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What changed in Advanced Flower Capital Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Advanced Flower Capital 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.

+639 added−549 removedSource: 10-K (2024-03-07) vs 10-K (2023-03-07)

Top changes in Advanced Flower Capital Inc.'s 2023 10-K

639 paragraphs added · 549 removed · 403 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

92 edited+55 added−14 removed153 unchanged
Biggest changeIn December 2022, the credit agreement with Subsidiary of Private Company G was amended to, among other things and subject to certain terms and conditions, (i) require the borrowers to make certain cash equity capital contributions, (ii) permit 75% of accrued cash interest to instead be paid in kind for four months and (iii) include an excess cash flow sweep. 11 Table of Contents (4) In December 2021, we entered into a credit agreement with Subsidiary of Public Company H, which provides Subsidiary of Public Company H with a $100.0 million senior secured credit facility, of which, we committed $60.0 million, ABW committed $10.0 million (which was ultimately transferred to AFCIF), and third-party lenders committed $30.0 million of the aggregate principal amount.
Biggest changeIn December 2022, the credit agreement with Subsidiary of Private Company G was amended to, among other things and subject to certain terms and conditions, (i) require the borrowers to make certain cash equity capital contributions, (ii) permit 75% of accrued cash interest to instead be paid in kind for four months and (iii) include an excess cash flow sweep.
Tannenbaum, our Chief Executive Officer and Chairman of the Board, made an equity investment of approximately $47.8 million in August 2020, which included a combination of cash and a transfer of loan assets at fair value plus accrued and unpaid interest, in exchange for 3,342,500 shares of our common stock.
Tannenbaum, our Chief Investment Officer and Executive Chairman of the Board, made an equity investment of approximately $47.8 million in August 2020, which included a combination of cash and a transfer of loan assets at fair value plus accrued and unpaid interest, in exchange for 3,342,500 shares of our common stock.
In December 2021, we entered into the second amendment to the Private Company A Credit Facility to, among other things, increase the total loan commitments by $20.0 million in an additional tranche, with $2.5 million allocated to Flower Loan Holdco, LLC, an entity wholly-owned by Mr. and Mrs. Tannenbaum (“FLH”), and the remaining new commitment allocated to third-party lenders.
In December 2021, we entered into the second amendment to the Private Company A Credit Facility to, among other things, increase the total loan commitments by $20.0 million in an additional tranche, with $2.5 million allocated to Flower Loan Holdco, LLC (“FLH”), an entity wholly-owned by Mr. and Mrs. Tannenbaum, and the remaining new commitment allocated to third-party lenders.
The service by any personnel of our Manager and its affiliates as a member of the Investment Committee will not, by itself, be dispositive in the determination as to whether such personnel is deemed “investment personnel” of our Manager and its affiliates for purposes of expense reimbursement.
The service by any personnel of our Manager and its affiliates as a member of the Investment Committee will not, by itself, be dispositive in the determination as to whether such personnel is deemed “investment personnel” of our Manager and its affiliates for purposes of expense reimbursement.
The duration of our loans, as compared to the length of leases usually employed by REIT land ownership models, allows us to redeploy our capital with more flexibility as market changes occur instead of being locked in for longer periods of time.
The duration of our loans, as compared to the length of leases usually employed by REIT land ownership models, allows us to redeploy our capital with more flexibility as market changes occur instead of being locked in for longer periods of time.
This model also allows our borrowers to retain control of their real estate assets, which is important to their businesses and allows for more flexibility regarding their capital structure.
This model also allows our borrowers to retain control of their real estate assets, which is important to their businesses and allows for more flexibility regarding their capital structure.
Upon its receipt of an actionable request, our Manager’s deal team prepares a standardized memorandum (an “Early Read Memorandum”) that serves as the initial recommendation to the Investment Committee with respect to initially pursuing such opportunity. This Early Read Memorandum contains key property metrics, including, without limitation, property characteristics, preliminary loan terms and structure.
Upon its receipt of an actionable request, our Manager’s deal team prepares a standardized memorandum (an “Early Read Memorandum”) that serves as the initial recommendation to the Investment Committee with respect to initially pursuing such opportunity. This Early Read Memorandum contains key property metrics, typically including, without limitation, property characteristics, preliminary loan terms and structure.
Our Manager’s team is comprised of professionals with extensive and diverse expertise and significant financing industry experience across many industries, including the real estate sector. We believe that the length and breadth of this team’s financing experience and their ability to source and execute a wide variety of loans is one of our significant competitive advantages.
Our Manager’s team is comprised of professionals with extensive and diverse expertise and significant financing experience across many industries, including the real estate sector. We believe that the length and breadth of this team’s financing experience and their ability to source and execute a wide variety of loans is one of our significant competitive advantages.
Our Leadership Leonard M. Tannenbaum, our Chief Executive Officer and Chairman of the Board, has over 25 years of investment management experience. He has taken three other entities public and has managed several externally-managed investment vehicles with approximately $5.0 billion of assets under management in the aggregate. During his career, Mr.
Our Leadership Leonard M. Tannenbaum, our Chief Investment Officer and Executive Chairman, has over 25 years of investment management experience. He has taken three other entities public and has managed several externally-managed investment vehicles with approximately $5.0 billion of assets under management in the aggregate. During his career, Mr.
In October 2022, the credit agreement with Subsidiary of Public Company H was amended to, among other things, increase the total loan commitment by $50.0 million, of which $30.0 million of the new loan commitment was allocated pro rata to the Company, $5.0 million was allocated to AFCIF and the remaining $15.0 million was allocated to a third-party lender.
In October 2022, the credit agreement with Subsidiary of Public Company H was amended to, among other things, increase the total loan commitment by $50.0 million , of which $30.0 million of the new loan commitment was allocated pro rata to us, $5.0 million was allocated to AFCIF and the remaining $15.0 million was allocated to a third-party lender.
Key model inputs include: the loan’s credit spread; OID and exit fees (if any); the timing and amount of future funding; the expected tenor and cost of asset-level financing; expected timing of repayments; likelihood of a loan extension past initial maturity; extension fees (if any); the cost of servicing; and an estimate of our management, general and administrative expenses.
Key model inputs typically include: the loan’s credit spread; OID and exit fees (if any); the timing and amount of future funding; the expected tenor and cost of asset-level financing; expected timing of repayments; likelihood of a loan extension past initial maturity; extension fees (if any); the cost of servicing; and an estimate of our management, general and administrative expenses.
Kalikow or any of their or our respective affiliates or entities in which any such person is an executive, in each case, excluding AFC Warehouse, our affiliate that is also managed by our Manager (such accounts, private funds, pooled investment vehicles and other entities, collectively, the “Ancillary Entities”), and, subject to compliance with the Manager COI Policy (as defined below), our related persons transaction policy, our code of business conduct and ethics and applicable regulatory considerations, our Manager may allocate such loans and participate in such loans on behalf of Ancillary Entities under such allocation process as our Manager deems reasonable under the circumstances in good faith.
Tannenbaum, or any of their or our respective affiliates or entities in which any such person is an executive, in each case, excluding AFC Warehouse, our affiliate that is also managed by our Manager (such accounts, private funds, pooled investment vehicles and other entities, collectively, the “Ancillary Entities”), and, subject to compliance with the Manager COI Policy (as defined below), our related persons transaction policy, our code of business conduct and ethics and applicable regulatory considerations, our Manager may allocate such loans and participate in such loans on behalf of Ancillary Entities under such allocation process as our Manager deems reasonable under the circumstances in good faith.
If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration, and other matters. 22 Table of Contents Federal Laws Applicable to the Regulated Cannabis Industry Cannabis (with the exception of hemp containing no more than 0.3% THC by dry weight) is illegal under U.S. federal law.
If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration, and other matters. 26 Table of Contents Federal Laws Applicable to the Regulated Cannabis Industry Cannabis (with the exception of hemp containing no more than 0.3% THC by dry weight) is illegal under U.S. federal law.
The aggregate Core Earnings, Annual Hurdle Amount, Clawback Amount and any components thereof for the initial and final fiscal years that our Management Agreement is in effect will be prorated based on the number of days during the initial and final fiscal years, respectively, that our Management Agreement is in effect, to the extent applicable. 15 Table of Contents Incentive Compensation Illustration The following illustration sets forth a simplified graphical representation of the calculation of our quarterly Incentive Compensation in accordance with our Management Agreement without consideration to any Clawback Obligation.
