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What changed in Terra Property Trust, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Terra Property Trust, 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.

+330 added−340 removedSource: 10-K (2024-03-15) vs 10-K (2023-03-13)

Top changes in Terra Property Trust, Inc.'s 2023 10-K

330 paragraphs added · 340 removed · 208 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

58 edited+27 added−16 removed75 unchanged
Biggest changeFollowing the consummation of the BDC Merger and as of December 31, 2022, former Terra BDC stockholders owned approximately 19.9% of our common equity, Terra JV held 1 70.0% of the issued and outstanding shares of our common stock with the remainder of 10.1% held by Terra Offshore REIT; and Terra Fund 5 and Terra Fund 7 owned an 87.6% and 12.4% interest, respectively, in Terra JV.
Biggest changeOn February 8, 2024, each of Terra Fund 5 and Terra JV were dissolved. As of December 31, 2023, Terra Fund 7 and Terra Offshore REIT held approximately 8.7% and 10.1%, respectively, of our issued and outstanding Class B Common Stock.
On October 1, 2022 (the “Closing Date”), pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Merger Agreement”), Terra BDC merged with and into Terra LLC, our wholly owned subsidiary, with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as our wholly owned subsidiary.
BDC Merger On October 1, 2022 (the “Closing Date”), pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Merger Agreement”), Terra BDC merged with and into Terra LLC, our wholly owned subsidiary, with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as our wholly owned subsidiary.
First mortgage loans may be either short-term (one to five years) or long-term (up to 10 years), may be fixed or floating rate and are predominantly current-pay loans. Our Manager originates current-pay first mortgage loans backed by high-quality properties in the United States that fit our investment strategy.
First mortgage loans may be either short-term (one to five years) or long-term (up to 10 years), may be fixed or floating rate and are predominantly current-pay loans. Our Manager originates first mortgage loans backed by high-quality properties in the United States that fit our investment strategy.
Emerging Growth Company Status We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and as such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not 7 previously approved.
Emerging Growth Company Status We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and as such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the 1940 Act that impose, among other things: • limitations on our capital structure and the use of leverage; • restrictions on specified investments; 6 • prohibitions on transactions with affiliates; and • compliance with reporting, record keeping, and other rules and regulations that would significantly change our operations.
If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the 1940 Act that impose, among other things: • limitations on our capital structure and the use of leverage; • restrictions on specified investments; • prohibitions on transactions with affiliates; and • compliance with reporting, record keeping, and other rules and regulations that would significantly change our operations.
However, we do not have direct liability to a participant under the participation agreements with respect to the underlying loan and the participants’ share of the investments is repayable only from the proceeds received from the related borrower/issuer of the investments and, therefore, the participants also are subject to credit risk (i.e., risk of default by the underlying borrower/ issuer).
We do not have direct liability to a participant under the participation agreements with respect to the underlying loan and the participants’ share of the investments is repayable only from the proceeds received from the related borrower/issuer of the investments and, therefore, the participants also are subject to credit risk (i.e., risk of default by the underlying borrower/ issuer).
Our Investment Strategy We focus on providing commercial real estate loans to creditworthy borrowers and seek to generate an attractive and consistent low volatility cash income stream. Our focus on originating debt and debt-like instruments emphasizes the payment of current returns to investors and the preservation of invested capital.
Our Investment Strategy We focus on providing real estate (primarily commercial real estate) loans to creditworthy borrowers and seek to generate an attractive and consistent low volatility cash income stream. Our focus on originating debt and debt-like instruments emphasizes the payment of current returns to investors and the preservation of invested capital.
We are responsible for the costs of our own employees; however, we do not currently have any employees and do not currently expect to have any employees. 8 Information About our Executive Officers The names, ages, positions and biographies of our officers are as follows: Name Age Position(s) Held with the Company Vikram S.
We are responsible for the costs of our own employees; however, we do not currently have any employees and do not currently expect to have any employees. Information About our Executive Officers The names, ages, positions and biographies of our officers are as follows: Name Age Position(s) Held with the Company Vikram S.
We may in the future also deploy leverage through other credit facilities and senior notes and we may divide the loans we originate into senior and junior tranches and dispose of the more 3 senior tranches as an additional means of providing financing to our business.
We may in the future also deploy leverage through other credit facilities and senior notes and we may divide the loans we originate into senior and junior tranches and dispose of the more senior tranches as an additional means of providing financing to our business.
Cooperman holds a B.S. in Finance from the University of Colorado at Boulder. 9 Available Information We are subject to the information requirements of the Exchange Act. Therefore, we file periodic reports and other information with the SEC.
Cooperman holds a B.S. in Finance from the University of Colorado at Boulder. Available Information We are subject to the information requirements of the Exchange Act. Therefore, we file periodic reports and other information with the SEC.
The effect of the existence of additional REITs and other institutions may be increased competition for the available supply of our targeted assets suitable for purchase, which may cause the price for such assets to rise.
The effect of the existence of 8 additional REITs and other institutions may be increased competition for the available supply of our targeted assets suitable for purchase, which may cause the price for such assets to rise.
Our Board 5 will review the Manager’s compliance with the investment guidelines periodically and receive an investment report at each quarter-end in conjunction with the review of our quarterly results by our Board.
Our Board will review the Manager’s compliance with the investment guidelines periodically and receive an investment report at each quarter-end in conjunction with the review of our quarterly results by our Board.
He has served as (i) the Chief Financial Officer of Terra Capital Advisors, Terra Capital Advisors 2 and Terra Income Advisors 2 since May 2012, September 2012 and October 2016; (ii) the Chief Operating Officer of Terra Capital Advisors, Terra Capital Advisors 2 and Terra Capital Partners since July 2014; (iii) the Chief Operating Officer of Terra Income Advisors 2 since October 2016; (iv) the Chief Financial Officer of Fund 5 International, Terra International and Terra Fund 7 since June 2014, October 2016 and October 2016, respectively; (v) a director of RESOF since October 2020; and (vi) the Chief Financial Officer and Chief Operating Officer of Terra Income Advisors and the Chief Financial Officer, Treasurer and Secretary of Terra BDC from May 2013 to October 2022 and the Chief Operating Officer of Terra BDC from July 2014 to October 2022.
He also served as (i) the Chief Financial Officer of Terra Capital Advisors, Terra Capital Advisors 2 and Terra Income Advisors 2 since May 2012, September 2012 and October 2016; (ii) the Chief Operating Officer of Terra Capital Advisors, Terra Capital Advisors 2 and Terra Capital Partners since July 2014; (iii) the Chief Operating Officer of Terra Income Advisors 2 since October 2016; (iv) the Chief Financial Officer of Fund 5 International, Terra International and Terra Fund 7 since June 2014, October 2016 and October 2016, respectively; (v) a director of RESOF since October 2020; and (vi) the Chief Financial Officer and Chief Operating Officer of Terra Income Advisors and the Chief Financial Officer, Treasurer and Secretary of Terra BDC from May 2013 to October 2022 and the Chief Operating Officer of Terra BDC from July 2014 to October 2022.
In addition, on March 2, 2020, we issued 2,457,684.59 shares of our common stock to Terra Offshore REIT in exchange for the settlement of $32.1 million of participation interests in loans also held by us, $8.6 million in cash and other net working capital (“Issuance of Common Stock to Terra Offshore REIT”).
In addition, on March 2, 2020, we issued 2,457,684.59 shares of our common stock to Terra Offshore REIT in exchange for the settlement of $32.1 million of participation interests in loans also held by us, $8.6 million in cash and other net working capital.
Our Financing Strategy We have historically utilized only limited amounts of borrowings as part of our financing strategy. One of the reasons we completed the REIT formation transactions, as described under “—Overview,” is to expand our financing options, access to capital and capital flexibility in order to position us for future growth.
Our Financing Strategy We have historically utilized only limited amounts of borrowings as part of our financing strategy. One of the reasons we completed the REIT Formation Transaction, as described under “—Overview,” is to expand our financing options, access to capital and capital flexibility in order to position us for future growth.
As of December 31, 2022, we had one TRS, but the TRS had no activity and no current or deferred taxes. We will continue to file a return for the TRS until it is dissolved. 1940 Act Exclusion We are not registered as an investment company under the 1940 Act.
As of December 31, 2023, we had one TRS, but the TRS had no activity and no current or deferred taxes. We will continue to file a return for the TRS until it is dissolved. 1940 Act Exclusion We are not registered as an investment company under the 1940 Act.
In addition, subject to maintaining our qualification as a REIT, a portion of our business may be conducted through, and a portion of our income may be earned with respect to, our taxable REIT subsidiaries (“TRSs”), should we decide to form TRSs in the future, which are subject to corporate income tax.
In addition, subject to maintaining our qualification as a REIT, a portion of our business may be conducted through, and a portion of our income may be earned with respect to, our taxable REIT subsidiaries (“TRSs”), should we decide to utilize TRSs in the future, which are subject to corporate income tax.
As previously disclosed, we continue to explore alternative liquidity transactions on an opportunistic basis to maximize stockholder value.
Potential Liquidity Transactions As previously disclosed, we continue to explore alternative liquidity transactions on an opportunistic basis to maximize stockholder value.
Uppal worked at Mount Kellett Capital Management, a private investment organization, and served as Co-Head of North American Real Estate Investments. Mr. Uppal holds a B.S. from the University of St. Thomas and a M.S. from Columbia University. Gregory M.
Uppal worked at Mount Kellett Capital Management, a private 9 investment organization, and served as Co-Head of North American Real Estate Investments. Mr. Uppal holds a B.S. from the University of St. Thomas and a M.S. from Columbia University.
We may sell an asset before the end of the expected holding period if we believe that market conditions have maximized its value to us or the sale of the asset would otherwise be in our best interests.
We may dispose of an asset before the end of the expected holding period if we believe that market conditions have maximized its value to us or the sale of the asset would otherwise be in our best interests.
Examples of the alternative liquidity transactions that, depending on market conditions, may be available to us include a listing of our shares of common stock on a national securities exchange, adoption of a share repurchase plan, a liquidation of our assets, a sale of our company or a strategic business combination, in each case, which may include the in-kind distribution of our shares of common stock indirectly owned by certain Terra Funds to the ultimate investors in the Terra Funds.
Examples of the alternative liquidity transactions that, depending on market conditions, may be available to us include a listing of our shares of common stock on a national securities exchange, adoption of a share repurchase plan, a liquidation of our assets, a sale of our company or a strategic business combination, in each case, which may include the further in-kind distribution of our shares of common stock indirectly owned by certain of our affiliate funds to the ultimate investors in such affiliate funds.
Terra Capital Partners is a real estate credit focused investment manager based in New York City with a 19-year track record focused primarily on the origination and management of mezzanine loans, as well as first mortgage loans, bridge loans, and preferred equity investments in all major property types through multiple public and private pooled investment vehicles.
Terra Capital Partners is a real estate credit focused investment manager based in New York City with a 20-year track record focused primarily on the origination and management of mezzanine loans, as well as first mortgage loans, bridge loans, and preferred equity investments in all major property types through multiple pooled investment vehicles.
The Class B Common Stock rank equally with and have identical preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption as each other share of our common stock, except as set forth below with respect to conversion.
The Class B Common Stock rank equally with and have identical preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption as each other share of our common stock, except with respect to conversion.
The value of the properties underlying this capital was approximately $11.2 billion based on appraised values as of the closing dates of each financing.
The value of the properties underlying this capital was approximately $11.9 billion based on appraised values as of the closing dates of each financing.
In connection with our loan origination activities, we may pursue equity participation opportunities, or interests in the projects being financed, in instances when we believe that the risk-reward characteristics of the loan merit additional upside participation because of the possibility of appreciation in value of the underlying properties securing the loan.
In connection with our loan investments, we may pursue equity participation opportunities, or interests in the projects being financed, in instances when we believe that the risk-reward characteristics of the loan merit 5 additional upside participation because of the possibility of appreciation in value of the underlying properties securing the loan.
For additional information concerning these competitive risks, see “Item 1A. Risk Factors — New entrants in the market for commercial loan originations and acquisitions could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns” in this Annual Report on Form 10-K.
For additional information concerning these competitive risks, see “ Item 1A. Risk Factors — New entrants in the market for commercial loan originations and acquisitions could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns ” in this Annual Report on Form 10-K.
Our Manager, MAVIK Capital Management, LP and Terra Capital Partners We are externally managed by our Manager, which is registered as an investment adviser under the Investment Advisers Act of 1940 Act, and is a subsidiary of Terra Capital Partners. On April 1, 2021, MAVIK Capital Management, LP (“Mavik”), an entity controlled by Vikram S.
Our Manager, Mavik Capital Management, LP and Terra Capital Partners We are externally managed by our Manager, which is registered as an investment adviser under the Investment Advisers Act of 1940 Act, and is a subsidiary of Terra Capital Partners. Mavik Capital Management, LP (“Mavik”), an entity controlled by Vikram S.
Our Manager continually performs a hold-sell analysis on each asset in order to determine the optimal time to hold the asset and generate a strong return to our stockholders. Economic and market conditions may influence us to hold investments for longer or shorter periods of time.
Our Manager continually performs a hold-sell analysis on each asset in order to determine the optimal time to hold the asset and generate optimal returns 6 to our stockholders. Economic and market conditions may influence us to hold investments for longer or shorter periods of time.
As of December 31, 2022, our portfolio included underlying properties located in 31 markets, across ten states and includes property types such as multifamily housing, hotels, student housing, commercial offices, medical offices, mixed-use and industrial properties. The profile of these properties ranges from stabilized and value-added properties to pre-development and construction.
As of December 31, 2023, our portfolio included underlying properties located in 21 markets, across nine states and includes property types such as multifamily housing, hotels, student housing, commercial offices, medical offices, mixed-use, industrial and infrastructure properties. The profile of these properties ranges from stabilized and value-added properties to pre-development and construction.
We and certain of our subsidiaries may at times rely primarily on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the 1940 Act, or any other exclusions that may be available to us (other than the exclusions under Section 3(c)(1) or Section 3(c)(7)).
Rather, we and our subsidiaries are primarily engaged in the non-investment company businesses. 7 We and certain of our subsidiaries may at times rely primarily on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the 1940 Act, or any other exclusions that may be available to us (other than the exclusions under Section 3(c)(1) or Section 3(c)(7)).
The financings provided by all vehicles managed by Terra Capital Partners from January 2004 through December 31, 2022 have been secured by approximately 13.9 million square feet of office properties, 3.7 million square feet of retail properties, 5.9 million square feet of industrial properties, 5,058 hotel rooms and 28,493 apartment units.
The financings provided by all vehicles managed by Terra Capital Partners from January 2004 through December 31, 2023 have been secured by approximately 13.9 million square feet of office properties, 3.7 million square feet of retail properties, 7.1 million square feet of industrial properties, 5,058 hotel rooms and 30,080 apartment units.
At the Effective Time, except for any shares of common stock, par value $0.001 per share, of Terra BDC (“Terra BDC Common Stock”) held by us or any of our wholly owned subsidiaries or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of our newly designated Class B Common Stock, par value $0.01 per share (“Class B Common Stock”), and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38.
At the Effective Time, except for any shares of common stock, par value $0.001 per share, of Terra BDC (“Terra BDC Common Stock”) held by us or any of our wholly owned subsidiaries or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of our newly designated Class B Common Stock, par value $0.01 per share (“Class B Common Stock”), and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38. 1 Pursuant to the terms of the transactions described in the Merger Agreement, approximately 4,847,910 shares of Class B Common Stock were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of the Closing Date.
