023 to stockholders of record as of the close of business on December 30, 2022.
For the period from October 1, 2023 through December 31, 2023, we declared an ordinary cash dividend of $0.47 per share of our common stock, relating to the fourth quarter of 2023, which was paid on January 12, 2024 to stockholders of record as of the close of business on December 29, 2023.
The declines in risk ratings shown in the following table from December 31, 2021 to December 31, 2022 consider borrower specific credit history and performance and quarterly re-evaluation of overall current macroeconomic conditions affecting its borrowers.
The risk ratings shown in the following table as of December 31, 2023 and 2022 consider borrower specific credit history and performance and quarterly re-evaluation of overall current macroeconomic conditions affecting the borrowers.
The allowances are deducted from the gross carrying amount of the assets to present the net carrying value of the amounts expected to be collected on such assets.
The CECL Reserve is deducted from the gross carrying amount of the assets to present the net carrying value of the amounts expected to be collected on such assets.
As of December 31, 2022 and 2021, all of our cash was unrestricted and totaled approximately $5.7 million and $80.2 million, respectively.
As of December 31, 2023 and 2022, all of our cash was unrestricted and totaled approximately $7.9 million and $5.7 million, respectively.
To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change. Actual results could differ from those estimates and assumptions. (7) This Loan is subject to Prime Rate floor. (8) This Loan is subject to an interest rate cap.
To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change. Actual results could differ from those estimates and assumptions.
Net Cash Provided by Financing Activities For the years ended December 31, 2022 and 2021, we reported “Net cash provided by financing activities” of $33.7 million and $218.8 million, respectively.
Net Cash (Used in)/Provided by Financing Activities For the years ended December 31, 2023 and 2022, we reported “Net cash (used in)/provided by financing activities” of $(24.3) million and $33.7 million, respectively.
Excise tax expense is included in the line item income tax expense. For the year ended December 31, 2022 and the period ended December 31, 2021, we did not incur excise tax expense.
Excise tax expense, if any, is included in the line item, income tax expense. For the years ended December 31, 2023 and 2022, we did not incur excise tax expense.
We bear all other costs and expenses of our operations and transactions, including (without limitation) fees and expenses relating to: ● organizational and offering expenses; ● quarterly valuation expenses; ● fees payable to third parties relating to, or associated with, making loans and valuing loans (including third-party valuation firms); ● fees and expenses associated with investor relations and marketing efforts (including attendance at investment conferences and similar events); ● accounting and audit fees and expenses from our independent registered public accounting firm; ● federal and state registration fees; ● any exchange listing fees; ● federal, state and local taxes; ● independent directors’ fees and expenses; ● brokerage commissions; ● costs of proxy statements, stockholders’ reports and notices; and ● costs of preparing government filings, including periodic and current reports with the SEC. 68 Income Taxes We are a Maryland corporation that elected to be taxed as a REIT under the Code, commencing with our taxable period ended December 31, 2021.
We bear all other costs and expenses of our operations and transactions, including (without limitation) fees and expenses relating to: • organizational and offering expenses; • quarterly valuation expenses; • fees payable to third parties relating to, or associated with, making loans and valuing loans (including third-party valuation firms); • fees and expenses associated with investor relations and marketing efforts (including attendance at investment conferences and similar events); • accounting and loan servicing fees from our third-party fund administrator; • audit fees and expenses from our independent registered public accounting firm; • federal and state registration fees; 61 • any exchange listing fees; • federal, state and local taxes; • independent directors’ fees and expenses; • brokerage commissions; • costs of proxy statements, stockholders’ reports and notices; and • costs of preparing government filings, including periodic and current reports with the SEC.
Additionally, we sold a senior secured loan to an affiliate under common control. The selling price of approximately $6.7 million was approved by the Audit Committee of the Board. The fair value approximated the carrying value of the loan plus accrued and unpaid interest through the selling date.
In March 2023, we completed the sale of a secured loan to an affiliate under common control. The selling price of approximately $13.7 million was approved by the Audit Committee of the Board and the fair value approximated the carrying value of the loan plus accrued and unpaid interest through March 31, 2023.
The largest loan represented approximately 10.9% and 15.0% of the funded principal and approximately 10.2% and 12.8% of the total commitments as of December 31, 2022 and 2021, respectively.
The largest loan represented approximately 10.9% and 10.9% of the funded principal and approximately 9.7% and 10.2% of the total commitments as of December 31, 2023 and 2022, respectively.