The aggregate Core Earnings, Annual Hurdle Amount, Clawback Amount and any components thereof for the initial and final fiscal years that our Management Agreement is in effect will be prorated based on the number of days during the initial and final fiscal years, respectively, that our Management Agreement is in effect, to the extent applicable. 19 Table of Contents Incentive Compensation Illustration The following illustration sets forth a simplified graphical representation of the calculation of our quarterly Incentive Compensation in accordance with our Management Agreement without consideration to any Clawback Obligation.
Although we believe our Manager’s expertise and our flexible funding structure provide us with valuable competitive advantages, we may not be able to achieve our business goals or expectations due to the competitive risks that we face. 21 Table of Contents Regulatory Environment Our operations are subject to regulation, supervision, and licensing under various United States, state, provincial, and local statutes, ordinances and regulations.
Although we believe our Manager’s expertise and our flexible funding structure provide us with valuable competitive advantages, we may not be able to achieve our business goals or expectations due to the competitive risks that we face. 25 Table of Contents Regulatory Environment Our operations are subject to regulation, supervision, and licensing under various United States, state, provincial, and local statutes, ordinances and regulations.
Flexible Structure : We believe we have a more flexible funding structure, with the ability to redeploy funding more quickly than the typical REIT land ownership models and traditional lenders.
Flexible Structure : We believe we have a more flexible funding structure, with the ability to redeploy capital more quickly than the typical REIT land ownership models and traditional lenders.
For additional information, see “— Incentive Compensation ” and “— Incentive Compensation—Incentive Compensation Clawback .” Quarterly in arrears in cash. 12 Table of Contents Expense Reimbursement We pay all of our costs and expenses and reimburse our Manager or its affiliates for expenses of our Manager and its affiliates paid or incurred on our behalf, excepting only those expenses that are specifically the responsibility of our Manager pursuant to our Management Agreement.
For additional information, see “— Incentive Compensation ” and “— Incentive Compensation—Incentive Compensation Clawback .” Quarterly in arrears in cash. 15 Table of Contents Expense Reimbursement We pay all of our costs and expenses and reimburse our Manager or its affiliates for expenses of our Manager and its affiliates paid or incurred on our behalf, excepting only those expenses that are specifically the responsibility of our Manager pursuant to our Management Agreement.
Item 1. Business The following description of the business of AFC Gamma, Inc. should be read in conjunction with the information included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2022. Unless the context otherwise requires, the terms “we,” “us” or “our” refers to AFC Gamma, Inc.
Item 1. Business The following description of the business of AFC Gamma, Inc. should be read in conjunction with the information included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2023. Unless the context otherwise requires, the terms “we,” “us” or “our” refers to AFC Gamma, Inc.
For a summary of compensation paid to our Manager for the years ended December 31, 2022 and 2021, see Note 15 to our consolidated financial statements in this Annual Report for more information. On March 10, 2022, we entered into an amendment to our Management Agreement between us and our Manager.
For a summary of compensation paid to our Manager for the years ended December 31, 2023 and 2022, see Note 15 to our consolidated financial statements in this Annual Report for more information. On March 10, 2022, we entered into an amendment to our Management Agreement between us and our Manager.
Our Manager also evaluates the Early Read Memorandum prepared by the deal team to evaluate the likely financing terms, comparable market transactions and the impact of the loan on our overall portfolio construction from a diversification and return standpoint. Loans are priced based on our Manager’s view of liquidity and market conditions.
Our Manager also evaluates the Early Read Memorandum prepared by the deal team to evaluate the likely financing terms, comparable market transactions and the impact of the loan on our overall portfolio construction from a diversification and return standpoint. Loans are priced based on our Manager’s view of risk and market conditions.
Although cannabis remains illegal at the federal level, all but three states now have some form of cannabis legalization, and more than half of the country’s population live in states that allows for “adult use” of cannabis leading to even more widespread commercialization of cannabis by licensed entities.
Although cannabis remains illegal at the federal level, all but nine states now have some form of cannabis legalization, and more than half of the country’s population live in states that allows for “adult use” of cannabis leading to even more widespread commercialization of cannabis by licensed entities.
Prior to the consummation of our IPO, we were not obligated to reimburse our Manager or its affiliates, as applicable, for any compensation paid to Mr. Tannenbaum, Mr. Kalikow or Mrs. Tannenbaum. For the years ended December 31, 2022 and 2021, our Manager did not seek reimbursement for our allocable share of Mr. Kalikow and Mr.
Prior to the consummation of our IPO, we were not obligated to reimburse our Manager or its affiliates, as applicable, for any compensation paid to Mr. Tannenbaum, Mr. Kalikow or Mrs. Tannenbaum. For the years ended December 31, 2023 and 2022, our Manager did not seek reimbursement for our allocable share of Mr. Kalikow and Mr.
Our Manager’s team meets regularly as a full team where each member is encouraged to actively participate in a wide range of topics relating to our operations. 23 Table of Contents We believe that our Manager’s ability to attract, develop, engage and retain key personnel is essential to our operations.
Our Manager’s team meets regularly as a full team where each member is encouraged to actively participate in a wide range of topics relating to our operations. 27 Table of Contents We believe that our Manager’s ability to attract, develop, engage and retain key personnel is essential to our operations.
As part of the expansion, the interest rate increased from a blended weighted-average rate across three tranches of 13.7% to U.S. prime rate plus 10.3%, subject to a U.S. prime rate floor of 4.5%, per annum and the PIK interest decreased from a blended weighted-average rate across three tranches of 1.8% to 0.0% per annum.
As part of the expansion, the interest rate increased from a blended weighted-average rate across three tranches of 13.7% to U.S. prime rate plus 10.25%, subject to a U.S. prime rate floor of 4.5%, per annum and the PIK interest decreased from a blended weighted-average rate across three tranches of 1.8% to 0.0% per annum.
As of December 31, 2022, our portfolio of assets, excluding assets held in TRS1, had weighted average real estate collateral coverage of approximately 1.1 times our aggregate committed principal amount of such loans, with the real estate collateral coverage for each of our loans measured as of the time of closing for such loan and based on various sources of data available at such time. 4 Table of Contents Leading loan origination platform in high-growth cannabis market with extensive barriers to entry : Through our size and scale of operations, as well as our incumbency and institutional infrastructure, we believe we are well positioned to continue as a leading financing source of choice for cannabis companies.
As of December 31, 2023, our portfolio of assets held outside of TRS1 had a weighted average real estate collateral coverage of approximately 1.0 times our aggregate committed principal amount of such loans, with the real estate collateral coverage for each of our loans measured as of the time of closing for such loan and based on various sources of data available at such time. 4 Table of Contents Leading loan origination platform in high-growth cannabis market with extensive barriers to entry : Through our size and scale of operations, as well as our incumbency and institutional infrastructure, we believe we are well positioned to continue as a leading financing source of choice for cannabis companies.
As of December 31, 2022, our portfolio of assets held outside of TRS1 had a weighted average real estate collateral coverage of approximately 1.1 times our aggregate committed principal amount of such loans, with the real estate collateral coverage for each of our loans measured as of the time of closing for such loan and based on various sources of data available at such time.
As of December 31, 2023, our portfolio of assets held outside of TRS1 had a weighted average real estate collateral coverage of approximately 1.0 times our aggregate committed principal amount of such loans, with the real estate collateral coverage for each of our loans measured as of the time of closing for such loan and based on various sources of data available at such time.
We believe we continue to be well positioned to take advantage of the capital supply and demand imbalance that exists in the cannabis market as well as the rising interest rate environment in the commercial real estate market.
We believe we continue to be well positioned to take advantage of the capital supply and demand imbalance that exists in the cannabis market as well as the elevated interest rate environment in the commercial real estate market.
Twenty-one of those states, the District of Columbia, Guam, and Northern Mariana have legalized cannabis for adults for non-medical purposes as well (sometimes referred to as adult or recreational use).
Twenty-four of those states, the District of Columbia, Guam, and Northern Mariana have legalized cannabis for adults for non-medical purposes as well (sometimes referred to as adult or recreational use).
Our Manager as well as our management team provided by our Manager and our Board strive to be attuned to the macro-environment and political environment as they relate to the lending and cannabis industries and the commercial real estate sector. 19 Table of Contents We expect to benefit from the tested method of capital allocation and on-going investment monitoring developed by our Manager.
Our Manager as well as our management team provided by our Manager and our Board strive to be attuned to the macro-environment and political environment as they relate to the lending and cannabis industries and the commercial real estate sector. We expect to benefit from the tested method of capital allocation and on-going investment monitoring developed by our Manager.