As part of our investment strategy, we: • target middle market loans of approximately $10 million to $50 million; • focus on the origination of new loans, not on the acquisition of loans originated by other lenders; • invest primarily in floating rate rather than fixed rate loans, but our Manager reserves the right to make debt investments that bear interest at a fixed rate; • originate loans expected to be repaid within one to five years; • maximize current income; • lend to creditworthy borrowers; • construct a portfolio that is diversified by property type, geographic location, tenancy and borrower; • source off-market transactions; and • hold loans until maturity unless, in our Manager’s judgment, market conditions warrant earlier disposition.
As part of our investment strategy, we: • target middle market loans of approximately $10 million to $50 million; • focus on the origination of new loans; 3 • focus on loans backed by properties in the United States; • invest primarily in floating rate rather than fixed rate loans, but our Manager reserves the right to make debt investments that bear interest at a fixed rate; • originate loans expected to be repaid within one to five years; • maximize current income; • lend to creditworthy borrowers; • construct a portfolio that is diversified by property type, geographic location, tenancy and borrower; • source off-market transactions; • hold loans until maturity unless, in our Manager’s judgment, market conditions warrant earlier disposition; and • invest in strategic non-real estate-related investments that align with our investment objectives and criteria.
Pinkus has served as the Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary of our company and the Chief Financial Officer and Chief Operating Officer of our Manager, and Terra Fund Advisors since January 2016, October 2017, and October 2017, respectively.
Pinkus has served as the Chief Financial Officer, Treasurer and Secretary of our company and the Chief Financial Officer and Chief Operating Officer of our Manager, and Terra Fund Advisors since January 2016, October 2017, and October 2017, respectively. Mr. Pinkus also served as the Chief Operating Officer of our company from January 2016 to February 2024.
Generally, we invest in mezzanine loans with last dollar loan-to-value ratios ranging from 60% to 85%. As of December 31, 2022, we owned five mezzanine loans with a total net principal amount of $26.8 million, which constituted 4.2% of our net loan investment portfolio. Preferred Equity Investments .
Generally, we invest in mezzanine loans with last dollar loan-to-value ratios ranging from 60% to 85%. As of December 31, 2023, we owned three mezzanine loans with a total net principal amount of $17.4 million, which constituted 3.4% of our net loan investment portfolio. Preferred Equity Investments .
We can generate additional revenues from these equity participations as a result of excess cash flows being distributed or as appreciated properties are sold or refinanced. As of December 31, 2022, we did not own any equity participations. Other Real Estate-Related Investments .
We can generate additional revenues from these equity participations as a result of excess cash flows being distributed or as appreciated properties are sold or refinanced. As of December 31, 2023, we did not own any equity participations. Operating Real Estate and Real Estate Owned .
We may pursue such a liquidity transaction as early as 2023, but we cannot provide any assurance that any alternative liquidity transaction will be available to us or, if available, that we will pursue or be successful in completing any such alternative liquidity transaction.
We cannot provide any assurance that any alternative liquidity transaction will be available to us or, if available, that we will pursue or be successful in completing any such alternative liquidity transaction.
However, such loans typically generate lower returns than subordinate debt such as mezzanine 4 loans, B-notes, or preferred equity investments. As of December 31, 2022, we owned 20 first mortgage loans with a total net principal amount of $456.4 million, which constituted 72.1% of our net loan investment portfolio.
However, such loans typically generate lower returns than subordinate debt such as mezzanine loans, B-notes, or preferred equity investments. As of December 31, 2023, we owned 13 first mortgage loans with a total net principal amount of $365.5 million, which constituted 71.7% of our net loan investment portfolio.
We are providing the address to our website solely for the information of investors. The information on our website is not a part of, nor is it incorporated by reference into, this Annual Report on Form 10-K.
The information on our website is not a part of, nor is it incorporated by reference into, this Annual Report on Form 10-K.
Uppal 39 Chairman of the Board of Directors, Chief Executive Officer and Chief Investment Officer Gregory M. Pinkus 58 Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary Daniel J. Cooperman 48 Chief Originations Officer Vikram S.
Uppal 40 Chairman of the Board of Directors, Chief Executive Officer and Chief Investment Officer Sarah Schwarzschild 43 Chief Operating Officer Gregory M. Pinkus 59 Chief Financial Officer, Treasurer and Secretary Daniel J. Cooperman 49 Chief Originations Officer Vikram S.
We continue to see attractive lending opportunities, and we expect market conditions to remain favorable for our strategy for the foreseeable future. Mezzanine Loans . These are loans secured by ownership interests in an entity that owns commercial real estate and that generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate.
We continue to see attractive lending opportunities, and we expect market conditions to remain favorable for our strategy for the foreseeable future. First Mortgage Loans . These loans generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate.
Targeted Assets Real Estate-Related Loans We originate, structure, fund and manage commercial real estate loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments related to high-quality commercial real estate in the United States.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in this Annual Report on Form 10‑K. Targeted Assets Real Estate-Related Investments We originate, structure, fund and manage commercial real estate loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments related to high-quality commercial real estate in the United States.
As of December 31, 2022, we used $413.1 million of senior mortgage loans as collateral for $261.0 million of borrowings under a revolving line of credit and two repurchase agreements. Subordinated Mortgage Loans (B-notes) . B-notes include structurally subordinated mortgage loans and junior participations in first mortgage loans or participations in these types of assets.
As of December 31, 2023, we used $342.9 million of senior mortgage loans as collateral for $204.9 million of borrowings under secured financing agreements. Subordinated Mortgage Loans (B-notes) . B-notes include structurally subordinated mortgage loans and junior participations in first mortgage loans or participations in these types of assets.
As of December 31, 2022, we owned a 27.9% equity interest in a limited partnership that invests in performing and non-performing mortgages, loans, mezzanines, B-notes and other credit instru ments supported by underlying commercial real estate assets. Additionally, we owned beneficial equity interests in three joint ventures that invest in real estate properties.
We may, to the extent consistent with our qualification as a REIT, invest in our targeted assets directly or through joint ventures. As of December 31, 2023, we owned equity interest in a limited partnership that invests in performing and non-performing mortgages, loans, mezzanines, B-notes and other credit instru ments supported by underlying commercial real estate assets.
We may invest in other real estate-related investments, which may include CMBS or other real estate debt or equity securities, so long as such investments do not constitute more than 15% of our assets .
We may invest in other real estate-related securities, which may include marketable securities and securitizations, so long as such securities do not constitute more than 15% of our assets. As of December 31, 2023, we owned $5.0 million in other real estate-related securities.
We may create B-notes by tranching our directly originated first mortgage loans generally through syndications of senior first mortgages or buy these loans directly from third-party originators.
We may create B-notes by tranching our directly originated first mortgage loans generally through syndications of senior first mortgages or buy these loans directly from third-party originators. We believe that the opportunities to both directly originate and to buy these types of loans from third parties on favorable terms will continue to be attractive.
Each of our loans was originated by Terra Capital Partners or its affiliates. Our portfolio is diversified based on location of the underlying properties, loan structure and property type.
We may also make strategic real estate equity and non-real estate-related investments that align with our investment objectives and criteria. Each of our investments was originated by Terra Capital Partners or its affiliates. Our portfolio is diversified based on location of the underlying properties, loan structure and property type.
We may also, to the extent consistent with our qualification as a REIT, acquire equity participations in the underlying collateral of some of such loans. We originate, structure and underwrite most, if not all, of our loans.
We may, to the extent consistent with our qualification as a REIT, invest in our targeted assets directly or through joint ventures and acquire equity participations in the underlying collateral of some of such loans.
We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2016.
These non-traded REIT provisions will spring into effect and become operative if we ultimately decide to register and sell shares in a non-traded REIT format. We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2016.
Stockholders may obtain copies of our filings with the SEC, free of charge from the website maintained by the SEC at www.sec.gov or from our website at www.terrapropertytrust.com. We will provide without charge a copy of this Annual Report on Form 10-K, including financial statements and schedules, upon written request delivered to our principal executive offices.
We will provide without charge a copy of this Annual Report on Form 10-K, including financial statements and schedules, upon written request delivered to our principal executive offices. 10 We are providing the address to our website solely for the information of investors.
The 2 entire senior management team has held leadership roles at many top international real estate and investment banking firms, including Mount Kellett Capital Management and Fortress Investment Group.
Members of the Terra Capital Partners management team have broad based, long-term relationships with major financial institutions, property owners and commercial real estate service providers. The entire senior management team has held leadership roles at many top international real estate and investment banking firms, including Mount Kellett Capital Management, Fortress Investment Group and BGO Strategic Capital Partners.
Uppal was a Managing Director on the Investment Team at Fortress Investment Group’s Credit and Real Estate Funds and Co-Head of North American Real Estate Investments at Mount Kellett Capital Management. Members of the Terra Capital Partners management team have broad based, long-term relationships with major financial institutions, property owners and commercial real estate service providers.
(“Axar Capital Management”) and its Head of Real Estate. Prior to Axar Capital Management, Mr. Uppal was a Managing Director on the Investment Team at Fortress Investment Group’s Credit and Real Estate Funds and Co-Head of North American Real Estate Investments at Mount Kellett Capital Management.
Item 1. Business. Overview We are a real estate credit focused company that originates, structures, funds and manages commercial real estate credit investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States, which we collectively refer to as our targeted assets.
We focus primarily on commercial real estate credit investments, including first mortgage loans, subordinated loans (including B-notes, mezzanine and preferred equity) and credit facilities throughout the United States, which we collectively refer to as our targeted assets. Our loans finance the acquisition, development or recapitalization of high-quality commercial real estate in the United States.
As of December 31, 2022, we owned five preferred equity investments with a total net principal amount of $121.2 million, which constituted 19.1% of our net loan investment portfolio. First Mortgage Loans . These loans generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate.
As of December 31, 2023, we owned five preferred equity investments with a total net principal amount of $126.6 million, which constituted 24.8% of our net loan investment portfolio. Equity Participations .
Pinkus (Chief Financial Officer) and Daniel Cooperman (Chief Originations Officer). Mr. Uppal was a Partner of Axar Capital Management L.P. (“Axar Capital Management”) and its Head of Real Estate. Prior to Axar Capital Management, Mr.
Uppal, our Chief Executive Officer and Chief Investment Officer, is the sole member of Terra Capital Partners. Terra Capital Partners is led by Mr. Uppal (Chief Executive Officer), Sarah Schwarzschild (Chief Operating Officer), Gregory M. Pinkus (Chief Financial Officer) and Daniel Cooperman (Chief Originations Officer). Mr. Uppal was a Partner of Axar Capital Management L.P.
We believe loans in this size range are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. Our investment objective is to provide attractive risk-adjusted returns to our stockholders, primarily through regular distributions. There can be no assurances that we will be successful in meeting our investment objective.
Our investment objective is to provide attractive risk-adjusted returns to our stockholders, primarily by earning high current income that allows for regular distributions, and, in certain instances, benefiting from potential capital appreciation. There can be no assurances that we will be successful in meeting our investment objective.
With our larger size and enhanced access to capital and capital flexibility, our company expects to deemphasize our use of participation arrangements. For additional information concerning our indebtedness, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10‑K.
With our larger size and enhanced access to capital and capital flexibility, our company expects to de-emphasize our use of participation arrangements. As of December 31, 2023, we did not have any obligations under participation agreements outstanding. For additional information concerning our indebtedness, see “ Item 7.
These equity interests had a total carrying value of $62.5 million and the credit facility had a principal balance of $28.8 million as of December 31, 2022 . Operating Real Estate From time to time, we may acquire operating real estate properties, including properties acquired in connection with foreclosures or deed in lieu of foreclosure.
From time to time, we may acquire operating real estate properties that meet our investment criteria. As well, we may assume control of properties acquired in connection with foreclosures or deed in lieu of foreclosure. As of December 31, 2023, we owned eight industrial buildings purchased in 2023.
Removed
Our loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. We focus on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties primarily in primary and secondary markets.
Added
Item 1. Business. Overview We are a real estate investment trust that originates, invests in and manages a diverse portfolio of real estate and real estate-related assets.
Removed
Pursuant to the terms of the transactions described in the Merger Agreement, approximately 4,847,910 shares of Class B Common Stock were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of the Closing Date.
Added
We focus on middle market loans in the approximately $10 million to $50 million range, which we believe are subject to less competition, offer higher risk-adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification.
Removed
On the date that is 180 calendar days (or, if such date is not a business day, the next business day) after the date (the “First Conversion Date”) of initial listing of shares of Class A Common Stock for trading on a national securities exchange or such earlier date as approved by our board of directors (our “Board”), one-third of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock.
Added
For additional information on our Class A Common Stock, please see the “ Potential Liquidity Transactions ” section below.
Removed
On the date that is 365 calendar days (or, if such date is not a business day, the next business day) after the date of initial listing of shares of Class A Common Stock for trading on a national securities exchange or such earlier date following the First Conversion Date as approved by our Board (the “Second Conversion Date”), one-half of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock.
Added
Distribution of Class B Common Stock by Terra Fund 5 Prior to undertaking the REIT Formation Transaction, the Terra Funds distributed a consent solicitation memorandum disclosing the details of the proposed transactions and received the requisite consent of investors in each of the Terra Funds to engage in the REIT Formation Transaction.
Removed
On the date that is 545 calendar days (or, if such date is not a business day, the next business day) after the date of initial listing of shares of Class A Common Stock for trading on a national securities exchange or such earlier date following the Second Conversion Date as approved by our Board (the “Third Conversion Date”), all of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock.
Added
The consent solicitation memorandum disclosed that Terra Fund 5 could in the future make a distribution-in-kind to its members of shares of our company, rather than a cash distribution. The limited liability company agreement of Terra Fund 5 provides that the term of Terra Fund 5 expired on December 31, 2023.
Removed
Uppal, our Chief Executive Officer, completed a series of related transactions that resulted in all of the outstanding interests in Terra Capital Partners being acquired by Mavik for a combination of cash and interests in Mavik (the “Recapitalization”).
Added
On December 20, 2023, Terra Fund 5 announced that effective December 29, 2023 (the “Distribution Date”), Terra Fund 5 would distribute all of its shares of Class B Common Stock to its members as part of the winding up of Terra Fund 5.
Removed
As part of the Recapitalization, a private fund managed by a division of a publicly-traded alternative asset manager, acquired a passive interest consisting of “non-voting securities,” as that term is defined under the 1940 Act, in Mavik. Terra Capital Partners is led by Vikram S. Uppal (Chief Executive Officer), Gregory M.
Added
On the Distribution Date, each member of Terra Fund 5 received 2,252.02 shares of Class B Common Stock for each unit of membership interest in Terra Fund 5 held by such member.
Removed
In addition, we intend to match our use of floating rate leverage with floating rate investments.
Added
Because Terra Fund 5 previously owned its interests in the shares of Class B Common Stock indirectly through its ownership of interests in Terra JV, prior to the Distribution Date, Terra JV first distributed the shares of Class B Common Stock to Terra Fund 5, and Terra Fund 5 then distributed those shares to its members on the Distribution Date.
Removed
As of December 31, 2022, we had outstanding indebtedness, consisting of borrowings under a mortgage loan of $29.3 million, unsecured notes payable of $123.5 million, a term loan of $25.0 million, a line of credit of $90.1 million and the repurchase agreements of $170.9 million.