No other material terms of the Revolving Loan were modified as a result of the execution of the Second Amendment and Restatement. The Company incurred debt issuance costs of $177,261 related to the Second Amendment and Restatement, which were capitalized and are subsequently amortized through maturity.
No other material terms of the Revolving Loan were modified as a result of the execution of the Fifth Amendment and Restatement. The 73 Company incurred debt issuance costs of approximately $0.1 million related to the Fifth Amendment and Restatement, which were capitalized and will subsequently be amortized through maturity.
Additionally, the Company must comply with certain financial covenants including: (1) maximum capital expenditures of $150,000, (2) maintaining a debt service coverage ratio greater than 1.35 to 1, and (3) maintaining a leverage ratio less than 1.50 to 1.
Additionally, we must comply with certain financial covenants including: (1) maximum capital expenditures of $150,000, (2) maintaining a debt service coverage ratio greater than 1.35 to 1, and (3) maintaining a leverage ratio less than 1.50 to 1. As of December 31, 2023, we were in compliance with all financial covenants with respect to the Revolving Loan.
The aggregate originated commitment under these loans was approximately $351.4 million and $235.1 million and outstanding principal was approximately $343.0 million and $200.6 million as of December 31, 2022 and 2021, respectively.
The aggregate originated commitment under these loans was approximately $378.8 million and $351.4 million and outstanding principal was approximately $355.7 million and $343.0 million as of December 31, 2023 and 2022, respectively.
ASC 326 requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment.
We consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment.
(6) Estimated YTM includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features. OID is recognized as a discount to the funded loan principal and is accreted to income over the term of the loan.
(6) Estimated YTM, calculated on a weighted average principal basis, includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features.
The Company incurred debt issuance costs of $323,779 related to the Third Amendment and Restatement, which were capitalized and are subsequently amortized through maturity.
We incurred debt issuance costs of $323,779 related to the Third Amendment and Restatement, which were capitalized and are subsequently amortized through maturity. On February 27, 2023, CAL entered into an amendment to the Third Amendment and Restatement (the “Amendment”).
The period ended December 31, 2021 was impacted by cash outflows primarily related to $159.9 million used for the origination and funding of loans held for investment, partially offset by $4.9 million received from the sales of loans and $9.8 million cash received from the principal repayment of loans held for investment.
For the year ended December 31, 2023, cash outflows primarily related to $92.2 million used for the origination and funding of loans held for investment, partially offset by $13.4 million of cash received from the sale of loans and $76.9 million of cash received from the principal repayment of loans held for investment.
Interest rates will vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, some of which cannot be predicted with any certainty.
Interest rates will vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, some of which cannot be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers.
Those accounting estimates that we believe are most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below. CECL Reserve In accordance with ASC 326, we record allowances for our loans held for investment.
Those accounting estimates that we believe are most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below.
The total amount of the cash dividend payment was $7.1 million.
The total amount of the cash dividend payment was approximately $8.5 million.
The statistics presented reflect the weighted average of the terms under all advances for the total aggregate loan commitment. 76 The following tables summarize our loans held for investment as of December 31, 2022 and 2021: As of December 31, 2022 Outstanding Principal (1) Original Issue Discount Carrying Value (1) Weighted Average Remaining Life (Years) (2) Senior Term Loans $ 343,029,334 $ (3,755,796 ) $ 339,273,538 2.2 Current expected credit loss reserve - - (3,940,939 ) Total loans held at carrying value, net $ 343,029,334 $ (3,755,796 ) $ 335,332,599 As of December 31, 2021 Outstanding Principal (1) Original Issue Discount Carrying Value (1) Weighted Average Remaining Life (Years) (2) Senior Term Loans $ 200,632,056 $ (3,647,490 ) $ 196,984,566 2.2 Current expected credit loss reserve - - (134,542 ) Total loans held at carrying value, net $ 200,632,056 $ (3,647,490 ) $ 196,850,024 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount, deferred loan fees and other upfront fees.