Termination for Cause We may terminate our Management Agreement effective upon 30 days’ prior written notice, without payment of any termination fee, if (i) our Manager, its agents or its assignees breach any material provision of our Management Agreement and such breach shall continue for a period of 30 days after written notice thereof specifying such breach and requesting that the same be remedied in such 30-day period (or 45 days after written notice of such breach if our Manager takes steps to cure such breach within 30 days of the written notice); (ii) there is a commencement of any proceeding relating to our Manager’s bankruptcy or insolvency, including an order for relief in an involuntary bankruptcy case or our Manager authorizing or filing a voluntary bankruptcy petition; (iii) any Manager change of control occurs that a majority of the independent directors determines is materially detrimental to us taken as a whole; (iv) our Manager is dissolved; or (v) our Manager commits fraud against us, misappropriates or embezzles our funds, or acts, or fails to act, in a manner constituting bad faith, willful misconduct, gross negligence or reckless disregard in the performance of its duties under this Agreement; provided, however, that if any of the actions or omissions described in this clause (v) are caused by an employee, personnel and/or officer of our Manager or one of its affiliates and our Manager (or such affiliate) takes all necessary and appropriate action against such person and cures the damage caused by such actions or omissions within 30 days of our Manager’s actual knowledge of its commission or omission, we shall not have the right to terminate our Management Agreement.
Our Management Agreement was amended and restated to reflect these terms upon the consummation of our IPO. 8 Table of Contents Termination for Cause We may terminate our Management Agreement effective upon 30 days’ prior written notice, without payment of any termination fee, if (i) our Manager, its agents or its assignees breach any material provision of our Management Agreement and such breach shall continue for a period of 30 days after written notice thereof specifying such breach and requesting that the same be remedied in such 30-day period (or 45 days after written notice of such breach if our Manager takes steps to cure such breach within 30 days of the written notice); (ii) there is a commencement of any proceeding relating to our Manager’s bankruptcy or insolvency, including an order for relief in an involuntary bankruptcy case or our Manager authorizing or filing a voluntary bankruptcy petition; (iii) any Manager change of control occurs that a majority of the independent directors determines is materially detrimental to us taken as a whole; (iv) our Manager is dissolved; or (v) our Manager commits fraud against us, misappropriates or embezzles our funds, or acts, or fails to act, in a manner constituting bad faith, willful misconduct, gross negligence or reckless disregard in the performance of its duties under this Agreement; provided, however, that if any of the actions or omissions described in this clause (v) are caused by an employee, personnel and/or officer of our Manager or one of its affiliates and our Manager (or such affiliate) takes all necessary and appropriate action against such person and cures the damage caused by such actions or omissions within 30 days of our Manager’s actual knowledge of its commission or omission, we shall not have the right to terminate our Management Agreement.
We purchased the loan commitments from the Manager at accreted cost plus accrued PIK interest. We did not pay any fees or premium to our Manager for our acquisition of our Manager’s loan commitments under the Credit Agreement with Private Company A (the “Private Company A Credit Facility”) pursuant to the September Commitment Assignment.
We purchased the loan commitments from our Manager at accreted cost plus accrued PIK interest. We did not pay any fees or premium to our Manager for our acquisition of our Manager’s loan commitments under the Credit Agreement with Private Company A (the “Private Company A Credit Facility”) pursuant to the S eptember Commitment Assignment.
Members of the Investment Committee of our Manager and the investment personnel provided by our Manager have approximately 100 years of combined investment management experience and are a valuable resource to us.
Members of the Investment Committee of our Manager and the investment personnel provided by our Manager have approximately 80 years of combined investment management experience and are a valuable resource to us.
In addition, the sale of the collateral securing our loans may be difficult and even for loans to cannabis operators, the collateral securing our loans may be sold to a party outside of the cannabis industry.
In addition, even for loans to cannabis operations, the sale of the collateral securing our loans may be difficult and may be sold to a party outside of the cannabis industry.
While we are a young company, having commenced operations in July 2020 and completed our initial public offering in March 2021, we believe our Manager provides a committed team of employees with substantial experience in each aspect of our operations, including cash flow and real estate lending, construction and real estate development, portfolio management, corporate finance and capital markets.
While we are a young company, having commenced operations in July 2020 and completed our IPO in March 2021, we believe our Manager provides a committed team of employees with substantial experience in each aspect of our operations, including cash flow and real estate lending, construction and real estate development, portfolio management, corporate finance and capital markets.
The primary components of the investment process are as follows: Origination Underwriting Investment Committee Legal Documentation and Post-Closing • Direct origination platform works to create enhanced yields and allows us to put in greater controls for loans in which our Manager originates and structures • Disciplined underwriting process leads to a highly selective approach • Focused on managing credit risk through comprehensive investment review process • Investment team works alongside external counsel to negotiate credit agreements and collateral liens • Platform drives increased deal flow, which provides for improved loan selectivity • Potential loans are screened based on four key criteria: company profile, state dynamics, regulatory matters and real estate asset considerations • The Investment Committee must approve each loan before commitment papers are issued • Emphasis is placed on financial covenants and limitations on actions that may be adverse to lenders • Allows for specific portfolio construction and a focus on higher quality companies • For the commercial real estate pipeline, as of March 1, 2023 since June 1, 2022 , we had 20 active loans in our pipeline at various stages in the diligence process, and we had passed on 117 of 137 sourced loan opportunities due to, among other reasons, nontarget location, high loan to cost, purchase price and/or value, insufficient equity, inexperienced sponsor and lack of net operating income • For the cannabis pipeline, as of March 1, 2023 since January 1, 2020 , we had 14 active loans in our pipeline at various stages in the diligence process, and we had passed on 666 of 709 sourced loan opportunities due to, among other reasons, lack of collateral, lack of cash flow, stage of company, state dynamics and lack of cash flow • Other tools that we frequently use to verify data include, but are not limited to: appraisals, quality of earnings, environmental reports, site visits, anti-money laundering compliance, comparable company analyses and background checks • Members of the Investment Committee currently include: Leonard M.
The primary components of the investment process are as follows: 23 Table of Contents Origination Underwriting Investment Committee Legal Documentation and Post-Closing • Direct origination platform works to create enhanced yields and allows us to put in greater controls for loans in which our Manager originates and structures • Disciplined underwriting process leads to a highly selective approach • Focused on managing credit risk through comprehensive investment review process • Investment team works alongside external counsel to negotiate credit agreements and collateral liens • Platform drives increased deal flow, which provides for improved loan selectivity • Potential loans are screened based on four key criteria: company profile, state dynamics, regulatory matters and real estate asset considerations • The Investment Committee must approve each loan before commitment papers are issued • Emphasis is placed on financial covenants and limitations on actions that may be adverse to lenders • Allows for specific portfolio construction and a focus on higher quality companies • For the commercial real estate pipeline, as of March 1, 2024 since June 1, 2022, we had 29 active loans in our pipeline at various stages in the diligence process, and we had passed on 396 of 432 sourced loan opportunities due to, among other reasons, nontarget location, high loan to cost, purchase price and/or value, insufficient equity, inexperienced sponsor and lack of net operating income • For the cannabis pipeline, as of March 1, 2024 since January 1, 2020, we had 10 active loans in our pipeline at various stages in the diligence process, and we had passed on 752 of 808 sourced loan opportunities due to, among other reasons, lack of collateral, lack of cash flow, stage of company, state dynamics and lack of cash flow • Other tools that we frequently use to verify data include, but are not limited to: appraisals, quality of earnings, environmental reports, site visits, construction review, anti-money laundering compliance, comparable company analyses and background checks • Members of the Investment Committee currently include: Leonard M.
All our loans require the approval of the Investment Committee. The members of the Investment Committee currently consist of Mr. Tannenbaum, Mrs. Tannenbaum, Mr. Kalikow and Mr. Berman.
All of our loans require the approval of the Investment Committee. The members of the Investment Committee currently consist of Mr. Tannenbaum, Mrs. Tannenbaum, Mr. Neville and Mr. Berman.
Some of our cannabis-related borrowers have their equity securities listed for public trading on the Canadian Securities Exchange (“CSE”) in Canada and/or over-the-counter (“OTC”) in the United States. We have expanded our investment guidelines to invest in attractive commercial real estate financing opportunities emerging from the current interest rate environment.
Some of our cannabis-related borrowers have their equity securities listed for public trading on the Canadian Securities Exchange (“CSE”) in Canada and/or over-the-counter (“OTC”) in the United States. 2 Table of Contents We have expanded our investment guidelines to invest in attractive commercial real estate financing opportunities emerging from the current interest rate environment. As the U.S.