Added
One of the potential future liquidity transactions that we continue to evaluate is a “direct listing” of the Class A Common Stock on a national securities exchange (i.e., a listing not involving a concurrent public offering of newly issued shares).
Removed
As of December 31, 2022, the amount remaining available under the line of credit and the repurchase agreements was $34.9 million and $224.1 million, respectively. Additionally, as of December 31, 2022, we had obligations under participation agreements with an aggregate outstanding principal amount of $12.6 million.
Added
If market conditions are not supportive of a direct listing that would in our view lead to a constructive trading environment for the Class A Common Stock, we will explore alternative paths to pursue our investment strategy and provide liquidity to our investors, including converting our company into a traditional “non-traded REIT.” As part of a potential conversion to a non-traded REIT, we would adopt a customary share repurchase plan pursuant to which our investors could request to have their shares of our common stock redeemed for cash.
Removed
As a result of the current credit market disruption related to the most recent recession and the decrease in capital available in this part of the capital structure, we believe that the opportunities to both directly originate and to buy these types of loans from third parties on favorable terms will continue to be attractive.
Added
To this end, as previously disclosed, we amended our articles of amendment and restatement on December 1, 2023 (the “A&R Articles”), to provide our board of directors (our “Board”) with greater flexibility to pursue a direct listing.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

81 edited+34 added−44 removed331 unchanged
Biggest changeThese conditions, or others we cannot predict, may adversely affect our results of operations, our financial position, the value of our assets and our cash flows. Inflation in the U.S. has accelerated recently and is currently expected to continue at an elevated level in the near-to medium-term, which may have an adverse impact on the valuation of our investments.
Biggest changeInflation in the U.S. has accelerated in recent years and is currently expected to continue at an elevated level in the near-to medium-term, which may have an adverse impact on the valuation of our investments. Inflation in the U.S. has accelerated in recent years and is currently expected to continue at an elevated level in the near-to medium-term.
Net operating income of an income-producing property can be adversely affected by, among other things: • tenant mix; • success of tenant businesses; • property management decisions; • property location, condition and design; • competition from comparable types of properties; • changes in national, regional or local economic conditions and/or specific industry segments; • declines in regional or local real estate values; • declines in regional or local rental or occupancy rates; 17 • increases in interest rates, real estate tax rates and other operating expenses; • costs of remediation and liabilities associated with environmental conditions; • the potential for uninsured or underinsured property losses; • changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance; • pandemics or other calamities that may affect tenants’ ability to pay their rent; and • acts of God, terrorism, social and political unrest, armed conflict, geopolitical events and civil disturbances.
Net operating income of an income-producing property can be adversely affected by, among other things: • tenant mix; • success of tenant businesses; • property management decisions; • property location, condition and design; • competition from comparable types of properties; • changes in national, regional or local economic conditions and/or specific industry segments; • declines in regional or local real estate values; • declines in regional or local rental or occupancy rates; • increases in interest rates, real estate tax rates and other operating expenses; • costs of remediation and liabilities associated with environmental conditions; • the potential for uninsured or underinsured property losses; • changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance; • pandemics or other calamities that may affect tenants’ ability to pay their rent; and • acts of God, terrorism, social and political unrest, armed conflict, geopolitical events and civil disturbances.
We are unable to predict whether U.S. federal, state or local authorities, or other pertinent bodies, will enact legislation, laws, rules, regulations, handbooks, guidelines or similar provisions that will affect our business or require changes in our practices in the future, and any such changes could have a material adverse effect on our results of operations, financial condition and cash flows.
We are unable to predict whether U.S. federal, state or local authorities, or other pertinent bodies, will enact legislation, laws, rules, 21 regulations, handbooks, guidelines or similar provisions that will affect our business or require changes in our practices in the future, and any such changes could have a material adverse effect on our results of operations, financial condition and cash flows.
To the extent that our portfolio is concentrated in any region, or by type of property, downturns relating generally to such region, type of borrower or security may result in defaults on a number of our assets within a short time period, which may 18 reduce our net income, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows.
To the extent that our portfolio is concentrated in any region, or by type of property, downturns relating generally to such region, type of borrower or security may result in defaults on a number of our assets within a short time period, which may reduce our net income, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows.
For instance, if interest rates rise, it is likely that the market price of our common stock will decrease as market rates on interest-bearing securities increase. If we complete an alternative liquidity transaction by pursuing an initial public offering or listing of our shares of common stock in the future, you will be subject to additional risks.
For instance, if interest 11 rates rise, it is likely that the market price of our common stock will decrease as market rates on interest-bearing securities increase. If we complete an alternative liquidity transaction by pursuing an initial public offering or listing of our shares of common stock in the future, you will be subject to additional risks.
B-notes are commercial real estate loans secured by a first mortgage on a single large commercial property or group of related properties and subordinated to a senior interest, referred to as an A-note. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-note owners after payment to the A-note owners.
B-notes are commercial real estate loans secured by a first mortgage on a single large 19 commercial property or group of related properties and subordinated to a senior interest, referred to as an A-note. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-note owners after payment to the A-note owners.
If any of the aforementioned occur, such event could have a material adverse effect on our results of operations, financial condition and cash flows. Changes in interest rates could adversely affect the demand for our target loans, the value of our loans, CMBS and other real-estate debt or equity assets and the availability and yield on our targeted assets.
If any of the aforementioned occur, such event could have a material adverse effect on our results of operations, financial condition and cash flows. 15 Changes in interest rates could adversely affect the demand for our target loans, the value of our loans, CMBS and other real-estate debt or equity assets and the availability and yield on our targeted assets.
There is risk that our acquisitions may not have the anticipated positive results, including results relating to: correctly assessing the asset quality of the assets being acquired; the total cost and time required to complete the integration successfully; being able to profitably deploy funds acquired in an acquisition; or the overall performance of the combined entity.
There is risk that our acquisitions may not have the anticipated positive results, including results relating to: correctly assessing the asset quality of 20 the assets being acquired; the total cost and time required to complete the integration successfully; being able to profitably deploy funds acquired in an acquisition; or the overall performance of the combined entity.
Because we cannot predict the amount of fees due our Manager, we cannot predict how precisely such fees will impact such payments. If our Manager causes us to enter into a transaction with an affiliate, our Manager may face conflicts of interest that would not exist if such transaction had been negotiated at arm’s-length with an independent party.
Because we cannot predict the amount of fees due our Manager, we cannot predict how precisely such fees will impact such payments. 26 If our Manager causes us to enter into a transaction with an affiliate, our Manager may face conflicts of interest that would not exist if such transaction had been negotiated at arm’s-length with an independent party.
In June 2016, the FASB issued an Accounting Standards Update (“ASU”), Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model. The new CECL standard became effective for us on January 1, 2023.
In June 2016, the FASB issued an Accounting Standards Update (“ASU”), Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which replaces the “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model. The new CECL standard became effective for us on January 1, 2023.
Accelerating repayment and terminating the agreements will require immediate repayment by us of the borrowed funds, which may require us to liquidate assets at a 28 disadvantageous time, causing us to incur further losses and adversely affecting our results of operations and financial condition, which may impair our ability to make principal and interest payments on our debt obligations.
Accelerating repayment and terminating the agreements will require immediate repayment by us of the borrowed funds, which may require us to liquidate assets at a disadvantageous time, causing us to incur further losses and adversely affecting our results of operations and financial condition, which may impair our ability to make principal and interest payments on our debt obligations.
There can be no assurance that any procedural protections will be sufficient to assure that these transactions will be made on terms that will be at least as favorable to us as those that would have been obtained in an arm’s-length transaction. 25 In addition, we will rely on our Manager for our day-to-day operations.
There can be no assurance that any procedural protections will be sufficient to assure that these transactions will be made on terms that will be at least as favorable to us as those that would have been obtained in an arm’s-length transaction. In addition, we will rely on our Manager for our day-to-day operations.
In addition, in a period of rising interest rates, our operating results will depend in large part on the difference between the income from our assets and our financing costs. We anticipate that, in most cases, the income from such assets will respond 15 more slowly to interest rate fluctuations than the cost of our borrowings.
In addition, in a period of rising interest rates, our operating results will depend in large part on the difference between the income from our assets and our financing costs. We anticipate that, in most cases, the income from such assets will respond more slowly to interest rate fluctuations than the cost of our borrowings.
These changes could have a material adverse effect on our results of operations, financial condition and cash flows. We may pursue and not be able to successfully complete securitization transactions, which could limit potential future sources of financing and could inhibit the growth of our business.
These changes could have a material adverse effect on our results of operations, financial condition and cash flows. 27 We may pursue and not be able to successfully complete securitization transactions, which could limit potential future sources of financing and could inhibit the growth of our business.
We may determine not to make or invest in real estate-related loans in any jurisdiction in 35 which we believe we have not complied in all material respects with applicable requirements, which reduce the amount of income we would otherwise receive. Item 1B. Unresolved Staff Comments. None.
We may determine not to make or invest in real estate-related loans in any jurisdiction in which we believe we have not complied in all material respects with applicable requirements, which reduce the amount of income we would otherwise receive. Item 1B. Unresolved Staff Comments. None.
Some of the factors that could negatively affect the market price of our common stock include: • our expected operating results and our ability to make distributions to our stockholders in the future; • volatility in our industry, the performance of the real estate-related loans we target, interest rates and spreads, the debt or equity markets, the general economy or the real estate market specifically, whether the result of market events or otherwise; • the availability of financing on acceptable terms or at all; • events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters or threatened or actual armed conflicts; • the availability of attractive risk-adjusted investment opportunities in real estate-related loans that satisfy our objectives and strategies; • the degree and nature of our competition; • changes in personnel of our Manager and lack of availability of qualified personnel; • unanticipated costs, delays and other difficulties in executing our long-term growth strategy; • the timing of cash flows, if any, from our investments due to the lack of liquidity of loans relative to more commonly traded securities; • an increase in interest rates; • the performance, financial condition and liquidity of our borrowers; and 10 • legislative and regulatory changes (including changes to laws governing the taxation of REITs or the exclusion or exemption from registration as an investment company under the 1940 Act).
Some of the factors that could negatively affect the fair value of our common stock include: • our expected operating results and our ability to make distributions to our stockholders in the future; • volatility in our industry, the performance of the real estate-related loans we target, interest rates and spreads, the debt or equity markets, the general economy or the real estate market specifically, whether the result of market events or otherwise; • the availability of financing on acceptable terms or at all; • events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters or threatened or actual armed conflicts; • the availability of attractive risk-adjusted investment opportunities in real estate-related loans that satisfy our objectives and strategies; • the degree and nature of our competition; • changes in personnel of our Manager and lack of availability of qualified personnel; • unanticipated costs, delays and other difficulties in executing our long-term growth strategy; • the timing of cash flows, if any, from our investments due to the lack of liquidity of loans relative to more commonly traded securities; • an increase in interest rates; • the performance, financial condition and liquidity of our borrowers; and • legislative and regulatory changes (including changes to laws governing the taxation of REITs or the exclusion or exemption from registration as an investment company under the 1940 Act).
Rating agencies may assign a lower than expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our loans and CMBS assets in the future. In addition, we may originate or acquire assets with no 19 rating or with below investment grade ratings.
Rating agencies may assign a lower than expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our loans and CMBS assets in the future. In addition, we may originate or acquire assets with no rating or with below investment grade ratings.
We would be required to pay the 26 Manager the base management fee in a particular period even if we experienced a net loss or a decline in the value of our portfolio during that period. We cannot predict the amounts of compensation to be paid to the Manager.
We would be required to pay the Manager the base management fee in a particular period even if we experienced a net loss or a decline in the value of our portfolio during that period. We cannot predict the amounts of compensation to be paid to the Manager.
Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected.
Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as performing loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected.
These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action letters were issued more than 20 years ago.
These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we 24 may face, and a number of these no-action letters were issued more than 20 years ago.
The value of the “investment 24 securities” held by an issuer must be less than 40% of the value of such issuer’s total assets on an unconsolidated basis (exclusive of U.S. government securities and cash items).
The value of the “investment securities” held by an issuer must be less than 40% of the value of such issuer’s total assets on an unconsolidated basis (exclusive of U.S. government securities and cash items).
Inflation can negatively impact the profitability of real estate assets with long-term leases that do not provide for short-term rent increases or that provide for rent increases with a lower annual percentage increase than inflation. Continued inflation, particularly at higher levels, may have an adverse impact on the valuation of our investments.
Inflation can negatively impact the profitability of real estate assets with long-term leases that do not provide for short-term rent increases or that provide for rent increases with a lower annual percentage increase than inflation. Continued inflation, particularly at elevated levels, may have an adverse impact on the valuation of our investments.
Examples of the alternative liquidity transactions that, depending on market conditions, may be available to us include a listing of our shares of common stock on a national securities exchange, adoption of a share repurchase plan, a liquidation of our assets, a sale of our company or a strategic business combination, in each case, which may include the in-kind distribution of our shares of common stock indirectly owned by certain Terra Funds to the ultimate investors in the Terra Funds.
Examples of the alternative liquidity transactions that, depending on market conditions, may be available to us include a listing of our shares of common stock on a national securities exchange, adoption of a share repurchase plan, a liquidation of our assets, a sale of our company or a strategic business combination, in each case, which may include the further in-kind distribution of our shares of common stock indirectly owned by certain of our affiliate funds to the ultimate investors in such affiliate funds.
As a result, our Manager and its affiliates (for the period that such shares continue to be held by Terra Fund 5 and Terra Fund 7 through Terra JV, and Terra Offshore REIT and not distributed to their respective equity owners), subject to a voting agreement as described below, have significant control over matters submitted to our stockholders for approval, including: • the election and removal of directors; and • the approval of any merger, consolidation or sale of all or substantially all of our assets.
As a result, our Manager and its affiliates (for the period that such shares continue to be held by Terra Fund 7 and Terra Offshore REIT and not distributed to their respective equity owners), subject to a voting agreement as described below, hold significant voting power over matters submitted to our stockholders for approval, including: • the election and removal of directors; and • the approval of any merger, consolidation or sale of all or substantially all of our assets.
Our Manager, our officers and the debt finance professionals assembled by our Manager will face competing demands relating to their time and this may cause our operations and our investors’ investments to suffer.
Our Manager, our officers and the investment professionals assembled by our Manager will face competing demands relating to their time and this may cause our operations and our investors’ investments to suffer.
We will rely on our Manager, its officers and on the debt finance professionals that our Manager retains to provide services to us for the day-to-day operation of our business. Messrs. Uppal, Pinkus and Cooperman are executive officers of our Manager as well as certain other funds managed by our Manager or its affiliates.
We will rely on our Manager, its officers and on the investment professionals that our Manager retains to provide services to us for the day-to-day operation of our business. Messrs. Uppal, Pinkus and Cooperman and Ms. Schwarzschild are executive officers of our Manager as well as certain other funds managed by our Manager or its affiliates.
Higher inflation and rising input costs may have adverse effects on our commercial real estate-related loans, commercial real estate-related debt securities and select commercial real estate equity investments, which are subject to the 13 risks typically associated with real estate.
Elevated inflation and input costs may have adverse effects on our commercial real estate-related loans, commercial real estate-related debt securities and select commercial real estate equity investments, which are subject to the risks typically associated with real estate.