The following tables summarize our loans held for investment as of December 31, 2023 and 2022: As of December 31, 2023 Outstanding Principal (1) Original Issue Discount Carrying Value (1) Weighted Average Remaining Life (Years) (2) Senior Term Loans $ 355,745,305 $ (2,104,695 ) $ 353,640,610 2.1 Current expected credit loss reserve - - (4,972,647 ) Total loans held at carrying value, net $ 355,745,305 $ (2,104,695 ) $ 348,667,963 As of December 31, 2022 Outstanding Principal (1) Original Issue Discount Carrying Value (1) Weighted Average Remaining Life (Years) (2) Senior Term Loans $ 343,029,334 $ (3,755,796 ) $ 339,273,538 2.2 Current expected credit loss reserve - - (3,940,939 ) Total loans held at carrying value, net $ 343,029,334 $ (3,755,796 ) $ 335,332,599 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount, deferred loan fees and other upfront fees.
The Revolving Loan incurs unused fees at a rate of 0.25% per annum which began on July 1, 2022 pursuant to the Second Amendment and Restatement.
We incurred debt issuance costs of $177,261 related to the Second Amendment and Restatement, which were capitalized and are subsequently amortized through maturity. The Revolving Loan incurs unused fees at a rate of 0.25% per annum which began on July 1, 2022 pursuant to the Second Amendment and Restatement.
As of December 31, 2022 and 2021, unamortized debt issuance costs related to the Revolving Loan and the First, Second and Third Amendments and Restatements of $805,596 and $868,022, respectively, are recorded in other receivables and assets, net on the consolidated balance sheets.
As of December 31, 2023 and 2022, unamortized debt issuance costs related to the Revolving Loan, including all amendments and amendments and restatements thereto, as applicable, of $366,592 and $516,261, respectively, are recorded in other receivables and assets, net on the consolidated balance sheets.
The Prime Rate during the year ended December 31, 2022 was as follows: Effective Date Rate (1) December 15, 2022 7.50 % November 3, 2022 7.00 % September 22, 2022 6.25 % July 28, 2022 5.50 % June 16, 2022 4.75 % May 5, 2022 4.00 % March 17, 2022 3.50 % March 15, 2020 3.25 % (1) Rate obtained from the Wall Street Journal Interest on our loans is generally payable monthly.
The Prime Rate during the years ended December 31, 2023 and 2022 was as follows: Effective Date Rate (1) July 27, 2023 8.50 % May 4, 2023 8.25 % March 23, 2023 8.00 % February 2, 2023 7.75 % December 15, 2022 7.50 % November 3, 2022 7.00 % September 22, 2022 6.25 % July 28, 2022 5.50 % June 16, 2022 4.75 % May 5, 2022 4.00 % March 17, 2022 3.50 % March 15, 2020 3.25 % (1) Rate obtained from the Wall Street Journal’s “Bonds, Rates & Yields” table.
We define Adjusted Distributable Earnings, for a specified period, as Distributable Earnings excluding certain non-recurring organizational expenses (such as one-time expenses related to our formation and start-up). 78 We believe providing Distributable Earnings and Adjusted Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to stockholders in assessing the overall performance of our business.
We believe providing Distributable Earnings and Adjusted Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to stockholders in assessing the overall performance of our business.
Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers. 69 Changes in Market Interest Rates and Effect on Net Interest Income Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control.
Changes in Market Interest Rates and Effect on Net Interest Income Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeAs of December 31, 2022, 89% of our portfolio is fully secured by real estate and 11% has limited or no real estate collateral. Our portfolio on average had real estate collateral coverage of 1.7x as of December 31, 2022, and all of our loans are secured by equity pledges of the borrower and all asset liens.
Biggest changeOur portfolio on average had real estate collateral coverage of 1.5x as of December 31, 2023, and all of our loans are secured by equity pledges of the borrower and all asset liens. As of December 31, 2022, 89% of our portfolio was fully secured by real estate and 11% had limited or no real estate collateral.
F or additional information regarding the credit risk associated with our loans and interest receivables, see “ Risk Factors— Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve significant risks.” Our Manager or affiliates of our Manager have originated all of our loans and intend to continue to originate our loans, but we may in the future also acquire loans from time to time.
For additional information regarding the credit risk associated with our loans and interest receivables, see “ Risk Factors— Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve significant risks.” Our Manager or affiliates of our Manager have originated all of our loans and intend to continue to originate our loans, but we may in the future also acquire loans from time to time.
In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. 90
In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. 82
Our portfolio on average had real estate collateral coverage of 2.2x as of December 31, 2021, and all of our loans were secured by equity pledges of the borrower and all asset liens. 89 Credit Risk We are subject to varying degrees of credit risk in connection with our loans and interest receivable.
Our portfolio on average had real estate collateral coverage of 1.7x as of December 31, 2022, and all of our loans were secured by equity pledges of the borrower and all asset liens. Credit Risk We are subject to varying degrees of credit risk in connection with our loans and interest receivable.