Tannenbaum, Jonathan Kalikow, Bernard D. Berman and Robyn Tannenbaum. • Portfolio is proactively managed to monitor ongoing performance, in some instances, through seats on borrowers’ boards of directors or board observer rights 20 Table of Contents Our Manager’s origination team meets regularly to evaluate new loan opportunities, employing a highly collaborative approach to investing.
Tannenbaum, Daniel Neville, Bernard D. Berman and Robyn Tannenbaum. • Portfolio is proactively managed to monitor ongoing performance, in some instances, through seats on borrowers’ boards of directors or board observer rights 24 Table of Contents Our Manager’s origination team meets regularly to evaluate new loan opportunities, employing a highly collaborative approach to investing.
Consistent with that, the federal government has chosen not to interfere with the state legal cannabis programs and has not brought criminal enforcement against state law compliant cannabis licensees or those doing business with them for the past eight years.
Consistent with that, the federal government has chosen not to interfere with the state-regulated cannabis programs and has not brought criminal enforcement against state law compliant cannabis licensees or those doing business with them for the past nine years.
From January 1, 2020 to March 1, 2023, members of our management team, provided by our Manager, and the members of the investment committee of our Manager (the “Investment Committee”), who advise on our investments and operations, sourced over $17.0 billion of loans across the cannabis industry in various states while maintaining a robust pipeline of potentially actionable opportunities.
From January 1, 2020 to March 1, 2024, members of our management team, provided by our Manager, and the members of the investment committee of our Manager (the “Investment Committee”), who advise on our investments and operations, sourced over $19.4 billion of loans across the cannabis industry in various states while maintaining a robust pipeline of potentially actionable opportunities.
Consummation of any Internalization Transaction agreed to between us and our Manager is conditioned upon the satisfaction of the following conditions: (i) our receipt of a fairness opinion from a nationally-recognized investment banking firm to the effect that the consideration to be paid by us for the assets and equity of our Manager is fair, from a financial point of view, to our shareholders who are not affiliated with our Manager or its affiliates; (ii) the approval of the acquisition by the Internalization Committee; and (iii) the approval of our shareholders holding a majority of the votes cast on such Internalization Transaction proposal at a meeting of shareholders duly called and at which a quorum is present, any of which conditions may be waived by us, in our sole discretion.
Consummation of any Internalization Transaction agreed to between us and our Manager is conditioned upon the satisfaction of the following conditions: (i) our receipt of a fairness opinion from a nationally-recognized investment banking firm to the effect that the consideration to be paid by us for the assets and equity of our Manager is fair, from a financial point of view, to our shareholders who are not affiliated with our Manager or its affiliates; (ii) the approval of the acquisition by the Internalization Committee; and (iii) the approval of our shareholders holding a majority of the votes cast on such Internalization Transaction proposal at a meeting of shareholders duly called and at which a quorum is present, any of which conditions may be waived by us, in our sole discretion. 9 Table of Contents The price to be paid to our Manager in any Internalization Transaction may be payable in cash, shares of our common stock or a combination at the discretion of our Board.
We commenced operations on July 31, 2020 and completed our initial public offering (“IPO”) in March 2021. We have elected to be taxed as a REIT under Section 856 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2020.
We commenced operations on July 31, 2020 and completed our initial public offering (“IPO”) in March 2021. We have elected to be taxed as a real estate investment trust (a “REIT”) under Section 856 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2020.
We do not pay any consideration to AFC Agent for its services as administrative agent under such credit facilities. Management Compensation Our Manager will manage our day-to-day affairs.
We do not pay any consideration to AFC Agent for its services as administrative agent under such credit facilities. 14 Table of Contents Management Compensation Our Manager will manage our day-to-day affairs.
Our Manager, its affiliates and the members of our Investment Committee manage several externally-managed vehicles totaling over $400.0 million in cannabis-related assets, including AFC Gamma, Inc. and AFC Warehouse Holding, LLC (“AFC Warehouse”), one of our affiliates. Our Manager’s Investment Committee is comprised of Leonard M. Tannenbaum, Jonathan Kalikow, Bernard D. Berman, and Robyn Tannenbaum.
Our Manager, its affiliates and the members of our Investment Committee manage several externally-managed vehicles totaling over $400.0 million in cannabis-related assets, including AFC Gamma, Inc. and AFC Warehouse Holding, LLC (“AFC Warehouse”), one of our affiliates. Our Manager’s Investment Committee is comprised of Leonard M. Tannenbaum, Robyn Tannenbaum, Bernard D. Berman, and Daniel Neville. In September 2023, Mr.
TRS1 began operating in July 2021 and the financial statements of TRS1 have been consolidated within our consolidated financial statements. 3 Table of Contents We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), and 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, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), and 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, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Any action to be taken by the Investment Committee requires the approval of a majority of the members of the Investment Committee; provided that during any time that the Investment Committee is comprised of less than four (4) members, any action by the Investment Committee shall require unanimous approval of all members of the Investment Committee.
An y action to be taken by the Investment Committee requires the approval of a majori ty of the members of the Investment Committee; provided that during any time that the Investment Committee is comprised of less than four (4) members, any action by the Investment Committee shall require unanimous approval of all members of the Investment Committee.
During the years ended December 31, 2022 and 2021, our Manager earned a Base Management Fee of approximately $3.4 million and $2.3 million respectively, which was net of a Base Management Fee Rebate of approximately $1.8 million and $1.0 million, respectively.
During the years ended December 31, 2023 and 2022, our Manager earned a Base Management Fee of approximately $3.7 million and $3.4 million respectively, which was net of a Base Management Fee Rebate of approximately $1.7 million and $1.8 million, respectively.
Our Portfolio For information about our investment portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Investment Portfolio” and Notes to our consolidated financial statements included in this Annual Report on Form 10-K.
Our Portfolio For information about our investment portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Investment Portfolio” and the notes to our consolidated financial statements included in this Annual Report.
Costs and expenses paid or incurred by the Manager on our behalf are reimbursed monthly in cash to the Manager and are made regardless of whether any cash distributions are made to our shareholders. 17 Table of Contents Termination Fee Upon termination of our Management Agreement, a Termination Fee will be payable to our Manager by us in cash in the event that (i) we decline to renew our Management Agreement, without cause, upon 180 days prior written notice and the affirmative vote of at least two-thirds of our independent directors that there has been unsatisfactory performance by our Manager that is materially detrimental to us taken as a whole, or (ii) our Management Agreement is terminated by our Manager (effective upon 60 days’ prior written notice) based upon our default in the performance or observance of any material term, condition or covenant contained in our Management Agreement and such default continuing for a period of 30 days after written notice thereof specifying such default and requesting that the same be remedied in such 30-day period.
Termination Fee Upon termination of our Management Agreement, a Termination Fee will be payable to our Manager by us in cash in the event that (i) we decline to renew our Management Agreement, without cause, upon 180 days prior written notice and the affirmative vote of at least two-thirds of our independent directors that there has been unsatisfactory performance by our Manager that is materially detrimental to us taken as a whole, or (ii) our Management Agreement is terminated by our Manager (effective upon 60 days’ prior written notice) based upon our default in the performance or observance of any material term, condition or covenant contained in our Management Agreement and such default continuing for a period of 30 days after written notice thereof specifying such default and requesting that the same be remedied in such 30-day period.
Our Loan Origination Pipeline As of March 1, 2023, our loan origination pipeline consisted of potential new loans to (i) commercial real estate owners, operators and related businesses representing prospective total loan commitments of approximately $454 million and (ii) state-compliant cannabis operators representing prospective total loan commitments of approximately $245 million.
Our Loan Origination Pipeline As of March 1, 2024, our loan origination pipeline consisted of potential new loans to (i) commercial real estate owners, operators and related businesses representing prospective total loan commitments of approximately $701 million and (ii) state law compliant cannabis operators representing prospective total loan commitments of approximately $279 million.
For more information on regulatory risks, see Risks Related to the Cannabis Industry and Related Regulations . State Regulation of the Cannabis Industry Thirty-nine states, the District of Columbia, Puerto Rico, the Virgin Islands, and Guam have legalized the commercial sale of cannabis for certain medical purposes.
For more information on regulatory risks, see “ Risk Factors — Risks Related to the Cannabis Industry and Related Regulations .” State Regulation of the Cannabis Industry Forty-one states, the District of Columbia, Puerto Rico, the Virgin Islands, and Guam have legalized the commercial sale of cannabis for certain medical purposes.
Each of our officers is employed by our Manager and certain of our officers are members of its Investment Committee. Our Manager’s team is comprised of professionals with extensive and diverse expertise and significant financing industry experience.