We rely entirely on the management team and employees of our Manager for our day-to-day operations, and our Manager has significant discretion as to the implementation of our operating policies and strategies. Our success depends substantially on the efforts and abilities of the management team of our Manager, including Messrs. Uppal, Pinkus and Cooperman, and our Manager’s debt finance professionals.
We rely entirely on the management team and employees of our Manager for our day-to-day operations, and our Manager has significant discretion as to the implementation of our operating policies and strategies. Our success depends substantially on the efforts and abilities of the management team of our Manager, including Messrs. Uppal, Pinkus and Cooperman, Ms.
These short-term, non-real estate-related investments, if any, are expected to provide a lower net return than we will seek to achieve from investments in real estate-related loans and other commercial real estate assets.
These short-term, non-real estate-related investments, if any, may provide a lower net return than we seek to achieve from investments in real estate-related loans and other commercial real estate assets.
As a result of their interests in other programs, their obligations to other investors and the fact that they engage in and will continue to engage in other business activities on behalf of themselves and others, Messrs.
As a result of their interests in other programs, their obligations to other investors and the fact that they engage in and will continue to engage in other business activities on behalf of themselves and others, Messrs. Uppal, Pinkus and Cooperman and Ms.
Except as otherwise required by law or the provisions of other agreements to which the parties are or may in the future become bound, the parties have agreed to vote all shares of our common stock directly or indirectly owned in favor (or against removal) of the directors properly nominated in accordance with the 2020 Voting Agreement.
Except as otherwise required by law or the provisions of other agreements to which our Manager is or may in the future become bound, our Manager has agreed to vote all shares of our common stock directly or indirectly owned in favor (or against removal) of the directors properly nominated in accordance with the 2020 Voting Agreement.
We are generally required to distribute to our stockholders dividends equal to at least 90% of our REIT taxable income (calculated without regard to our net capital gain and the dividends paid deduction), although our reported financial results for United States generally accepted accounting principles (“U.S.
We are generally required to distribute to our stockholders dividends equal to at least 90% of our REIT taxable income (calculated without regard to our net capital gain and the dividends paid deduction), although our reported financial results for United States generally accepted accounting principles (“U.S. GAAP”) purposes may differ materially from our REIT taxable income.
See “Forward-Looking Statements.” Risks Related to Owning Our Common Stock There is no public market for our common stock and a market may never develop, which could cause our common stock to trade at a discount and make it difficult for holders of our common stock to sell their shares.
Some statements in this section constitute forward-looking statements. See “Forward-Looking Statements.” Risks Related to Owning Our Common Stock There is no public market for our common stock and a market may never develop, which could cause our common stock to trade at a discount and make it difficult for holders of our common stock to sell their shares.
Uppal, Pinkus and Cooperman face conflicts of interest in allocating their time between us and other Terra Capital Partners-sponsored programs and other business activities in which they are involved.
Schwarzschild face conflicts of interest in allocating their time between us and other Terra Capital Partners-sponsored programs and other business activities in which they are involved.
Uppal, Pinkus and Cooperman, and the other debt finance professionals of our Manager to identify suitable investments. Certain other companies managed by our Manager or its affiliates also rely on many of these same professionals. These funds have similar investment objectives as we do.
We rely on our officers and the officers of our Manager, including Messrs. Uppal, Pinkus and Cooperman, Ms. Schwarzschild and the other investment professionals of our Manager to identify suitable investments. Certain other companies managed by our Manager or its affiliates also rely on many of these same professionals. These funds have similar investment objectives as we do.
Deterioration of economic and market conditions in the future could negatively impact credit spreads as well as our ability to obtain financing, particularly from the debt markets, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows. Returns on our real estate-related loans may be limited by regulations.
Deterioration of economic and market conditions in the future could negatively impact credit spreads as well as our ability to obtain financing, particularly from the debt markets, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows.
In the course of our business, we may take title to real estate, and, as a result, we could be subject to environmental liabilities with respect to these properties.
We may be exposed to environmental liabilities with respect to properties to which we take title, which may in turn decrease the value of the underlying properties. In the course of our business, we may take title to real estate, and, as a result, we could be subject to environmental liabilities with respect to these properties.
Therefore, our portfolio of assets may, at times, be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations.
We are not required to observe specific diversification criteria. Therefore, our portfolio of assets may, at times, be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations.
The loss of any of such individuals could have a material adverse effect on our results of operations, financial condition and cash flows We face certain conflicts of interest with respect to our operations and our relationship with our Manager and its affiliates. We are subject to conflicts of interest arising out of our relationship with our Manager.
Schwarzschild and our Manager’s investment professionals. The loss of any of such individuals could have a material adverse effect on our results of operations, financial condition and cash flows We face certain conflicts of interest with respect to our operations and our relationship with our Manager and its affiliates.
Further, our loans are concentrated in office, industrial and multifamily property types representing approximately 27.1%, 23.3% and 16.5%, respectively, of our net loan portfolio as of December 31, 2022. As a result, a downturn in any particular industry in which we are heavily invested may significantly impact the aggregate returns we realize.
Further, our loans are concentrated in office, multifamily and industrial property types representing approximately 28.4%, 16.8% and 13.3%, respectively, of our net loan portfolio as of December 31, 2023. As a result, a downturn in any particular industry in which we are heavily invested may significantly impact the aggregate returns we realize.
We may pursue such a liquidity transaction as early as 2023, but we cannot provide any assurance that any alternative liquidity transaction will be available to us or, if available, that we will pursue or be successful in completing any such alternative liquidity transaction.
We cannot provide any assurance that any alternative liquidity transaction will be available to us or, if available, that we will pursue or be successful in completing any such alternative liquidity transaction.
In calculating our loan-to-value ratios for the purpose of determining maximum borrowing capacity, we use the estimated value of the property at the time of completion of the project, which increases the risk that, if we foreclose on the collateral before it is fully developed, we may not be able to sell the collateral for the amount owed to us by the borrower, which in turn may have an adverse effect on our results of operations, financial condition and cash flows.
In calculating our loan-to-value ratios for the purpose of determining maximum borrowing capacity, we use the estimated value of the property at the time of completion of the project, which increases the risk that, if we foreclose on the collateral before it is fully developed, we may not be able to sell the collateral for the amount owed to us by the borrower, which in turn may have an adverse effect on our results of operations, financial condition and cash flows. 18 Loans to small businesses involve a high degree of business and financial risk, which can result in substantial losses that would adversely affect our business, results of operation and financial condition.
In addition, quarantines, states of emergencies and other measures taken to curb the spread of the COVID-19 pandemic may negatively impact the ability of such properties to continue to obtain necessary goods and services or provide adequate staffing, which may also adversely affect our investments and operating results.
In addition, quarantines, states of emergencies and other measures taken to curb the spread of any such future outbreak may negatively impact the ability of such properties to continue to obtain necessary goods and services or provide adequate staffing, which may also adversely affect our investments, business, financial condition and results of operations.
In the event that our Manager underestimates the losses relative to the price we pay for a particular investment, we may experience losses with respect to such investment, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows. 14 Further, from time to time and in the ordinary course of business, our Manager may make exceptions to our predetermined loan underwriting guidelines.
In the event that our Manager underestimates the losses relative to the price we pay for a particular investment, we may experience losses with respect to such investment, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows.
Any reduction in our ability to make principal and 27 interest payments on our debt obligations, including the term loan, the unsecured notes and the revolving line of credit, may have a material adverse effect on our results of operations, financial condition and cash flows.
Any reduction in our ability to make principal and interest payments on our debt obligations, including the term loan, the unsecured notes and the revolving line of credit, may have a material adverse effect on our results of operations, financial condition and cash flows. Our Manager is authorized to follow broad investment guidelines that have been approved by our Board.
Any failure to make payments when due or upon acceleration could result in the foreclosure upon our assets by our lenders. Our inability to access funding could have a material adverse effect on our results of operations, financial condition and cash flows. We may rely on short-term financing and thus are especially exposed to changes in the availability of financing.
Any failure to make payments when due or upon acceleration could result in the foreclosure upon our assets by our lenders. 28 Our inability to access funding could have a material adverse effect on our results of operations, financial condition and cash flows.
In addition, our Manager’s and its affiliates’ voting control may discourage transactions involving a change of control of our company, including transactions in which a holder of our common stock might otherwise receive a premium for his or her shares over the then-current market price.
Our Manager’s voting power may discourage transactions involving a change of control of our company, including transactions in which a holder of our common stock might otherwise receive a premium for his or her shares over the then-current market price. Holders of our common stock may receive distributions on a delayed basis or distributions may decrease over time.
During the loan underwriting process, appraisals are generally obtained on the collateral underlying each prospective loan. The quality of these appraisals may vary widely in accuracy and consistency.
Deficiencies in appraisal quality in the mortgage loan origination process may result in increased principal loss severity. During the loan underwriting process, appraisals are generally obtained on the collateral underlying each prospective loan. The quality of these appraisals may vary widely in accuracy and consistency.
As a result of a significant portion of our investments being in preferred equity of entities that own mezzanine loans and first mortgages secured by office, multifamily and hospitality properties located in the United States, the ongoing COVID-19 pandemic will impact our investments and operating results to the extent that it reduces occupancy, increases the cost of operation or results in limited hours or necessitates the closure of such properties.
As a result of a significant portion of our investments being in preferred equity, mezzanine loans and first mortgages secured by office, multifamily and hospitality properties located in the United States, any future local, regional, national or international outbreak of a contagious disease, including COVID-19 and its variants or any other similar diseases, will impact our investments and operating results to the extent that it reduces occupancy, increases the cost of operation or results in limited hours or necessitates the closure of such properties.
Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation. 20 Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could have an adverse effect on our results of operations, financial condition and cash flows. results.
Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could have an adverse effect on our results of operations, financial condition and cash flows. results.
We currently have outstanding indebtedness and expect to use additional borrowings, such as first mortgage financings, credit facilities, senior notes, term loans and repurchase agreements, and other financings, as part of our operating strategy.
We may rely on short-term financing and thus are especially exposed to changes in the availability of financing. We currently have outstanding indebtedness and expect to use additional borrowings, such as first mortgage financings, credit facilities, senior notes, term loans and repurchase agreements, and other financings, as part of our operating strategy.
To the extent that an owner of an underlying property becomes liable for removal costs, the ability of the owner to make debt payments may be reduced, which in turn may adversely affect the value of the relevant mortgage-related assets held by us.
To the extent that an owner of an underlying property becomes liable for removal costs, the ability of the owner to make debt payments may be reduced, which in turn may adversely affect the value of the relevant mortgage-related assets held by us. 23 Insurance on the properties underlying our loans may not adequately cover all losses and uninsured losses could materially and adversely affect us.
To the extent we take advantage of some or all of the reduced reporting requirements applicable to emerging growth companies or smaller reporting companies, an investment in our company may be less attractive to investors. 23 We may be exposed to environmental liabilities with respect to properties to which we take title, which may in turn decrease the value of the underlying properties.
To the extent we take advantage of some or all of the reduced reporting requirements applicable to emerging growth companies or smaller reporting companies, an investment in our company may be less attractive to investors.
This could result in a loan portfolio with a different risk profile. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described herein.
This could result in a portfolio with a different risk profile. A change in our investment strategy may increase our exposure to risks applicable to other industries. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described herein.
Also, as a result of this competition, desirable investments in our targeted assets may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives.
Also, as a result of this competition, desirable investments in our targeted assets may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives. 16 Our loans are dependent on the ability of the commercial property owner to generate net income from operating the property, which may result in the inability of such property owner to repay a loan, as well as the risk of foreclosure.
Pursuant to the terms of the Management Agreement, our Manager is responsible for, among other services, managing the investment and reinvestment of our assets, subject to the oversight and supervision of our Board. Our investors will not have input into investment decisions.
Pursuant to the terms of the Management Agreement, our Manager is responsible for, among other services, managing the investment and reinvestment of our assets, subject to the oversight and supervision of our Board. We may also make strategic non-real estate-related investments that align with our investment objectives and criteria. Our investors will not have input into investment decisions.
Our Manager is authorized to follow broad investment guidelines that have been approved by our Board. Those investment guidelines, as well as our target assets, investment strategy, financing strategy and hedging policies with respect to investments, originations, acquisitions, growth, operations, indebtedness, capitalization and distributions, may be changed at any time without notice to, or the consent of, our investors.
Those investment guidelines, as well as our target assets, investment strategy, financing strategy and hedging policies with respect to investments, originations, acquisitions, growth, operations, indebtedness, capitalization and distributions, may be changed at any time without notice to, or the consent of, our investors. We may make strategic non-real estate-related investments that align with our investment objectives and criteria.
Insurance on the properties underlying our loans may not adequately cover all losses and uninsured losses could materially and adversely affect us. Generally, our borrowers will be responsible for the costs of insurance coverage for the properties we lease, including for casualty, liability, fire, floods, earthquakes, extended coverage and rental or business interruption loss.
Generally, our borrowers will be responsible for the costs of insurance coverage for the properties we lease, including for casualty, liability, fire, floods, earthquakes, extended coverage and rental or business interruption loss.
Such conflicts may not be resolved in our favor and our investors will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before or after making their investment.
Such conflicts may not be resolved in our favor and our investors will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before or after making their investment. 25 Our officers and the officers of our Manager are also officers of other affiliates of our Manager; therefore, our officers and the officers of our Manager will face competing demands based on the allocation of investment opportunities between us and our affiliates.
Consistent with the original voting agreement dated February 8, 2018, for the period that Terra REIT Advisors remains our external manager, Terra REIT Advisors will have the right to nominate two individuals to serve as our directors and, until Terra JV no longer holds at least 10% of our outstanding shares of common stock, Terra JV will have the right to nominate one individual to serve as one of our director.
Consistent with the original voting agreement dated February 8, 2018, for the period that Terra REIT Advisors remains our external manager, it will have the right to nominate two individuals to serve as our directors.
We may enter into additional transactions with our Manager, its affiliates, or entities managed by our Manager or its affiliates.
We are subject to conflicts of interest arising out of our relationship with our Manager. We may enter into additional transactions with our Manager, its affiliates, or entities managed by our Manager or its affiliates.
From time to time, before appropriate real estate-related investments can be identified, our Manager may choose to have us invest in interest-bearing, short-term investments, including money market accounts and/or funds, that are consistent with our intention to maintain our qualification as a REIT.
Even if investment opportunities are available, there can be no assurance that the due diligence processes of our Manager will uncover all relevant facts or that any particular investment will be successful. 14 From time to time, before appropriate real estate-related investments can be identified, our Manager may choose to have us invest in interest-bearing, short-term investments, including money market accounts and/or funds, among others, that align with our investment objectives and criteria and are consistent with our intention to maintain our qualification as a REIT.
Risks Related to Our Business Changes in national, regional or local economic, demographic or real estate market conditions may adversely affect our results of operations, our financial position, the value of our assets and our cash flows.
Our originations or acquisitions may be highly speculative and aggressive, and therefore an investment in our shares of common stock may not be suitable for someone with lower risk tolerance. 13 Risks Related to Our Business Changes in national, regional or local economic, demographic or real estate market conditions may adversely affect our results of operations, our financial position, the value of our assets and our cash flows.
Our loans are concentrated in California, New York, Georgia, Texas and New Jersey representing approximately 24.0%, 14.5%, 11.4%, 10.7% and 9.8%, respectively, of our net loan portfolio as of December 31, 2022. Additionally, we own a multi-tenant office building in California.