We estimate that a hypothetical 100 basis points increase in the Prime Rate would result in an increase in annual interest expense of approximately $0.6 million and a 100 basis points decrease in the Prime Rate would result in a decrease in annual interest expense of approximately $0.6 million.
We estimate that a hypothetical 100 basis points increase in the Prime Rate would result in an increase in annual cash interest income, excluding the effects of PIK interest, of approximately $2.9 million and a 100 basis points decrease in the Prime Rate would result in a decrease in annual interest income of approximately $2.9 million.
As of December 31, 2022, we had 18 floating-rate loans, representing approximately 83.1% of our loan portfolio based on aggregate outstanding principal balances, subject to a Prime Rate floor.
As of December 31, 2023, we had 21 floating-rate loans, representing approximately 80.5% of our loan portfolio based on aggregate outstanding principal balances.
In addition, with respect to any particular target investment, prior to origination or acquisition our Manager’s investment team evaluates, among other things, relative valuation, comparable company analysis, supply and demand trends, shape-of-yield curves, delinquency and default rates, recovery of various sectors and vintage of collateral. 88 Market Conditions We provide loans to established companies operating in the cannabis industry which involves significant risks, including the risk of strict enforcement against our borrowers of the federal illegality of cannabis, our borrowers’ inability to renew or otherwise maintain their licenses or other requisite authorizations for their cannabis operations, and such loans lack of liquidity, and we could lose all or part of any of our loans.
Market Conditions We provide loans to established companies operating in the cannabis industry which involves significant risks, including the risk of strict enforcement against our borrowers of the federal illegality of cannabis, our borrowers’ inability to renew or otherwise 81 maintain their licenses or other requisite authorizations for their cannabis operations, and such loans lack of liquidity, and we could lose all or part of any of our loans.
In addition, our Revolving Loan is exposed to similar market risks. Changes in market rates may change the fair value of our Revolving Loan as our loan bears interest at the great of (1) the Prime Rate plus the applicable margin and (2) 3.25%.
Changes in market rates may change the fair value of our Revolving Loan as our loan bears interest at the greater of (1) the Prime Rate plus the applicable margin and (2) 3.25%. As of December 31, 2023, we had an outstanding balance of $66.0 million under the Revolving Loan.
We estimate that a hypothetical 100 basis points increase in the Prime Rate would result in an increase in annual interest income of approximately $2.8 million and a 100 basis points decrease in the Prime Rate would result in a decrease in annual interest income of approximately $2.8 million. Our loans generally have a Prime Rate floor of 3.25%.
Based on our outstanding balance as of December 31, 2023, we estimate that a hypothetical 100 basis points increase in the Prime Rate would result in an increase in annual cash interest expense, excluding unused fees, of approximately $0.7 million and a 100 basis points decrease in the Prime Rate would result in a decrease in annual interest expense of approximately $0.7 million.
As of December 31, 2021, 92% of our portfolio was fully secured by real estate and 8% had limited or no real estate collateral.
As of December 31, 2023, 69.7% of our portfolio is fully secured by real estate, 27.6% is partially secured by real estate, and 2.7% has no real estate collateral .
Removed
As of December 31, 2022, we had an outstanding balance of $58.0 million under the Revolving Loan.
Added
Our loans generally have a Prime Rate floor established at the prevailing Prime Rate at the time of origination. Refer to Note 3 for Prime Rate floor by loan. In addition, our Revolving Loan is exposed to similar market risks.
Added
Changes in Market Interest Rates and Effect on Net Interest Income Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We will be subject to interest rate risk in connection with our assets and our related financing obligations.
Added
Our operating results will depend in large part on differences between the income earned on our assets and our cost of borrowing. The cost of our borrowings generally will be based on prevailing market interest rates.
Added
During a period of rising interest rates, our borrowing costs generally will increase (a) while the yields earned on our leveraged fixed-rate loan assets will remain static, and (b) at a faster pace than the yields earned on our leveraged floating-rate loan assets, which could result in a decline in our net interest spread and net interest margin.
Added
The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target investments.
Added
If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.
Added
In addition, with respect to any particular target investment, prior to origination or acquisition our Manager’s investment team evaluates, among other things, relative valuation, comparable company analysis, supply and demand trends, shape-of-yield curves, delinquency and default rates, recovery of various sectors and vintage of collateral.

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