Each of our officers is employed by our Manager and certain of our officers are members of AFC Gamma’s Investment Committee. 6 Table of Contents Our Manager’s team is comprised of professionals with extensive and diverse expertise and significant financing industry experience.
For purposes of computing the Base Management Fees, “Equity” means, as of any date (i) the sum of (A) the net proceeds from all of our issuances of equity securities since our inception through such date (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus (B) our retained earnings at the end of the most recently completed fiscal quarter determined in accordance with GAAP (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less (ii) (A) any amount that we have paid to repurchase our common stock since our inception through such date, (B) any unrealized gains and losses and other non-cash items that have impacted shareholders’ equity as reported in our consolidated financial statements prepared in accordance with GAAP through such date; and (C) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above, through such date, in each case as determined after discussions between our Manager and our independent directors and approval by a majority of our independent directors. 14 Table of Contents Incentive Compensation In addition to the Base Management Fees, our Manager receives incentive compensation (“Incentive Compensation” or “Incentive Fees”) with respect to each fiscal quarter (or portion thereof that our Management Agreement is in effect) based upon our achievement of targeted levels of Core Earnings (as defined below).
For purposes of computing the Base Management Fees, “Equity” means, as of any date (i) the sum of (A) the net proceeds from all of our issuances of equity securities since our inception through such date (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus (B) our retained earnings at the end of the most recently completed fiscal quarter determined in accordance with generally accepted accounting principles (“GAAP”) in the United States (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less (ii) (A) any amount that we have paid to repurchase our common stock since our inception through such date, (B) any unrealized gains and losses and other non-cash items that have impacted shareholders’ equity as reported in our consolidated financial statements prepared in accordance with GAAP through such date; and (C) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above, through such date, in each case as determined after discussions between our Manager and our independent directors and approval by a majority of our independent directors.
Termination Fee Equal to three times the sum of (i) the annual Base Management Fee and (ii) the annual Incentive Compensation, in each case, earned by our Manager during the 12-month period immediately preceding the most recently completed fiscal quarter prior to the date of termination.
For additional information, see “— Expense Reimbursement .” Monthly in cash. 16 Table of Contents Termination Fee Equal to three times the sum of (i) the annual Base Management Fee and (ii) the annual Incentive Compensation, in each case, earned by our Manager during the 12-month period immediately preceding the most recently completed fiscal quarter prior to the date of termination.
We could remain an “emerging growth company” for up to five years from our initial public offering, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.
We could remain an “emerging growth company” for up to five years from our initial public offering, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. 3 Table of Contents Spin-Off On February 22, 2024, we announced that our Board unanimously approved a plan to spin-off (the “Spin-Off”) our commercial real estate (“CRE”) portfolio into an independent, publicly traded REIT, named Sunrise Realty Trust, Inc.
Initially, no Incentive Compensation is payable with respect to any fiscal quarter unless our Core Earnings for such quarter exceed the amount equal to the product of (i) 1.75% and (ii) the Adjusted Capital as of the last day of the immediately preceding fiscal quarter (the “Hurdle Amount”).
To the extent earned by our Manager, the Incentive Compensation will be payable to our Manager quarterly in arrears in cash. 18 Table of Contents Initially, no Incentive Compensation is payable with respect to any fiscal quarter unless our Core Earnings for such quarter exceed the amount equal to the product of (i) 1.75% and (ii) the Adjusted Capital as of the last day of the immediately preceding fiscal quarter (the “Hurdle Amount”).
Further, we note that, as presented in the above table, Adjusted Capital, Core Earnings, Catch-up Amount and Excess Earnings Amount are hypothetical non-GAAP financial measures and reconciliation of those numbers to the most directly comparable financial measure prepared in accordance with GAAP are not provided in this Annual Report on Form 10-K as they are derived from our actual historical financials and are meant to serve as an illustrative tool to assist the investor in understanding how our Manager’s fees would be calculated based on hypothetical assumptions pursuant to the terms of the Management Agreement.
Further, we note that, as presented in the above table, Adjusted Capital, Core Earnings, Catch-up Amount and Excess Earnings Amount are hypothetical non-GAAP financial measures and reconciliation of those numbers to the most directly comparable financial measure prepared in accordance with GAAP are not provided in this Annual Report as they are derived from our actual historical financials and are meant to serve as an illustrative tool to assist the investor in understanding how our Manager’s fees would be calculated based on hypothetical assumptions pursuant to the terms of the Management Agreement. 21 Table of Contents Expense Reimbursement We pay all of our costs and expenses and reimburse our Manager and/or its affiliates for expenses of our Manager and/or its affiliates paid or incurred on our behalf, excepting only those expenses that are specifically the responsibility of our Manager pursuant to our Management Agreement.
We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act. Our wholly-owned subsidiary, AFCG TRS1, LLC (“TRS1”), operates as a taxable real estate investment trust subsidiary (a “TRS”).
We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940 as amended (the “Investment Company Act”). Our wholly-owned subsidiary, AFCG TRS1, LLC (“TRS1”), operates as a taxable REIT subsidiary (a “TRS”). TRS1 began operating in July 2021.
As the Federal Reserve began to increase interest rates in 2022 to curb rising inflation, we believe the higher interest rates and associated pressures have created an opportunity in real estate lending, where there is currently less capital available in the marketplace to finance real estate projects.
Federal Reserve Board (the “Federal Reserve”) began to increase interest rates in the first quarter of 2022 and continued to do so through the third quarter of 2023 in an effort to curb rising inflation, we believe the higher interest rates and associated pressures have created an opportunity in real estate lending, where there is currently less capital available in the marketplace to finance real estate projects.
Additionally, our Manager may terminate our Management Agreement if we are required to register as an investment company under the Investment Company Act, in which case we shall not be required to pay a termination fee. 8 Table of Contents Internalization of our Manager Our Management Agreement was amended and restated in connection with our IPO such that upon the date on which our equity equals or exceeds $1,000,000,000 (such date, the “Internalization Trigger Date”), we may, at our election, provide our Manager with a written offer for an internalization transaction in which our Manager will contribute all of its assets to us, or in the alternative, the equity owners of our Manager will contribute 100% of the outstanding equity interest in our Manager to us (such transaction an “Internalization Transaction”).
Internalization of our Manager Our Management Agreement was amended and restated in connection with our IPO such that upon the date on which our equity equals or exceeds $1,000,000,000 (such date, the “Internalization Trigger Date”), we may, at our election, provide our Manager with a written offer for an internalization transaction in which our Manager will contribute all of its assets to us, or in the alternative, the equity owners of our Manager will contribute 100% of the outstanding equity interest in our Manager to us (such transaction an “Internalization Transaction”).
(2) In September 2021, we entered into an assignment with our Manager (the “September Commitment Assignment”) pursuant to which our Manager assigned to us its commitment to make loans to Private Company A in a principal amount of up to $20.0 million, which was funded in September 2021.
As of December 31, 2023 , our outstanding principal balance was approximately $3.8 million, which is fully funded . 11 Table of Contents (2) In September 2021, we entered into an assignment with our Manager (the “September Commitment Assignment”) pursuant to which our Manager assigned to us its commitment to make loans to Private Company A in a principal amount of up to $20.0 million , which was funded in September 2021.
Key elements of our strategy include: • Targeting loans for origination and/or investment that typically have the following characteristics: – principal balance greater than $5.0 million; – real estate collateral coverage of at least one times the principal balance; – secured by commercial real estate properties; and – well-capitalized sponsors with substantial experience in particular relevant sectors and geographic markets. • Diversifying our financing sources with increased access to equity and debt capital, which may provide us with a lower overall cost of funding and the ability to hold larger loan sizes, among other things. 18 Table of Contents Underwriting and Investment Process Pursuant to the Management Agreement, our Manager manages our loans and day-to-day operations, subject at all times to the further terms and conditions set forth in the Management Agreement and such further limitations or parameters as may be imposed from time to time by our Board.
Key elements of our strategy include: • Targeting loans for origination and/or investment that typically have the following characteristics: – principal balance greater than $10.0 million; – real estate collateral coverage of at least one times the principal balance; – secured by commercial real estate properties; and – well-capitalized sponsors with substantial experience in particular relevant sectors and geographic markets. • Diversifying our financing sources with increased access to equity and debt capital, which may provide us with a lower overall cost of funding and the ability to hold larger loan sizes, among other things.
In March 2023, TRS1 agreed, subject to certain terms and conditions, to defer an upcoming principal payment and permit a portion of an upcoming cash interest payment to instead be paid in kind.