Our loans are concentrated in California, New York, New Jersey, Georgia and Utah representing approximately 23.4%, 17.8%, 16.2%, 14.6% and 9.7%, respectively, of our net loan portfolio as of December 31, 2023. Additionally, we own eight industrial buildings in Texas.
If a person is able to circumvent our security measures, he or she could destroy or misappropriate valuable information or disrupt our operations.
If a person is able to circumvent our security measures, he or she could destroy or misappropriate valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation.
Loans originated with exceptions may result in a higher number of delinquencies and defaults, which could have a material and adverse effect on our results of operations, financial condition and cash flows. Deficiencies in appraisal quality in the mortgage loan origination process may result in increased principal loss severity.
Further, from time to time and in the ordinary course of business, our Manager may make exceptions to our predetermined loan underwriting guidelines. Loans originated with exceptions may result in a higher number of delinquencies and defaults, which could have a material and adverse effect on our results of operations, financial condition and cash flows.
Prospective investors should consult with their tax advisors regarding the U.S. federal, state, local and foreign income and other tax consequences applicable to an investment in us. General Risk Factors The effects of the ongoing COVID-19 pandemic, as well as any future pandemics or similar events, and the actions taken in response thereto, may adversely affect our investments and operations.
Prospective investors should consult with their tax advisors regarding the U.S. federal, state, local and foreign income and other tax consequences applicable to an investment in us. General Risk Factors COVID-19, or the future outbreak of other highly infectious or contagious diseases, could materially and adversely impact or disrupt our investments, business, financial condition and results of operations.
If we fail to adapt to or comply with regulatory requirements or investor or stakeholder ESG standards, our reputation, ability to do business with certain partners, access to capital, operations and earnings could be adversely affected. 21 Risks Related to Regulation The increasing number of proposed U.S. federal, state and local laws may affect certain mortgage-related assets in which we invest and could materially increase our cost of doing business.
Risks Related to Regulation The increasing number of proposed U.S. federal, state and local laws may affect certain mortgage-related assets in which we invest and could materially increase our cost of doing business.
We are an “emerging growth company,” and a “smaller reporting company” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies or smaller reporting companies will make an investment in us less attractive to investors.
Under the CECL model, if we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations. 22 We are an “emerging growth company,” and a “smaller reporting company” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies or smaller reporting companies will make an investment in us less attractive to investors.
This differs significantly from the “incurred loss” model required under current U.S. GAAP, which delays recognition until it is probable a loss has been incurred. The adoption of ASU 2016-13 resulted in an incremental reserve of approximately $4.6 million, which included reserve on future loan funding commitments.
This differs significantly from the “incurred loss” model required under current U.S. GAAP, which delays recognition until it is probable a loss has been incurred.
We continue to prudently evaluate our liquidity and review the rate of future distributions in light of our financial condition and the applicable minimum distribution requirements under applicable REIT tax laws and regulations.
For the years ended December 31, 2023 and 2022, our Board declared total cash distributions of $0.76 and $0.78 per share, respectively, which were paid monthly. We continue to prudently evaluate our liquidity and review the rate of future distributions in light of our financial condition and the applicable minimum distribution requirements under applicable REIT tax laws and regulations.
We have in the past and may in the future seek to grow our business by acquiring other businesses that we believe will complement or augment our existing businesses. For example, we completed the BDC Merger in October 2022. We cannot predict with certainty the benefits of such acquisitions, which often constitute multi-year endeavors.
We have in the past and may in the future seek to grow our business by acquiring other businesses that we believe will complement or augment our existing businesses. For example, we completed the BDC Merger in October 2022. Acquisition targets may not have a history of synergistic business operations, practices or, if applicable, investment criteria and strategies.
If property securing or underlying loans become real estate owned as a result of foreclosure, we bear the risk of not being able to sell the property and recovering our investment and of being exposed to the risks attendant to the ownership of real property.
If property securing or underlying loans become real estate owned as a result of foreclosure, we bear the risk of not being able to sell the property and recovering our investment and of being exposed to the risks attendant to the ownership of real property. 17 Our loan portfolio may at times be concentrated in certain property types or secured by properties concentrated in a limited number of geographic areas, which increases our exposure to economic downturn with respect to those property types or geographic locations.
Before making an investment decision, you should carefully consider the following risk factors together with all of the other information contained in this Annual Report on Form 10-K.The risks set forth below are not the only risks we face, and we may face other risks that we have not yet identified, which we do not currently deem material or which are not yet predictable.
Item 1A. Risk Factors. Before making an investment decision, you should carefully consider the following risk factors together with all of the other information contained in this Annual Report on Form 10-K.
Following the consummation of the BDC Merger and as of December 31, 2022, Terra JV, former shareholders of Terra BDC and Terra Offshore REIT held 70.0%, 19.9% and 10.1% of the issued and outstanding shares of the Class B Common Stock, respectively. 11 Our principal stockholders, which are currently controlled by affiliates of our Manager, own a significant amount of our outstanding shares of common stock, which is sufficient to approve or veto most corporate actions requiring a vote of our stockholders.
As of December 31, 2023, Terra Fund 7 and Terra Offshore REIT held approximately 8.7% and 10.1% of our issued and outstanding Class B Common Stock, respectively. Our principal stockholders, which are currently controlled by affiliates of our Manager, own a significant amount of our outstanding shares of common stock.
These complexities could lead to a delay in the preparation of financial information and the delivery of this information to our investors.
These complexities could lead to a delay in the preparation of financial information and the delivery of this information to our investors. Changes in accounting rules, interpretations or our assumptions could also undermine our ability to prepare timely and accurate financial statements, which could result in a lack of investor confidence in our financial information.
Terra Fund 5 and Terra Fund 7 are managed by Terra Fund Advisors, which is 51% owned by the estate of Bruce Batkin, Dan Cooperman and Simon Mildé and 49% owned by an affiliate of Axar Capital Management.
Terra Fund 7 is managed by Terra Fund Advisors, 12 which is 51% owned by the estate of Bruce Batkin, Dan Cooperman and Simon Mildé and 49% owned by Terra Capital Partners. On March 2, 2020, we, Terra Fund 5, Terra JV and our Manager also entered into the Amended and Restated Voting Agreement (the “2020 Voting Agreement”).
Inflation in the U.S. has accelerated recently and is currently expected to continue at an elevated level in the near-to medium-term. Further, heightened competition for workers, supply chain issues, the relocation of foreign production and manufacturing businesses to the U.S., and rising energy and commodity prices have contributed to increasing wages and other economic inputs.
While inflation in the U.S. appears to be easing gradually, there can be no assurance that further deterioration in financial market and economic conditions will not occur. Further, heightened competition for workers, the relocation of foreign production and manufacturing businesses to the U.S., and rising energy and commodity prices have contributed to increasing wages and other economic inputs.
In addition, the former BDC stockholders and Terra Offshore REIT owns shares of our common stock representing 19.9% and 10.1% of the voting power of our outstanding shares of common stock, respectively. Our Manager also serves as manager to Terra Offshore REIT.
Terra Fund 7 and Terra Offshore REIT hold approximately 8.7% and 10.1% of our issued and outstanding Class B Common Stock, respectively. Our Manager also serves as manager to Terra Offshore REIT.
Our Manager is a subsidiary of Terra Capital Partners. On April 1, 2021, Mavik, an entity controlled by Vikram S. Uppal, our Chief Executive Officer, completed a series of related transactions that resulted in all of the outstanding interests in Terra Capital Partners being acquired by Mavik for a combination of cash and interests in Mavik.
Our Manager is a subsidiary of Terra Capital Partners. Mavik, an entity controlled by our Chief Executive Officer and Chief Investment Officer, is the sole member of Terra Capital Partners.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Additionally, as of December 31, 2022, we owned a multi-tenant office building that is subject to a ground lease.
Biggest changeOcean Avenue Santa Monica Realty LLC, Superior Court of California, Los Angeles County, Case No. 20STCV34217). Additionally, from time to time, we and individuals employed by us and our Manager may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our borrowers and investees.
The ground lease provides for a new base rent every 5 years based on the greater of the annual base rent for the prior lease year or 9% of the fair market value of the land. The next rent reset on the ground lease is scheduled for November 1, 2025.
Item 3. Legal Proceedings. We previously owned a multi-tenant office building that is subject to a ground lease. The ground lease provides for a new base rent every 5 years based on the greater of the annual base rent for the prior lease year or 9% of the fair market value of the land.
We are currently litigating with the landlord with respect to the appropriate method for determining the fair value of the land for purposes of setting the ground rent – Terra Ocean Ave., LLC v. Ocean Avenue Santa Monica Realty LLC, Superior Court of California, Los Angeles County, Case No. 20STCV34217.
The next rent reset on the ground lease is scheduled for November 1, 2025. We were litigating with the landlord with respect to the appropriate method for determining the fair value of the land for purposes of setting the ground rent.
Removed
We believe this determination should be based on comparable sales, while the landlord insists that the rent under the ground lease itself is also relevant. Our position has prevailed in all three of the prior arbitrations to reset the ground rent. We intend vigorously to pursue the litigation.
Added
On October 19, 2023, we conveyed our interest in the property to a subsidiary of Centennial Bank by deed-in-lieu of foreclosure. Accordingly, we are no longer a party to the ground lease and have taken the necessary steps to terminate the associated litigation (styled Terra Ocean Ave., LLC v.
Removed
While we believe our arguments will likely prevail, the outcome of the legal proceeding cannot be predicted with certainty. If the landlord prevails, the future rent reset determinations could result in significantly higher ground rent, which would likely result in a significant diminution in the value of our interest in the ground lease and the office building. Item 4.
Added
While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that such proceedings will have a material effect upon our financial condition or results of operations.

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. Market Information There is no established trading market for our Class B Common Stock. As of March 10, 2023, we had 24,335,379 shares of Class B Common Stock outstanding held by 2,121 investors.
Biggest changeItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information There is no established trading market for our Class B Common Stock. As of March 15, 2024, we had 24,336,033 shares of Class B Common Stock outstanding held by 5,379 investors.
As of March 10, 2023, there were no outstanding options, warrants to purchase our common stock or securities convertible into our shares of common stock. Sales of Unregistered Equity Securities There were no sales of unregistered equity securities during the year ended December 31, 2022.
As of March 15, 2024, there were no outstanding options, warrants to purchase our common stock or securities convertible into our shares of common stock. Sales of Unregistered Equity Securities There were no sales of unregistered equity securities during the year ended December 31, 2023.
Issuer Purchases of Equity Securities There were no issuer purchases of equity securities during the year ended December 31, 2022. Item 6. [Reserved]. 36
Issuer Purchases of Equity Securities There were no issuer purchases of equity securities during the year ended December 31, 2023. Item 6. [Reserved].

Item 7. Management's Discussion & Analysis

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

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Biggest changeDue to the illiquidity of the loans, valuation of our loans may be difficult, as there generally will be no established markets for these loans. 42 Results of Operations The following table presents the comparative results of our operations: Years Ended December 31, 2022 2021 Change Revenues Interest income $ 42,591,972 $ 36,743,470 $ 5,848,502 Real estate operating revenue 11,451,914 8,894,991 2,556,923 Prepayment fee income 1,984,061 190,997 1,793,064 Other operating income 586,499 855,799 (269,300) 56,614,446 46,685,257 9,929,189 Operating expenses Operating expenses reimbursed to Manager 8,076,321 6,916,371 1,159,950 Asset management fee 6,556,492 5,134,149 1,422,343 Asset servicing fee 1,560,044 1,181,924 378,120 Provision for loan losses 11,813,409 10,904,163 909,246 Real estate operating expenses 5,005,551 5,003,893 1,658 Depreciation and amortization 6,530,595 3,989,114 2,541,481 Impairment charge 1,604,989 3,395,430 (1,790,441) Professional fees 3,697,792 1,795,856 1,901,936 Directors fees 192,497 145,000 47,497 Other 747,535 448,503 299,032 45,785,225 38,914,403 6,870,822 Operating income 10,829,221 7,770,854 3,058,367 Other income and expenses Interest expense from obligations under participation agreements (3,180,771) (10,596,545) 7,415,774 Interest expense on repurchase agreement payable (7,913,942) (142,495) (7,771,447) Interest expense on mortgage loan payable (2,173,114) (2,449,239) 276,125 Interest expense on revolving line of credit (2,674,568) (911,811) (1,762,757) Interest expense on term loan payable (524,344) (6,835,877) 6,311,533 Interest expense on unsecured notes payable (6,682,937) (3,173,673) (3,509,264) Interest expense on secured borrowing (1,507,572) (1,576,502) 68,930 Net unrealized (losses) gains on marketable securities (122,299) 22,500 (144,799) Loss on sale of real estate (51,984) — (51,984) Income from equity investment in unconsolidated investments 2,731,477 5,925,802 (3,194,325) Gain on sale of interests in unconsolidated investments 799,827 — 799,827 Realized loss on loan repayments — (517,989) 517,989 Gain on extinguishment of obligations under participation agreements 3,435,902 — 3,435,902 Realized gains on marketable securities 83,411 129,248 (45,837) (17,780,914) (20,126,581) 2,345,667 Net loss $ (6,951,693) $ (12,355,727) $ 5,404,034 Net Loan Portfolio In assessing the performance of our loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements, term loan payable, revolving credit facility and repurchase agreement payable. 43 The following table presents a reconciliation of our loan portfolio on a weighted average basis from gross to net : Year Ended December 31, 2022 Year Ended December 31, 2021 Weighted Average Principal Amount (1) Weighted Average Coupon Rate (2) Weighted Average Principal Amount (1) Weighted Average Coupon Rate (2) Total portfolio Gross loans $ 550,062,087 10.7 % $ 456,344,152 8.5 % Obligations under participation agreements and secured borrowing (59,931,021) 12.1 % (114,437,021) 11.0 % Repurchase agreement payable (167,507,961) 6.2 % (6,349,642) 2.6 % Term loan payable (10,303,678) 5.3 % (103,433,296) 5.3 % Revolving line of credit (47,383,467) 7.6 % (16,721,744) 4.0 % Net loans (3) $ 264,935,960 14.0 % $ 215,402,449 9.2 % Senior loans Gross loans 408,607,321 9.7 % 272,577,220 6.5 % Obligations under participation agreements and secured borrowing (24,800,580) 8.1 % (51,693,824) 8.9 % Repurchase agreement payable (167,507,961) 6.2 % (6,349,642) 2.6 % Term loan payable (10,303,678) 5.3 % (103,433,296) 5.3 % Revolving line of credit (47,383,467) 7.6 % (16,721,744) 4.0 % Net loans (3) $ 158,611,635 14.6 % $ 94,378,714 7.2 % Subordinated loans (4) Gross loans 141,454,766 13.6 % 183,766,932 11.4 % Obligations under participation agreements (35,130,441) 13.7 % (62,743,197) 12.8 % Net loans (3) $ 106,324,325 13.6 % $ 121,023,735 10.7 % _______________ (1) Amount is calculated based on the number of days each loan is outstanding.