In March 2023, TRS1 agreed, subject to certain terms and conditions, to defer an upcoming principal payment and permit a portion of an upcoming cash interest payment to instead be paid in kind. In May 2023, Private Company I failed to pay its full principal and interest payments due May 1, 2023.
Kaufman was the Chief Financial Officer of Ladenburg Thalmann Financial Services. 6 Table of Contents Our Manager and Our Management Agreement We are externally managed and advised by our Manager, a registered investment adviser under the Investment Advisers Act of 1940, as amended (“Advisers Act”), and an affiliate of Mr. Tannenbaum, Mrs. Tannenbaum, and Mr. Kalikow.
Our Manager and Our Management Agreement We are externally managed and advised by our Manager, a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and an affiliate of Mr. Tannenbaum, Mrs. Tannenbaum and Mr. Neville.
The Managing Member shall be automatically removed as such in the event of his or her death, permanent physical or mental disability. Upon the resignation or removal of Leonard M.
The Managing Member shall be automatically removed as such in the event of his or her death, permanent physical or mental disability. Upon the resignation or removal of Mr. Tannenbaum as the Managing Member, the members of our Manager will appoint Mrs.
Certain investment opportunities in loans, which may be suitable for us, may also be suitable for other accounts, private funds, pooled investment vehicles or other entities managed or advised, directly or indirectly, by our Manager, Mr. Tannenbaum, Mrs. Tannenbaum, Mr.
Subsequent to December 31, 2023, there were an additional two co-invested loans held by us and our affiliates. Certain investment opportunities in loans, which may be suitable for us, may also be suitable for other accounts, private funds, pooled investment vehicles or other entities managed or advised, directly or indirectly, by our Manager, Mr. Tannenbaum or Mrs.
For additional information, see “— Termination Fee .” Upon specified termination in cash. 13 Table of Contents General Under our Management Agreement, we pay a Base Management Fee and Incentive Compensation to our Manager.
For additional information, see “— Termination Fee .” Upon specified termination in cash. General Under our Management Agreement, we pay a Base Management Fee and Incentive Compensation to our Manager. Upon the consummation of our IPO, our Management Agreement was amended and restated to revise the Base Management Fee and Incentive Compensation payable to our Manager as specified below.
Under these assumptions, the hypothetical quarterly Incentive Compensation payable to our Manager would be $1.045 million as calculated below: Illustrative Amount Calculation 1. What are the Core Earnings? $ 5,225,000 Assumed to be a 5.2% quarterly or 20.9% per annum return on Adjusted Capital as of the last day of the immediately preceding fiscal quarter ($100.0 million). 2.
What are the Core Earnings? $ 5,225,000 Assumed to be a 5.2% quarterly or 20.9% per annum return on Adjusted Capital as of the last day of the immediately preceding fiscal quarter ($100.0 million). 2.
The initial term of the Management Agreement continues until July 31, 2023. After the initial term, the Management Agreement shall automatically renew every year for an additional one-year period, unless we or our Manager elects not to renew. The Management Agreement may be terminated by us or our Manager under certain specified circumstances.
Currently, the Management Agreement automatically renews every year on July 31 st for a one-year period, unless we or our Manager elects not to renew. The Management Agreement may be terminated by us or our Manager under certain specified circumstances.
This example of a quarterly Incentive Compensation calculation assumes the following: ▪ Adjusted Capital as of the last day of the immediately preceding fiscal quarter of $100.0 million; and ▪ Core Earnings before the Incentive Compensation for the specified quarter representing a quarterly yield of 20.9% on Adjusted Capital as of the last day of the immediately preceding fiscal quarter.
This example of a quarterly Incentive Compensation calculation assumes the following: ▪ Adjusted Capital as of the last day of the immediately preceding fiscal quarter of $100.0 million; and ▪ Core Earnings before the Incentive Compensation for the specified quarter representing a quarterly yield of 20.9% on Adjusted Capital as of the last day of the immediately preceding fiscal quarter. 20 Table of Contents Under these assumptions, the hypothetical quarterly Incentive Compensation payable to our Manager would be $1.045 million as calculated below: Illustrative Amount Calculation 1.
Kalikow, one of our directors and our Head of Real Estate, with each such owner also holding a beneficial ownership of our Manager. AFCIF holds approximately one-third of the loan’s aggregate principal amount as of December 31, 2022. On April 1, 2022, our investment in the senior secured loan to Private Company I was transferred to TRS1.
AFCIF holds approximately one-third of the loan’s aggregate principal amount as of December 31, 2023. On April 1, 2022, our investment in the senior secured loan to Private Company I was transferred to TRS1.
Summary Compensation and Expenses Reimbursement Table Year ended December 31, 2022 2021 Management fees $ 5,213,535 $ 3,340,123 Less: outside fees earned (1,785,916) (1,029,315) Base management fees 3,427,619 2,310,808 Incentive fees earned 12,337,631 6,010,704 General and administrative expenses reimbursable to Manager 3,976,312 2,319,074 Total $ 19,741,562 $ 10,640,586 Base Management Fees Initially, our Manager received base management fees (“Base Management Fees”) that were calculated and payable quarterly in arrears in cash, in an amount equal to 0.4375% of our Equity (as defined below), determined as of the last day of each such quarter.
The Incentive Compensation fee payable to our Manager for the years ended December 31, 2023 and 2022 was approximately $10.4 million and $12.3 million, respective ly. 17 Table of Contents Summary Compensation and Expenses Reimbursement Table Years ended December 31, 2023 2022 Management fees $ 5,395,617 $ 5,213,535 Less: outside fees earned (1,693,133) (1,785,916) Base management fees 3,702,484 3,427,619 Incentive fees earned 10,361,821 12,337,631 General and administrative expenses reimbursable to Manager 3,590,594 3,976,312 Total $ 17,654,899 $ 19,741,562 Base Management Fees Initially, our Manager received base management fees (“Base Management Fees”) that were calculated and payable quarterly in arrears in cash, in an amount equal to 0.4375% of our Equity (as defined below), determined as of the last day of each such quarter.
Term The initial term of our Management Agreement shall continue until July 31, 2023. After the initial term, our Management Agreement shall automatically renew every year for an additional one-year period, unless we or our Manager elect not to renew.
Term The Management Agreement automatically renews every year on July 31 st for a one-year period, unless we or our Manager elect not to renew.
Prior to the consummation of our IPO, we were not obligated to reimburse our Manager or its affiliates, as applicable, for any compensation paid to Mr. Tannenbaum, Mr. Kalikow or Mrs. Tannenbaum. For the years ended December 31, 2022 and 2021, our Manager did not seek reimbursement for our allocable share of Mr. Kalikow and Mr.
Prior to the consummation of our IPO, we were not obligated to reimburse our Manager or its affiliates, as applicable, for any compensation paid to Mr. Tannenbaum, Mr. Jonathan Kalikow, a former director and officer of the Company, or Mrs. Tannenbaum.
We draw upon our Manager’s expertise in sourcing, underwriting, structuring and funding capabilities to implement our growth strategy. From January 1, 2020 to December 31, 2022, our Manager and its affiliates have had access to over $17.0 billion of potential loan opportunities, which we have historically focused on loans to cannabis operators.
From January 1, 2020 to December 31, 2023, our Manager and its affiliates have had access to over $19.4 billion of potential loan opportunities, which we have historically focused on loans to cannabis operators.
In August 2022, we committed an additional $8.1 million under the credit agreement with the Subsidiary of Private Company G. Following the expansion, we now hold $73.5 million in commitments, of which we have funded approximately $71.1 million in total principal amount.
ABW’s commitment was ultimately transferred to AFCIF. In August 2022, we committed an additional $8.1 million under the credit agreem ent with Subsidiary of Private Company G. Following the expansion, we now hold $73.5 million in commitments.
We intend to fund these potential loans using capacity under our secured revolving credit facility (the “Revolving Credit Facility,” and the credit agreement governing the Revolving Credit Facility, as amended, restated, supplemented or otherwise modified from time to time, the “Revolving Credit Agreement”), net proceeds of future debt and/or equity offerings, existing cash and/or, depending upon the timing of closing, or net proceeds from loan repayments.
We intend to fund these potential loans using unused borrowing capacity under our senior secured revolving credit facility (the “Revolving Credit Facilit y”), obtained under the Loan and Security Agreement (the “Revolving Credit Agreement”), net proceeds of future debt or equity offerings, including in connection with our at-the-market offering program (the “ATM Program”), existing cash and/or, depending upon the timing of closing, or net proceeds from loan repayments.