Biggest changeDue to the illiquidity of the loans, valuation of our loans may be difficult, as there generally will be no established markets for these loans. 43 Results of Operations The following table presents the comparative results of our operations: Years Ended December 31, 2023 2022 Change Revenues Interest income $ 56,140,437 $ 42,591,972 $ 13,548,465 Real estate operating revenue 11,050,716 11,451,914 (401,198) Prepayment fee income — 1,984,061 (1,984,061) Other operating income 722,881 586,499 136,382 67,914,034 56,614,446 11,299,588 Operating expenses Operating expenses reimbursed to Manager 9,234,357 8,076,321 1,158,036 Asset management fee 7,807,198 6,556,492 1,250,706 Asset servicing fee 1,857,765 1,560,044 297,721 Provision for credit losses 45,548,803 11,813,409 33,735,394 Real estate operating expenses 4,586,245 5,005,551 (419,306) Depreciation and amortization 6,968,985 6,530,595 438,390 Impairment charge 11,765,540 1,604,989 10,160,551 Professional fees 3,741,720 3,697,792 43,928 Directors’ fees 347,714 192,497 155,217 Other 539,957 747,535 (207,578) 92,398,284 45,785,225 46,613,059 Operating (loss) income (24,484,250) 10,829,221 (35,313,471) Other income and expenses Interest expense on secured financing (28,113,245) (14,793,540) (13,319,705) Interest expense on unsecured notes payable (9,643,974) (6,682,937) (2,961,037) Interest expense on obligations under participation agreements (1,353,006) (3,180,771) 1,827,765 Gain on extinguishment of participation liability 14,079,379 3,435,902 10,643,477 Unrealized losses on investments, net (316,573) (122,299) (194,274) (Loss) income from equity investment in unconsolidated investments (2,383,938) 2,731,477 (5,115,415) Gain on sale of interests in unconsolidated investments — 799,827 (799,827) Loss on disposal of real estate (4,211,153) (51,984) (4,159,169) Realized (losses) gains on investments, net (459,279) 83,411 (542,690) (32,401,789) (17,780,914) (14,620,875) Net loss $ (56,886,039) $ (6,951,693) $ (49,934,346) 44 Net Loan Portfolio In assessing the performance of our loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements, notes payable, term loan payable, revolving credit facility and repurchase agreements payable.
Cash Flows Used in Investing Activities For the year ended December 31, 2022, cash flows used in investing activities were $49.1 million, primarily related to origination and purchase of loans of $290.0 million and purchase of equity interests in unconsolidated investments of $25.5 million, partially offset by proceeds from repayments of loans of $197.5 million, proceeds from sale of interests in joint ventures of $33.7 million, cash and restricted cash acquired in connection with the BDC Merger of $24.6 million, proceeds from sale of real estate of $8.6 million and proceeds from sale of marketable securities of $1.3 million.
For the year ended December 31, 2022, cash flows used in investing activities were $49.1 million, primarily related to origination and purchase of loans of $290.0 million and purchase of equity interests in unconsolidated investments of $25.5 million, partially offset by proceeds from repayments of loans of $197.5 million, proceeds from sale of interests in joint ventures of $33.7 million, cash and restricted cash acquired in connection with the BDC Merger of $24.6 million, proceeds from sale of real estate of $8.6 million and proceeds from sale of marketable securities of $1.3 million.
At the Effective Time, except for any shares of Terra BDC Common Stock held by us or any of our wholly owned subsidiaries or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of our newly designated Class B Common Stock, and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by 37 multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38.
At the Effective Time, except for any shares of Terra BDC Common Stock held by us or any of our wholly owned subsidiaries or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of our newly designated Class B Common Stock, and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38.
With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to slow; and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase.
With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate and real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to slow; 42 and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase.
Cost Sharing and Reimbursement Agreement with Terra LLC We have entered into a cost sharing and reimbursement agreement with Terra LLC, effective October 1, 2022 pursuant to which Terra LLC will be responsible for its allocable share of our expenses, including fees paid by us to our Manager based on 51 relative assets under management.
Cost Sharing and Reimbursement Agreement with Terra LLC We have entered into a cost sharing and reimbursement agreement with Terra LLC, effective October 1, 2022 pursuant to which Terra LLC will be responsible for its allocable share of our expenses, including fees paid by us to our Manager based on relative assets under management.
Income from Equity Investment in Unconsolidated Investments In August 2020, we entered into a subscription agreement with RESOF, an affiliate managed by our Manager, whereby we committed to fund up to $50.0 million to purchase partnership interest in RESOF.
(Loss) Income from Equity Investment in Unconsolidated Investments In August 2020, we entered into a subscription agreement with RESOF, an affiliate managed by our Manager, whereby we committed to fund up to $50.0 million to purchase partnership interest in RESOF.
Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.
Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may 50 change in subsequent periods.
Recent Developments BDC Merger On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022, Terra BDC merged with and into Terra LLC, our wholly owned subsidiary, with Terra LLC continuing as the surviving entity of the merger and as our wholly owned subsidiary.
Recent Developments Merger Agreements On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022, Terra BDC merged with and into Terra LLC, our wholly owned subsidiary, with Terra LLC continuing as the surviving entity of the merger and as our wholly owned subsidiary.
If we take ownership of a property as a result of a workout or foreclosure of a loan, we will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price. Transaction Breakup Fee .
If we take ownership of a 51 property as a result of a workout or foreclosure of a loan, we will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price. Transaction Breakup Fee .
We maintain all of our cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. Concentration Risk We hold real estate-related loans.
We maintain all of our cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. Concentration Risk We hold real estate and real estate-related loans.
Thus, our loan portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such loans could materially reduce our capital.
Thus, our investment portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such investments could materially reduce our capital.
Operating Expenses Reimbursed to Manager Under the terms of the Management Agreement with our Manager, we reimburse our Manager for operating expenses incurred in connection with services provided to us, including our allowable share of our Manager’s overhead, such as rent, employee costs, utilities and technology costs.
Operating Expenses Reimbursed to Manager Under the terms of a management agreement (the “Management Agreement”) with our Manager, we reimburse our Manager for operating expenses incurred in connection with services provided to us, including our allowable share of our Manager’s overhead, such as rent, employee costs, utilities and technology costs.
These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for our business. We expect to fund approximately $44.1 million of the unfunded commitments to borrowers during the next twelve months.
These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for our business. We expect to fund approximately $22.4 million of the unfunded commitments to borrowers during the next twelve months.
As of December 31, 2022 and 2021, we owned 27.9% and 50.0% of the equity interest in RESOF, respectively. W e also owned beneficial equity interests in three joint ventures that invest in real estate properties. In 2022, in connection with a mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower.
As of December 31, 2023 and 2022, we owned 14.9% and 27.9% of the equity interest in RESOF, respectively. W e also own beneficial equity interests in three joint ventures that invest in real estate properties. In 2022, in connection with a mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower.
As of December 31, 2022, our portfolio included underlying properties located in 31 markets, across 10 states and includes property types such as multifamily housing, student housing, commercial offices, medical offices, mixed-use and industrial properties. The profile of these properties ranges from stabilized and value-added properties to pre-development and construction.
As of December 31, 2023, our portfolio included underlying properties located in 21 markets, across nine states and includes property types such as multifamily housing, student housing, commercial offices, medical offices, mixed-use, industrial and infrastructure properties. The profile of these properties ranges from stabilized and value-added properties to pre-development and construction.
Interest Income For the year ended December 31, 2022 as compared to the same period in 2021, interest income increased by $5.8 million, primarily due to an increase in contractual interest income as a result of an increase in the weighted average principal balance of gross loans due to new loans we originated in 2022 and loans we acquired in connection with the BDC Merger, as well as an increase in the weighted average coupon rate due to increases in the underlying index rates.
Interest Income For the year ended December 31, 2023 as compared to the year ended December 31, 2022, interest income increased by $13.5 million, primarily due to an increase in contractual interest income as a result of an increase in the weighted average principal balance of gross loans due to loans originated in 2022 and loans we acquired in connection with the BDC Merger, as well as an increase in the weighted average coupon rate due to increases in the underlying index rates.
Book Value Per Share We calculate our book value per share by dividing our net equity by the number of outstanding shares of our common stock, unless otherwise determined by our Board. Our book value per share of Class B Stock Common Stock as of December 31, 2022 was $13.23.
Book Value Per Share We calculate our book value per share by dividing our net equity by the number of outstanding shares of our common stock, unless otherwise determined by our Board. Our book value per share of Class B Stock Common Stock as of December 31, 2023 and 2022 was $9.93 and $13.23, respectively.
Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to increase; and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease. 41 Prepayment Risk Prepayments can either positively or adversely affect the yields on our loans.
Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate and real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to increase; and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease.
For the year ended December 31, 2022, the weighted average outstanding principal balance on obligations under participation agreements and secured borrowing was approximately $59.9 million, and the weighted average interest rate was approximately 12.1%, compared to weighted average outstanding principal balance of approximately $114.4 million, and weighted average interest rate of approximately 11.0% for the year ended December 31, 2021.
For the year ended December 31, 2023, the weighted average outstanding principal balance on obligations under participation agreements was approximately $10.0 million and the weighted average interest rate was approximately 17.4%, compared to the weighted average outstanding principal balance on obligations under participation agreements and secured borrowing of approximately $59.9 million and the weighted average interest rate was approximately 12.1% for the year ended December 31, 2022.
We have also sold a portion of a loan to a third party that did not qualify for sale accounting. In connection with the BDC Merger, the obligations under participation agreements with Terra BDC totaling $37.0 million were effectively extinguished.
We have also sold a portion of a loan to a third party that did not qualify for sale accounting. In connection with the BDC Merger, the obligations under participation agreements with Terra BDC totaling $37.0 million were effectively extinguished. As of December 31, 2023, there was no participation obligation.
Impairment Charge For the years ended December 31, 2022 and 2021, we recorded an impairment charge of $1.6 million and $3.4 million, respectively, on 4.9 acres of the development land located in Pennsylvania in order to reduce the carrying value of the land to 45 its estimated fair value, which is the estimated selling price less the cost of sale.
For the year ended December 31, 2022, we recognized an impairment charge of $1.6 million, on 4.9 acres of the development land located in Pennsylvania in order to reduce the carrying value of the land to its estimated fair value, which is the estimated selling price less the cost of sale.
Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty.
Prepayment Risk Prepayments can either positively or adversely affect the yields on our loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty.
For the year ended December 31, 2021, we recognized income from equity investment in unconsolidated investments of $5.9 million, which consisted of equity income from RESOF of $6.2 million, partially offset by equity loss from two joint ventures of $0.2 million.
For the year ended December 31, 2022, we recognized income from equity investment in unconsolidated investments of $2.7 million, which consisted of equity income from RESOF of $5.2 million, partially offset by equity loss from the joint ventures of $2.5 million.
For the year ended December 31, 2022 as compared to the same period in 2021, asset management fees increased by $1.4 million, primarily due to an increase in total assets under management resulting from new loans we originated as well as loans acquired in connection with the BDC Merger.
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, asset management fees increased by $1.3 million, primarily due to an increase in total assets under management primarily resulting from loans acquired in connection with the BDC Merger.
For the year ended December 31, 2022 as compared to the same period in 2021, operating expenses reimbursed to our Manager increased by $1.2 million, as a result of an increase in the allocation ratio resulting from an increase in total assets under management due to new loans we originated as well as loans acquired in connection with the BDC Merger.
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, operating expenses reimbursed to our Manager increased by $1.2 million, primarily due to an increase in the allocation ratio resulting from an increase in total assets under management primarily due to loans acquired in connection with the BDC Merger.
For each of the year ended December 31, 2022 as compared to the same period in 2021, asset servicing fees increased by $0.4 million, primarily due to an increase in total assets under management resulting from new loans we originated as well as loans acquired in connection with the BDC Merger.
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, asset servicing fees increased by $0.3 million, primarily due to an increase in total assets under management resulting from loans acquired in connection with the BDC Merger.
We record an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) impaired loan reserves, if any.
Prior to the adoption of ASU 2016-13, we recorded an allowance for credit losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) past due loan reserves, if any.
On March 2, 2020, we engaged in a series of transactions pursuant to which we issued an aggregate of 4,574,470.35 shares of common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by us, cash of $25.5 million and other working capital.
On March 2, 2020, we engaged in a series of transactions pursuant to which we issued an aggregate of 4,574,470.35 shares of common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by us, cash of $25.5 million and other working capital. 38 As of December 31, 2023, Terra Fund 7 and Terra Offshore REIT held approximately 8.7% and 10.1%, respectively, of our issued and outstanding Class B Common Stock.
In connection with the BDC Merger, we assumed $38.4 million in aggregate principal amount of 7.00% notes due in 2026. For the year ended December 31, 2022 as compared to the same periods in 2021, interest expense on unsecured notes payable increased by $3.5 million, as a result of an increase in the weighted average principal amount outstanding.
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, interest expense on unsecured notes payable increased by $3.0 million, as a result of an increase in the weighted average principal amount outstanding due to the assumption of unsecured notes payable in connection with the BDC Merger.
Interest Expense from Obligations under Participation Agreements For the year ended December 31, 2022 as compared to the same period in 2021, interest expense from obligations under participation agreements decreased by $7.4 million, as a result of a decrease in the weighted average principal amount outstanding on obligations under participation agreements, partly due to the release of obligations under participation agreements with Terra BDC in connection with the BDC Merger.
Interest from Obligations under Participation Agreements For the year ended December 31, 2023 as compared to the year ended December 31, 2022, interest expense from obligations under participation agreements decreased by $1.8 million, as a result of a decrease in the weighted average principal amount outstanding, primarily due to the release of obligations under participation agreements with Terra BDC in connection with the BDC Merger, partially offset by an increase in the index rate on the outstanding obligations under participation agreements.
(2) As of December 31, 2022 and 2021, amount included $413.1 million and $163.1 million of senior mortgages used as collateral for $261.0 million and $93.8 million of borrowings under credit facilities, respectively. (3) As of December 31, 2022 and 2021, twenty-one and thirteen of these loans, respectively, are subject to a LIBOR or SOFR floor, as applicable.
(2) As of December 31, 2023 and 2022, amount included $342.9 million and $413.1 million of senior mortgages used as collateral for $204.9 million and $261.0 million of borrowings under credit facilities, respectively. (3) As of December 31, 2023 and 2022, 14 and 21 loans, respectively, are subject to a LIBOR, SOFR, or Term SOFR floor, as applicable.
As of December 31, 2022, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 31 loans in 10 states with an aggregate net principal balance of $633.2 million, a weighted average coupon rate of 11.5%, a weighted average loan-to-value ratio of 70.1% and a weighted average remaining term to maturity of 1.1 years.
As of December 31, 2023, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 21 loans in nine states with an aggregate net principal balance of $509.5 million, a weighted average coupon rate of 12.9% and a weighted average remaining term to maturity of 0.8 years.
Additionally, as of December 31, 2022 and 2021, we owned 27.9% and 50.0%, respectively, of equity interest in a limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. W e also beneficially owned equity interests in three joint ventures that invest in real estate properties.
Equity Investments Additionally, as of December 31, 2023 and 2022, we owned 14.9% and 27.9%, respectively, of equity interest in a limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets.
Other For the year ended December 31, 2022 as compared to the same period in 2021, other expense increased by $0.3 million, as a result of a fee paid to a third-party in connection with the sale of a parcel of land.
Other For the year ended December 31, 2023 as compared to the year ended December 31, 2022, other expenses decreased by $0.2 million, primarily as a result of a fee paid in 2022 to a third-party in connection with the sale of a parcel of land in June 2022.
An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund or structure real estate-related investments, including any third-party expenses related to such loan.
Management Agreement with Terra REIT Advisors We currently pay the following fees to Terra REIT Advisors pursuant to the Management Agreement: Origination and Extension Fee . An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund or structure real estate-related investments, including any third-party expenses related to such loan.
Cash Flows Provided by Financing Activities For the year ended December 31, 2022, cash flows provided by financing activities were $34.1 million, primarily due to proceeds from borrowings under the repurchase agreements of $151.9 million, proceeds from borrowings under the revolving line of credit of $130.5 million, and proceeds from obligations under participation agreements of $29.6 million, partially offset by repayments of borrowings under the term loan of $93.8 million, repayments on borrowings under the revolving line of credit of $79.0 million, repayment of secured borrowing of $38.7 million, repayments of borrowings under repurchase agreements of $25.6 million, repayments of obligations under participation agreements of $22.2 million and distributions paid of $16.1 million.
For the year ended December 31, 2022, cash flows provided by financing activities were $34.1 million, primarily due to proceeds from secured financing of $286.6 million and proceeds from obligations under participation agreements of $29.6 million, partially offset by principal repayments on secured financing of $239.7 million, repayments of obligations under participation agreements of $22.2 million and distributions paid of $16.1 million.
Portfolio Investment Activity For the years ended December 31, 2022 and 2021, we invested $126.9 million and $117.3 million in new and add-on investments and had $33.3 million and $85.1 million of repayments, resulting in net investments of $93.6 million and $32.2 million, respectively.
Portfolio Investment Activity Net Loan Portfolio For the years ended December 31, 2023 and 2022, we invested $19.2 million and $126.9 million in new and add-on investments and had $10.3 million and $33.3 million of repayments, resulting in net investments of $8.9 million and $93.6 million, respectively. Amounts are net of obligations under participation agreements and secured financing.
Financial Condition, Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, funding and maintaining our assets and operations, making distributions to our stockholders and other general business needs.
Net Loss For the year ended December 31, 2023 as compared to the year ended December 31, 2022, the resulting net loss increased by $49.9 million. 48 Financial Condition, Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, funding and maintaining our assets and operations, making distributions to our stockholders and other general business needs.
Amounts are net of obligations under participation agreements, secured borrowing, borrowings under the master repurchase agreement, the term loan, the repurchase agreements and the revolving line of credit. 39 Net Loan Portfolio Information The tables below set forth the types of loans in our loan portfolio, as well as the property type and geographic location of the properties securing these loans, on a net loan basis, which represents our proportionate share of the loans, based on our economic ownership of these loans as of: December 31, 2022 December 31, 2021 Loan Structure Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total First mortgages $ 456,408,889 $ 461,299,182 75.1 % $ 310,933,350 $ 313,515,326 79.8 % Preferred equity investments 121,231,434 122,132,177 19.9 % 63,441,546 63,515,633 16.2 % Credit facility 28,802,833 29,080,183 4.7 % 11,762,500 11,859,876 3.0 % Mezzanine loans 26,767,345 26,770,521 4.4 % 17,444,357 17,622,804 4.5 % Allowance for loan losses — (25,471,890) (4.1) % — (13,658,481) (3.5) % Total $ 633,210,501 $ 613,810,173 100.0 % $ 403,581,753 $ 392,855,158 100.0 % December 31, 2022 December 31, 2021 Property Type Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total Office $ 171,611,750 $ 172,042,063 27.9 % $ 166,071,342 $ 166,836,320 42.5 % Industrial 147,796,164 148,891,742 24.3 % 18,762,500 18,859,876 4.8 % Multifamily 104,589,464 105,570,432 17.2 % 72,999,417 73,955,240 18.8 % Mixed-use 64,880,450 65,838,965 10.7 % 28,940,658 28,977,024 7.4 % Infill land 48,860,291 49,565,437 8.1 % 28,960,455 28,923,827 7.4 % Hotel - full/select service 43,222,382 43,758,804 7.1 % 56,847,381 57,395,682 14.6 % Student housing 31,000,000 31,774,261 5.2 % 31,000,000 31,565,670 8.0 % Infrastructure 21,250,000 21,840,359 3.6 % — — — % Allowance for loan losses — (25,471,890) (4.1) % — (13,658,481) (3.5) % Total $ 633,210,501 $ 613,810,173 100.0 % $ 403,581,753 $ 392,855,158 100.0 % December 31, 2022 December 31, 2021 Geographic Location Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total United States California $ 151,668,387 $ 153,158,967 24.9 % $ 187,209,547 $ 189,082,380 48.1 % New York 91,845,479 91,877,084 14.9 % 63,441,546 63,515,633 16.2 % Georgia 72,401,718 73,101,964 11.9 % 53,289,288 53,536,884 13.6 % Texas 67,625,000 68,142,046 11.1 % 13,625,000 13,725,690 3.5 % New Jersey 62,228,622 62,958,482 10.3 % — — — % Washington 56,671,267 57,027,639 9.3 % 3,523,401 3,382,683 0.9 % Utah 49,250,000 50,698,251 8.3 % 28,000,000 28,420,056 7.2 % North Carolina 43,520,028 44,041,162 7.2 % 44,492,971 44,704,699 11.4 % Arizona 31,000,000 31,276,468 5.1 % — — — % Massachusetts 7,000,000 7,000,000 1.1 % 7,000,000 7,000,000 1.8 % South Carolina — — — % 3,000,000 3,145,614 0.8 % Allowance for loan losses — (25,471,890) (4.1) % — (13,658,481) (3.5) % Total $ 633,210,501 $ 613,810,173 100.0 % $ 403,581,753 $ 392,855,158 100.0 % 40 Factors Impacting Operating Results Our results of operations are affected by a number of factors and primarily depend on, among other things, the level of the interest income from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business.
Net Loan Portfolio Information The tables below set forth the types of loans in our loan portfolio, as well as the property type and geographic location of the properties securing these loans, on a net loan basis, which represents our proportionate share of the loans, based on our economic ownership of these loans as of: December 31, 2023 December 31, 2022 Loan Structure Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total First mortgages $ 365,465,500 $ 368,918,890 80.9 % $ 456,408,889 $ 461,299,182 75.1 % Preferred equity investments 126,550,969 127,105,312 27.8 % 121,231,434 122,132,177 19.9 % Mezzanine loans 17,444,357 17,424,081 3.8 % 26,767,345 26,770,521 4.4 % Credit facility — — — % 28,802,833 29,080,183 4.7 % Allowance for credit losses — (56,976,025) (12.5) % — (25,471,890) (4.1) % Total $ 509,460,826 $ 456,472,258 100.0 % $ 633,210,501 $ 613,810,173 100.0 % December 31, 2023 December 31, 2022 Property Type Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total Office $ 144,812,619 $ 144,853,769 31.7 % $ 171,611,750 $ 172,042,063 27.9 % Multifamily 85,660,082 86,210,868 18.9 % 104,589,464 105,570,432 17.2 % Industrial 67,579,869 67,612,621 14.8 % 147,796,164 148,891,742 24.3 % Mixed-use 63,096,365 63,531,806 13.9 % 64,880,450 65,838,965 10.7 % Infill land 52,839,509 54,172,663 11.9 % 48,860,291 49,565,437 8.1 % Hotel - full/select service 43,222,382 43,801,303 9.6 % 43,222,382 43,758,804 7.1 % Student housing 31,000,000 31,821,832 7.0 % 31,000,000 31,774,261 5.2 % Infrastructure 21,250,000 21,443,421 4.7 % 21,250,000 21,840,359 3.6 % Allowance for credit losses — (56,976,025) (12.5) % — (25,471,890) (4.1) % Total $ 509,460,826 $ 456,472,258 100.0 % $ 633,210,501 $ 613,810,173 100.0 % 41 December 31, 2023 December 31, 2022 Geographic Location Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total United States California $ 119,093,246 $ 120,296,944 26.4 % $ 151,668,387 $ 153,158,967 24.9 % New York 90,483,672 90,483,672 19.8 % 91,845,479 91,877,084 14.9 % New Jersey 82,419,378 83,489,049 18.3 % 62,228,622 62,958,482 10.3 % Georgia 74,335,828 74,602,328 16.3 % 72,401,718 73,101,964 11.9 % Utah 49,250,000 50,329,949 11.0 % 49,250,000 50,698,251 8.3 % Washington 34,052,223 34,020,449 7.5 % 56,671,267 57,027,639 9.3 % Arizona 31,000,000 31,296,235 6.9 % 31,000,000 31,276,468 5.1 % North Carolina 21,826,479 21,929,657 4.8 % 43,520,028 44,041,162 7.2 % Massachusetts 7,000,000 7,000,000 1.5 % 7,000,000 7,000,000 1.1 % Texas — — — % 67,625,000 68,142,046 11.1 % Allowance for credit losses — (56,976,025) (12.5) % — (25,471,890) (4.1) % Total $ 509,460,826 $ 456,472,258 100.0 % $ 633,210,501 $ 613,810,173 100.0 % Factors Impacting Operating Results Our results of operations are affected by a number of factors and primarily depend on, among other things, the level of the interest income from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business.
The following table presents a summary of fees paid and costs reimbursed to our Manager in connection with providing services to us: Years Ended December 31, 2022 2021 Origination and extension fee expense (1)(2) $ 2,967,291 $ 2,729,598 Asset management fee 6,556,492 5,134,149 Asset servicing fee 1,560,044 1,181,924 Operating expenses reimbursed to Manager 8,076,321 6,916,371 Disposition fee (3) 890,194 1,006,302 Total $ 20,050,342 $ 16,968,344 _______________ (1) Origination and extension fee expense is generally offset with origination and extension fee income.
The following table presents a summary of fees paid and costs reimbursed to our Manager in connection with providing services to us: Years Ended December 31, 2023 2022 Origination and extension fee expense (1) $ 2,312,656 $ 3,189,291 Asset management fee 7,807,198 6,556,492 Asset servicing fee 1,857,765 1,560,044 Operating expenses reimbursed to Manager 9,234,357 8,076,321 Disposition fee (2) 1,451,063 890,194 Total $ 22,663,039 $ 20,272,342 _______________ (1) Origination and extension fee expense is generally offset with origination and extension fee income.
For the year ended December 31, 2021, two previously defaulted loans were repaid at a discount and we recognized a net loss on loan repayment of $0.5 million, excluding previously accrued allowance for loan losses of $1.0 million. 47 Gain on Extinguishment of Obligations Under Participation Agreements In connection with the BDC Merger, the obligations under participation agreements with Terra BDC totaling $37.0 million were effectively extinguished and we recognized a net gain of $3.4 million for the year ended December 31, 2022, representing the difference between the carrying value of the Company’s obligations under participation agreements and the fair value of Terra BDC’s investments acquired through participation agreements.
Gain on Extinguishment of Participation Liability In September 2023, the counterparty to a participation agreement conveyed its interest in the obligation under participation agreement to us and we recognized a gain on extinguishment of participation liability of $10.6 million for the year ended December 31, 2023. 47 In connection with the BDC Merger, the obligations under participation agreements with Terra BDC totaling $37.0 million were effectively extinguished and we recognized a net gain of $3.4 million for the year ended December 31, 2022, representing the difference between the carrying value of the Company’s obligations under participation agreements and the fair value of Terra BDC’s investments acquired through participation agreements.
For the year ended December 31, 2022, interest expense on repurchase agreement payable increased by $7.8 million, as a result of an increase in the weighted average principal amount outstanding on repurchase agreement payable.
For the year ended December 31, 2023 as compared to the year ended December 31, 2022, interest expense on secured financing increased by $13.3 million as a result of an increase in the weighted average principal amount outstanding as well as an increase in the index rate on secured financing agreements.
We expect to maintain sufficient cash on hand to fund such commitments through matching these commitments with principal repayments on outstanding loans or draw downs on our credit facilities.
We expect to maintain sufficient liquidity to fund such commitments through matching these commitments with principal repayments on outstanding loans or draw downs on our credit facilities. In connection with the BDC Merger, we assumed a $25.0 million term loan.
We accounted for this arrangement as an equity investment. For the year ended December 31, 2022, we recognized income from equity investment in unconsolidated investments of $2.7 million, which consisted of equity income from RESOF of $5.2 million and equity loss from the joint ventures of $2.5 million.
For the year ended December 31, 2023, we recognized loss from equity investment in unconsolidated investments of $2.4 million, which consisted of net equity loss from the joint ventures and the mezzanine loan of $3.5 million, partially offset by equity income from RESOF of $1.1 million.
Coupon rate shown was determined using LIBOR of 4.39%, average SOFR of 4.06% and Term SOFR of 4.36% as of December 31, 2022, and LIBOR of 0.10% as of December 31, 2021.
Coupon rates shown were determined using LIBOR of 5.47%, average SOFR of 5.34% and Term SOFR of 5.35% as of December 31, 2023, and LIBOR of 4.39%, average SOFR of 4.06% and Term SOFR of 4.36% as of December 31, 2022.
In addition to our net loan portfolio, as of December 31, 2022, we owned a multi-tenant office building acquired pursuant to a foreclosure and as of December 31, 2021, we owned 4.9 acres of land acquired pursuant to a deed in lieu of foreclosure and the aforementioned multi-tenant office building.
Real Estate Ownership In addition to our net loan portfolio, as of December 31, 2023, through two investments, we owned eight industrial buildings acquired in 2023; and as of December 31, 2022, we owned a multi-tenant office building acquired pursuant to a foreclosure.
Overview We are a real estate credit focused company that originates, structures, funds and manages commercial real estate credit investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States, which we collectively refer to as our targeted assets.
We focus primarily on commercial real estate credit investments, including first mortgage loans, subordinated loans (including B-notes, mezzanine and preferred equity) and credit facilities throughout the United States, which we collectively refer to as our targeted assets. Our loans finance the acquisition, development or recapitalization of high-quality commercial real estate in the United States.
Portfolio Summary The following tables provide a summary of our net loan portfolio as of: December 31, 2022 Fixed Rate Floating Rate (1)(2)(3) Total Gross Loans Obligations under Participation Agreements Total Net Loans Number of loans 8 23 31 1 31 Principal balance $ 90,990,183 $ 554,805,276 $ 645,795,459 $ 12,584,958 $ 633,210,501 Amortized cost 92,274,998 534,215,769 626,490,767 12,680,594 613,810,173 Fair value 90,729,098 532,416,656 623,145,754 12,680,595 610,465,159 Weighted average coupon rate 13.82 % 11.23 % 11.59 % 16.36 % 11.50 % Weighted-average remaining term (years) 1.35 1.10 1.14 1.69 1.13 38 December 31, 2021 Fixed Rate Floating Rate (1)(2)(3) Total Gross Loans Obligations under Participation Agreements and Secured Borrowing Total Net Loans Number of loans 6 15 21 4 21 Principal balance $ 74,880,728 $ 405,270,423 $ 480,151,151 $ 76,569,398 $ 403,581,753 Amortized cost 75,520,212 394,153,102 469,673,314 76,818,156 392,855,158 Fair value 75,449,410 391,752,209 467,201,619 75,900,089 391,301,530 Weighted average coupon rate 12.39 % 7.01 % 7.85 % 10.40 % 7.37 % Weighted-average remaining term (years) 1.93 1.45 1.53 0.82 1.66 _______________ (1) These loans pay a coupon rate of LIBOR or SOFR plus a fixed spread.
On February 8, 2024, each of Terra Fund 5 and Terra JV were dissolved. 39 Portfolio Summary Net Loan Portfolio The following tables provide a summary of our net loan portfolio as of: December 31, 2023 Fixed Rate Floating Rate (1)(2)(3) Total Gross Loans Obligations under Participation Agreements Total Net Loans Number of loans 5 16 21 — 21 Principal balance $ 53,998,648 $ 455,462,178 $ 509,460,826 $ — $ 509,460,826 Carrying value 54,095,173 402,377,085 456,472,258 — 456,472,258 Fair value 53,435,742 403,904,207 457,339,949 — 457,339,949 Weighted average coupon rate 12.95 % 12.92 % 12.93 % — % 12.93 % Weighted-average remaining term (years) 1.18 0.70 0.77 — 0.77 December 31, 2022 Fixed Rate Floating Rate (1)(2)(3) Total Gross Loans Obligations under Participation Agreements Total Net Loans Number of loans 8 23 31 1 31 Principal balance $ 90,990,183 $ 554,805,276 $ 645,795,459 $ 12,584,958 $ 633,210,501 Carrying value 92,274,998 534,215,769 626,490,767 12,680,594 613,810,173 Fair value 90,729,098 532,416,656 623,145,754 12,680,595 610,465,159 Weighted average coupon rate 13.82 % 11.23 % 11.59 % 16.36 % 11.50 % Weighted-average remaining term (years) 1.35 1.10 1.14 1.69 1.13 _______________ (1) These loans pay a coupon rate of London Interbank Offered Rate (“LIBOR”), Secured Overnight Financing Rate (“SOFR”), or forward-looking term rate SOFR (“Term SOFR”) plus a fixed spread.
For the year ended December 31, 2021, cash flows used in investing activities were $87.7 million, primarily related to origination and purchase of loans of $252.4 million, purchase of partnership interest in a limited partnership of $32.2 million and purchase of marketable securities of $6.5 million, partially offset by proceeds from repayments of loans of $196.8 million and proceeds from sale of marketable securities of $6.6 million.
Cash Flows Used in Investing Activities For the year ended December 31, 2023, cash flows used in investing activities were $10.0 million, primarily related to origination and purchase of loans of $78.9 million, purchase of real estate properties of $52.5 million, purchase of held-to-maturity securities of $20.0 million, purchase of marketable securities of $7.9 million, purchase of equity interests in unconsolidated investments of $7.3 million, and funding for promissory note receivable of $3.8 million, partially offset by proceeds from repayments of loans of $126.1 million, proceeds from redemption of held-to-maturity securities of $20.0 million, return of capital on unconsolidated investments of $11.3 million, and proceeds from sale of marketable equity securities of $2.4 million.
The parcel of land was sold in the second quarter of 2022. The real estate and related lease intangible assets and liabilities had a net carrying value of $40.6 million and $56.1 million as of December 31, 2022 and 2021, respectively.
As of December 31, 2023 and 2022, the real estate and related lease intangible assets and liabilities had a net carrying value of $129.8 million and $40.6 million, respectively, and the mortgage loans payable encumbering the real estate properties had an outstanding principal amount of $73.5 million and $29.3 million, respectively.
These origination fees were capitalized to the carrying value of the unconsolidated investment as a transaction cost. (3) Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.
Any excess is deferred and amortized to interest income over the term of the loan. (2) Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.
In 2022, in connection with a mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower. We accounted for this arrangement as an equity investment. As of December 31, 2022 and 2021, these equity investments had total carrying value of $62.5 million and $69.7 million, respectively.
W e also beneficially owned equity interests in three joint ventures that invest in real estate properties. In 2022, in connection with a $10.0 million mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower. We accounted for this arrangement as an equity investment.
For the year ended December 31, 2022 as compared to the same period in 2021, prepayment fee income increased by $1.8 million, as a result of an increase in loans with minimum yield provisions repaid before maturity. 44 Other Operating Income For the year ended December 31, 2022 as compared to the same period in 2021, other operating income decreased by $0.3 million, as a result of a decrease in dividend income earned on the marketable securities resulting from a decrease in the weighted average balance of the marketable securities.
Other Operating Income For the year ended December 31, 2023 as compared to the year ended December 31, 2022, other operating income increased by $0.1 million, primarily due to an increase in dividend income recognized on marketable securities, partially offset by a decrease in application fees income on deals under application.
For the year ended December 31, 2022 as compared to the same period in 2021, interest expense on secured borrowing decreased by $0.1 million as a result of a decrease in the weighted average principal amount outstanding. Interest Expense on Unsecured Notes Payable In June 2021, we issued $85.1 million in aggregate principal amount of 6.00% notes due 2026.
Interest Expense on Unsecured Notes Payable In June 2021, we issued $85.1 million in aggregate principal amount of 6.00% notes due 2026. In connection with the BDC Merger, we assumed $38.4 million in aggregate principal amount of 7.00% notes due in 2026.
We believe loans in this size range are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. Our investment objective is to provide attractive risk-adjusted returns to our stockholders, primarily through regular distributions. There can be no assurances that we will be successful in meeting our investment objective.
Our investment objective is to provide attractive risk-adjusted returns to our stockholders, primarily by earning high current income that allows for regular distributions, and, in certain instances, benefiting from potential capital appreciation. There can be no assurances that we will be successful in meeting our investment objective.
For the year ended December 31, 2022 as compared to the same period in 2021, interest expense on revolving line of credit increased by $1.8 million, due to an increase in weighted average principal amount outstanding on the revolving line of credit.
Cash Flows Provided by Operating Activities For the year ended December 31, 2023, as compared to the year ended December 31, 2022, cash flows provided by operating activities increased by $8.2 million, primarily due to an increase in net contractual interest income.
Depreciation and Amortization For the year ended December 31, 2022 as compared to the same period in 2021, depreciation and amortization increased by $2.5 million, primarily due to a lease termination notice received in November 2021, at which time we accelerated the amortization of lease intangibles.
Unrealized Losses on Investments, Net For the year ended December 31, 2023, as compared to the year ended December 31, 2022, unrealized losses on investments, net increased by $0.2 million, primarily due to a decrease in the fair value of our marketable securities at period end.
Following the consummation of the BDC Merger, former Terra BDC stockholders owned approximately 19.9% of our common equity. On the Closing Date, we filed with the SDAT the Charter Amendment.
Following the consummation of the BDC Merger, former Terra BDC stockholders owned approximately 19.9% of our common equity. On June 28, 2023, we announced we entered into an Agreement and Plan of Merger, dated as of June 27, 2023 (the “WMC Merger Agreement”), with Western Asset Mortgage Capital Corporation, a Delaware corporation (“WMC”).
The was no such gain for the year ended December 31, 2021. Net Loss For the year ended December 31, 2022 as compared to the same period in 2021, net loss decreased by $5.4 million.
There was no such gain for the year ended December 31, 2023. Loss on Disposal of Real Estate In October 2023, we conveyed our interest in an office building to the lender by deed in lieu of foreclosure and recognized a net loss on disposal of real estate of $4.2 million for the year ended December 31, 2023.
In connection with the BDC Merger, we assumed a $25.0 million delayed draw term loan. This term loan bears interest at an annual rate of 5.625% and matures on July 1, 2023.
The term loan currently bears interest at an annual rate of SOFR plus 7.375% with a SOFR floor of 5.0% and matures on March 31, 2024. We expect to either maintain sufficient liquidity to repay the facility or refinance the facility.
Removed
Our loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. We focus on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties primarily in primary and secondary markets.
Added
Overview We are a real estate investment trust that originates, invests in and manages a diverse portfolio of real estate and real estate-related assets.
Removed
Following the consummation of the BDC Merger and as of December 31, 2022, former Terra BDC stockholders owned approximately 19.9% of our common equity, Terra JV held 70.0% of the issued and outstanding shares of our common stock with the remainder of 10.1% held by Terra Offshore REIT; and Terra Fund 5 and Terra Fund 7 owned an 87.6% and 12.4% interest, respectively, in Terra JV.
Added
We focus on middle market loans in the approximately $10 million to $50 million range, which we believe are subject to less competition, offer higher risk-adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification.
Removed
The Certificate of Merger and Articles of Merger with respect to the BDC Merger were filed with the Secretary of State of the State of Delaware and SDAT, respectively, at the Effective Time.
Added
We may also make strategic real estate equity and non-real estate-related investments that align with our investment objectives and criteria.
Removed
Pursuant to the Charter Amendment, (i) the authorized shares of our stock which we have authority to issue were increased from 500,000,000 to 950,000,000, consisting of 450,000,000 shares of Class A Common Stock, 450,000,000 shares of Class B Common Stock, and 50,000,000 shares of Preferred Stock, and (ii) each share of our common stock issued and outstanding immediately prior to the Effective Time was automatically changed into one issued and outstanding share of Class B Common Stock.
Added
On August 8, 2023, WMC terminated the WMC Merger Agreement pursuant to its terms (the “Termination”), and we were paid a termination fee of $3.0 million.
Removed
The Class B Common Stock rank equally with and have identical preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption as each other share of our common stock, except as set forth below with respect to conversion.
Added
Distribution of Class B Common Stock by Terra Fund 5 Prior to undertaking the REIT Formation Transaction, the Terra Funds distributed a consent solicitation memorandum disclosing the details of the proposed transactions and received the requisite consent of investors in each of the Terra Funds to engage in the REIT Formation Transaction.
Removed
On the First Conversion Date of initial listing of shares of Class A Common Stock for trading on a national securities exchange or such earlier date as approved by our Board, one-third of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock.
Added
The consent solicitation memorandum disclosed that Terra Fund 5 could in the future make a distribution-in-kind to its members of shares of our company, rather than a cash distribution. The limited liability company agreement of Terra Fund 5 provides that the term of Terra Fund 5 expires on December 31, 2023.
Removed
On the Second Conversion Date, one-half of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock.
Added
On December 20, 2023, Terra Fund 5 announced that effective December 29, 2023, Terra Fund 5 would distribute all its shares of Class B Common Stock to its members as part of the winding up of Terra Fund 5.
Removed
On the Third Conversion Date, all of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock.
Added
On the Distribution Date, each member of Terra Fund 5 received 2,252.02 shares of Class B Common Stock for each unit of membership interest in Terra Fund 5 held by such member.
Removed
As of the Effective Time and in accordance with the Merger Agreement, the size of our Board was increased by three members and each of Spencer Goldenberg, Adrienne Everett and Gaurav Misra (each a “Terra BDC Designee) was elected to our Board to fill the vacancies created by such increase, with each Terra BDC Designee to serve until our next annual meeting of stockholders and until his or her successor is duly elected and qualifies.
Added
Because Terra Fund 5 previously owned its interests in the shares of Class B Common Stock indirectly through its ownership of interests in Terra JV, prior to the Distribution Date, Terra JV first distributed the shares of Class B Common Stock to Terra Fund 5, and Terra Fund 5 then distributed those shares to its members on the Distribution Date.
Removed
Each of the other members of our Board immediately prior to the Effective Time continued as members following the Effective Time.
Added
In May 2023, we purchased the underlying assets and the $10.0 million mezzanine loan was settled in connection with the purchase. In November 2023, in connection with a loan restructuring, we contributed $5.0 million to another joint venture that owns a real estate property.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

3 edited+1 added−14 removed9 unchanged
Biggest changeWhile hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. For the years ended December 31, 2022 and 2021, we did not engage in interest rate hedging activities.
Biggest changeWhile hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. For the years ended December 31, 2023 and 2022, we did not engage in interest rate hedging activities.
Real Estate Risk The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; 53 pandemics; natural disasters; and other acts of god.
Real Estate Risk The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; pandemics; natural disasters; and other acts of god.
In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses. Credit Risk We are subject to varying degrees of credit risk in connection with holding a portfolio of our target assets.
In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses. 54 Credit Risk We are subject to varying degrees of credit risk in connection with holding a portfolio of our target assets.
Removed
As of December 31, 2022, we had 10 investments with an aggregate principal balance of $295.0 million, net of obligations under participation agreements, that provide for interest income at an annual rate of LIBOR plus a spread, eight of which are subject to a LIBOR floor.
Added
The following table summarizes the aggregate principal balance of variable rate investments and indebtedness as of: December 31, 2023 Variable rate investments $ 438,839,001 Variable rate debt $ 253,163,757 The following table summarizes estimated changes in net investment income on our variable rate investments and indebtedness as of December 31, 2023 assuming hypothetical increases or decreases in Term SOFR or SOFR: 1.00% Decrease 1.00% Increase Investment income from variable rate investments $ (4,517,751) $ 4,554,622 Interest expense from variable rate debt 1,913,391 (2,531,638) Net investment income from variable rate instruments $ (2,604,360) $ 2,022,984 We may hedge against interest rate fluctuations by using standard hedging instruments, such as futures, options and forward contracts.
Removed
A decrease of 100 basis points in LIBOR would decrease our annual interest income, net of interest expense on participation agreements, by approximately $2.9 million, and an increase of 100 basis points in LIBOR would increase our annual interest income, net of interest expense on participation agreements, by approximately $2.9 million.
Removed
Additionally, we had 13 investments with an aggregate principal balance of $247.2 million that provide for interest income at an annual rate of SOFR or Term SOFR, plus a spread, all of which were subject to a SOFR or Term SOFR floor.
Removed
A decrease of 100 basis points in SOFR or Term SOFR would decrease our annual interest income by $2.5 million, and an increase of 100 basis points in SOFR or Term SOFR would increase our annual interest income by $2.5 million.
Removed
Additionally, as of December 31, 2022, we had $29.3 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBOR plus a spread that is collateralized by an office building; a revolving line of credit with an outstanding balance of $90.1 million that bears interest at an annual rate of LIBOR plus a spread that is collateralized 52 by $177.4 million of first mortgages; a repurchase agreement with an outstanding balance of $51.1 million that bears interest at an annual rate of LIBOR or Term SOFR, as applicable, plus a spread that is collateralized by $68.1 million of first mortgages; and another repurchase agreement with an outstanding balance of $119.8 million that bears interest at an annual rate of Term SOFR plus a spread that is collateralized by $167.5 million of first mortgages.
Removed
A decrease of 100 basis points in LIBOR and Term SOFR would decrease our annual interest expense by approximately $2.9 million, and an increase of 100 basis points in LIBOR and Term SOFR would increase our annual interest expense by approximately $2.9 million. In July 2017, the U.K.
Removed
Financial Conduct Authority, which regulates the LIBOR administrator, IBA, announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, which has subsequently been delayed to June 30, 2023. The Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions convened by the U.S.
Removed
Federal Reserve, has recommended SOFR as a more robust reference rate alternative to U.S. dollar LIBOR. SOFR is calculated based on overnight transactions under repurchase agreements, backed by Treasury securities.
Removed
SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members.
Removed
Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions.
Removed
Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question. As such, the future of LIBOR at this time is uncertain. Potential changes, or uncertainty related to such potential changes, may adversely affect the market for LIBOR-based loans, including our portfolio of LIBOR-indexed, floating-rate loans, or the cost of our borrowings.
Removed
In addition, changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based loans, including the value of the LIBOR-indexed, floating-rate loans in our portfolio, or the cost of our borrowings.
Removed
In the event LIBOR is unavailable, our investment documents provide for a substitute index, on a basis generally consistent with market practice, intended to put us in substantially the same economic position as LIBOR.
Removed
We may hedge against interest rate fluctuations by using standard hedging instruments, such as futures, options and forward contracts, subject to the requirements of the 1940 Act.

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