As such, the Company’s risk is limited to the carrying value of its investment in any such loan. As of December 31, 2022, there were four co-invested loans held by the Company and affiliates of the Company.
We are not obligated to provide, nor have we provided, any financial support to the other managed investment vehicles. As such, our risk is limited to the carrying value of its investment in any such loan. As of December 31, 2023 , there were four co-invested loans held by us and our affiliates.
(3) In September 2021, we entered into the second amended and restated credit agreement with Subsidiary of Private Company G to, among other things, increase the total loan commitments by $53.4 million in three tranches, with approximately $10.0 million allocated to ABW and the remaining $43.4 million allocated to the Company. ABW’s commitment was ultimately transferred to AFCIF.
Refer to Note 17 to our consolidated financial statements for more information on Private Company A prepayments that occurred subsequent to December 31, 2023 . 12 Table of Contents (3) In September 2021, we entered into the second amended and restated credit agreement with Subsidiary of Private Company G to, among other things, increase the total loan commitments by $53.4 million in three tranches, with approximately $10.0 million allocated to ABW and the remaining $43.4 million allocated to us.
The foregoing is solely a hypothetical example of a quarterly Incentive Compensation that we could pay to our Manager for a given fiscal quarter and is based on the simplified assumptions described above. 16 Table of Contents Non-GAAP Metrics Used in Hypothetical Example As used in this Annual Report on Form 10-K, we use hypothetical Equity, Adjusted Capital, Catch-up Amount and Excess Earnings Amount only as measures in the calculation of the financial metrics that we are required to calculate under the terms of the Management Agreement.
Non-GAAP Metrics Used in Hypothetical Example As used in this Annual Report, we use hypothetical Equity, Adjusted Capital, Catch-up Amount and Excess Earnings Amount only as measures in the calculation of the financial metrics that we are required to calculate under the terms of the Management Agreement.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeFood and Drug Administration (the “FDA”) regulation of cannabis and the possible registration of facilities where cannabis is grown could negatively affect the cannabis industry, which could directly affect our financial condition and the financial condition of our borrowers; • The cannabis industry may face significant opposition from other industries that perceive cannabis products and services as competitive with their own, including but not limited to the pharmaceutical industry, adult beverage industry and tobacco industry, all of which have powerful lobbying and financial resources; and • Consumer complaints and negative publicity regarding cannabis-related products and services could lead to political pressure on states to implement new laws and regulations that are adverse to the cannabis industry, to not modify existing, restrictive laws and regulations, or to reverse current favorable laws and regulations relating to cannabis. 44 Table of Contents We and our borrowers may have difficulty accessing the service of banks and other financial institutions, which may make it difficult to sell products and services, and we may be limited in our ability to provide debt to participants in the cannabis industry, which could materially and adversely affect our business, financial condition, liquidity and results of operations.
Biggest changeFood and Drug Administration (the “FDA”) regulation of cannabis and the possible registration of facilities where cannabis is grown could negatively affect the cannabis industry, which could directly affect our financial condition and the financial condition of our borrowers; • The cannabis industry may face significant opposition from other industries that perceive cannabis products and services as competitive with their own, including but not limited to the hemp industry, pharmaceutical industry, adult beverage industry and tobacco industry, some of which have powerful lobbying and financial resources; and 47 Table of Contents • Consumer complaints and negative publicity regarding cannabis-related products and services could lead to political pressure on states to implement new laws and regulations that are adverse to the cannabis industry, to not modify existing, restrictive laws and regulations, or to reverse current favorable laws and regulations relating to cannabis.
Subject to the approval of our Manager, our Board (which must include a majority of our independent directors) may change our investment strategies or guidelines, financing strategies or leverage policies without the consent of our shareholders.
Subject to the approval of our Board (which must include a majority of our independent directors), our Manager may change our investment strategies or guidelines, financing strategies or leverage policies without the consent of our shareholders.
Subject to the approval of our Manager, our Board (which must include a majority of our independent directors) may change our investment strategies or guidelines, financing strategies or leverage policies with respect to loans, originations, acquisitions, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our shareholders, which could result in a portfolio with a different risk profile than that of our Existing Portfolio or of a portfolio comprised of our target loans.
Subject to the approval of our Board (which must include a majority of our independent directors), our Manager may change our investment strategies or guidelines, financing strategies or leverage policies with respect to loans, originations, acquisitions, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our shareholders, which could result in a portfolio with a different risk profile than that of our Existing Portfolio or of a portfolio comprised of our target loans.
NOI of an income-producing property can be affected by many factors, including, but not limited to: • the ongoing need for capital improvements, particularly in older structures; • changes in operating expenses; • changes in general or local market conditions; • changes in tenant mix and performance, the occupancy or rental rates of the property or, for a property that requires new leasing activity, a failure to lease the property in accordance with the projected leasing schedule; 37 Table of Contents • competition from comparable property types or properties; • unskilled or inexperienced property management; • limited availability of mortgage funds or fluctuations in interest rates which may render the sale and refinancing of a property difficult; • development projects that experience cost overruns or otherwise fail to perform as projected including, without limitation, failure to complete planned renovations, repairs, or construction; • unanticipated increases in real estate taxes and other operating expenses; • challenges to the borrower’s claim of title to the real property; • environmental considerations, including liability for testing, monitoring and remediation; • changes in zoning laws, rent control laws and other similar legal restrictions on property ownership and operation; • other governmental rules and policies; • community health issues, including, without limitation, epidemics and pandemics; • unanticipated structural defects or costliness of maintaining the property; • uninsured losses, such as possible acts of theft, terrorism, social unrest or civil disturbances; • a decline in the operational performance of a facility on the real property (such facilities may include multifamily rental facilities, office properties, retail facilities, hospitality facilities, healthcare-related facilities, industrial facilities, warehouse facilities, restaurants, mobile home facilities, recreational or resort facilities, arenas or stadiums, religious facilities, parking lot facilities or other facilities); and • large-scale fire, earthquake or severe weather-related damage to, or the effect of climate change on, the property and/or its operations.
NOI of an income-producing property can be affected by many factors, including, but not limited to: • the ongoing need for capital improvements, particularly in older structures; • changes in operating expenses; • changes in general or local market conditions; • changes in tenant mix and performance, the occupancy or rental rates of the property or, for a property that requires new leasing activity, a failure to lease the property in accordance with the projected leasing schedule; • competition from comparable property types or properties; • unskilled or inexperienced property management; • limited availability of mortgage funds or fluctuations in interest rates which may render the sale and refinancing of a property difficult; • development projects that experience cost overruns or otherwise fail to perform as projected including, without limitation, failure to complete planned renovations, repairs, or construction; 40 Table of Contents • unanticipated increases in real estate taxes and other operating expenses; • challenges to the borrower’s claim of title to the real property; • environmental considerations, including liability for testing, monitoring and remediation; • changes in zoning laws, rent control laws and other similar legal restrictions on property ownership and operation; • other governmental rules and policies; • community health issues, including, without limitation, epidemics and pandemics; • unanticipated structural defects or costliness of maintaining the property; • uninsured losses, such as possible acts of theft, terrorism, social unrest or civil disturbances; • a decline in the operational performance of a facility on the real property (such facilities may include multifamily rental facilities, office properties, retail facilities, hospitality facilities, healthcare-related facilities, industrial facilities, warehouse facilities, restaurants, mobile home facilities, recreational or resort facilities, arenas or stadiums, religious facilities, parking lot facilities or other facilities); and • large-scale fire, earthquake or severe weather-related damage to, or the effect of climate change on, the property and/or its operations.
Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include: ▪ our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy or prospects; 72 Table of Contents ▪ changes in governmental policies, regulations or laws; ▪ loss of a major funding source or inability to obtain new favorable funding sources in the future; ▪ equity issuances by us, or share resales by our shareholders, or the perception that such issuances or resales may occur; ▪ actual, anticipated or perceived accounting or internal control problems; ▪ publication of research reports about us, the real estate industry or the cannabis industry; ▪ our value of the properties securing our loans; ▪ changes in market valuations of similar companies; ▪ adverse market reaction to any increased indebtedness we may incur in the future; ▪ additions to or departures of the executive officers or key personnel supporting or assisting us from our Manager or its affiliates, including our Manager’s investment professionals; ▪ speculation in the press or investment community about us or other similar companies; ▪ our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts; ▪ increases in market interest rates, which may lead investors to demand a higher distribution yield for our common stock (if we have begun to make distributions to our shareholders) and which could cause the cost of our interest expenses on our debt to increase; ▪ failure to qualify or maintain our qualification as a REIT or exemption from the Investment Company Act; ▪ price and volume fluctuations in the stock market generally; and ▪ general market and economic conditions, including the state of the credit and capital markets.
Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include: ▪ our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy or prospects; 77 Table of Contents ▪ changes in governmental policies, regulations or laws; ▪ loss of a major funding source or inability to obtain new favorable funding sources in the future; ▪ equity issuances by us, or share resales by our shareholders, or the perception that such issuances or resales may occur; ▪ actual, anticipated or perceived accounting or internal control problems; ▪ publication of research reports about us, the real estate industry or the cannabis industry; ▪ our value of the properties securing our loans; ▪ changes in market valuations of similar companies; ▪ adverse market reaction to any increased indebtedness we may incur in the future; ▪ additions to or departures of the executive officers or key personnel supporting or assisting us from our Manager or its affiliates, including our Manager’s investment professionals; ▪ speculation in the press or investment community about us or other similar companies; ▪ our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts; ▪ increases in market interest rates, which may lead investors to demand a higher distribution yield for our common stock (if we have begun to make distributions to our shareholders) and which could cause the cost of our interest expenses on our debt to increase; ▪ failure to qualify or maintain our qualification as a REIT or exemption from the Investment Company Act; ▪ price and volume fluctuations in the stock market generally; and ▪ general market and economic conditions, including the state of the credit and capital markets.
In addition, due to a number of factors (including but not limited to potentially greater clarity and/or unification of the laws and regulations governing cannabis by states and the federal government including through federal legislation or descheduling of cannabis, which may, in turn, encourage additional federally-chartered banks to provide their services to cannabis-related businesses), the number of entities and the amount of funds competing to provide suitable capital may increase, resulting in loans with terms less favorable to us.
In addition, due to a number of factors (including but not limited to potentially greater clarity and/or unification of the laws and regulations governing cannabis by states and the federal government including through federal legislation or rescheduling or descheduling of cannabis, which may, in turn, encourage additional federally-chartered banks to provide their services to cannabis-related businesses), the number of entities and the amount of funds competing to provide suitable capital may increase, resulting in loans with terms less favorable to us.
Our indebtedness could have significant adverse consequences to us, such as: • limiting our ability to satisfy our financial obligations,; 55 Table of Contents • limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital expenditures or other debt service requirements or for other purposes; • limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service debt; • limiting our ability to compete with other companies who are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions; • restricting us from making strategic acquisitions, developing properties or exploiting business opportunities; • restricting the way in which we conduct our business because of financial and operating covenants; • covenants in the agreements governing our and our subsidiaries’ existing and future indebtedness; • exposing us to potential events of default (if not cured or waived) under financial and operating covenants contained in our or our subsidiaries’ debt instruments that could have a material adverse effect on our business, financial condition and operating results; • increasing our vulnerability to a downturn in general economic conditions; and • limiting our ability to react to changing market conditions in our industry and in our borrowers’ industries.
Our indebtedness could have significant adverse consequences to us, such as: • limiting our ability to satisfy our financial obligations,; • limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital expenditures or other debt service requirements or for other purposes; • limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service debt; • limiting our ability to compete with other companies who are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions; 58 Table of Contents • restricting us from making strategic acquisitions, developing properties or exploiting business opportunities; • restricting the way in which we conduct our business because of financial and operating covenants; • covenants in the agreements governing our and our subsidiaries’ existing and future indebtedness; • exposing us to potential events of default (if not cured or waived) under financial and operating covenants contained in our or our subsidiaries’ debt instruments that could have a material adverse effect on our business, financial condition and operating results; • increasing our vulnerability to a downturn in general economic conditions; and • limiting our ability to react to changing market conditions in our industry and in our borrowers’ industries.
Our Charter and Bylaws include, among others, provisions that: • authorize our Board, without your approval, to cause us to issue additional shares of our common stock or to raise capital through the creation and issuance of our preferred stock, debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our Board in its sole discretion may determine; • authorize “blank check” preferred stock, which could be issued by our Board without shareholder approval, subject to certain specified limitations, and may contain voting, liquidation, dividend and other rights senior to our common stock; • establish a classified Board such that not all members of the Board are elected at each annual meeting of shareholders, which may delay the ability of our stockholders to change the membership of a majority of our Board; 58 Table of Contents • specify that only our Board, the chairman of our Board, our chief executive officer or president or, upon the written request of shareholders entitled to cast not less than a majority of the votes entitled to be cast, our secretary can call special meetings of our shareholders; • establish advance notice procedures for shareholder proposals to be brought before an annual meeting of our shareholders, including proposed nominations of individuals for election to our Board; • provide that a majority of directors then in office, even though less than a quorum, may fill any vacancy on our Board, whether resulting from an increase in the number of directors or otherwise; • specify that no shareholder is permitted to cumulate votes at any election of directors; • provide our Board the exclusive power to adopt, alter or repeal any provision of our Bylaws and to make new Bylaws; and • require supermajority votes of the holders of our common stock to amend specified provisions of our Charter.
Our Charter and Bylaws include, among others, provisions that: • authorize our Board, without your approval, to cause us to issue additional shares of our common stock or to raise capital through the creation and issuance of our preferred stock, debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our Board in its sole discretion may determine; • authorize “blank check” preferred stock, which could be issued by our Board without shareholder approval, subject to certain specified limitations, and may contain voting, liquidation, dividend and other rights senior to our common stock; • establish a classified Board such that not all members of the Board are elected at each annual meeting of shareholders, which may delay the ability of our stockholders to change the membership of a majority of our Board; • specify that only our Board, the chairman of our Board, our chief executive officer or president or, upon the written request of shareholders entitled to cast not less than a majority of the votes entitled to be cast, our secretary can call special meetings of our shareholders; • establish advance notice procedures for shareholder proposals to be brought before an annual meeting of our shareholders, including proposed nominations of individuals for election to our Board; • provide that a majority of directors then in office, even though less than a quorum, may fill any vacancy on our Board, whether resulting from an increase in the number of directors or otherwise; • specify that no shareholder is permitted to cumulate votes at any election of directors; • provide our Board the exclusive power to adopt, alter or repeal any provision of our Bylaws and to make new Bylaws; and • require supermajority votes of the holders of our common stock to amend specified provisions of our Charter.
Industry observers anticipate no reversal of that policy of non-enforcement against businesses complying with the state regulated cannabis programs under the Biden administration given his campaign’s position on cannabis and statements made by Attorney General Merrick Garland , discussed below, although prosecutions against state-legal entities cannot be ruled out entirely at this time.
Industry observers anticipate no reversal of that policy of non-enforcement against businesses complying with the state-regulated cannabis programs under the Biden administration given his campaign’s position on cannabis and statements made by Attorney General Merrick Garland , discussed below, although prosecutions against state-regulated entities cannot be ruled out entirely at this time.
Indeed, after the U.S. government removed hemp and its extracts from the CSA as part of the Agriculture Improvement Act of 2008, then FDA Commissioner Scott Gottlieb issued a statement reminding the public of the FDA’s continued authority “to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug and Cosmetic Act (the “FD&C Act”) and section 351 of the Public Health Service Act.” He also reminded the public that “it’s unlawful under the FD&C Act to introduce food containing added cannabidiol (“CBD”) or THC into interstate commerce, or to market CBD or THC products, as, or in, dietary supplements, regardless of whether the substances are hemp-derived,” and regardless of whether health claims are made, because CBD and THC entered the FDA testing pipeline as the subject of public substantial clinical investigations for GW Pharmaceuticals’ Sativex (THC and CBD) and Epidiolex (CBD).
Indeed, after the U.S. government removed hemp and its extracts from the CSA as part of the Agriculture Improvement Act of 2008, then FDA Commissioner Scott Gottlieb issued a statement reminding the public of the FDA’s continued authority “to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug and Cosmetic Act (the “FD&C Act”) and section 351 of the Public Health Service Act.” He also reminded the public that “it’s unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products, as, or in, dietary supplements, regardless of whether the substances are hemp-derived,” and regardless of whether health claims are made, because CBD and THC entered the FDA testing pipeline as the subject of public substantial clinical investigations for GW Pharmaceuticals’ Sativex (THC and CBD) and Epidiolex (CBD).
If the market does not develop as a borrower expects, it could have a material adverse effect on its business; • we, our executive officers and directors and our Manager may, in the ordinary course of business, be named as defendants in litigation arising from our loans to such borrowers and may, as a result, incur significant costs and expenses in connection with such litigation and/or related indemnification obligations; 28 Table of Contents • changes in laws and regulations, as well as their interpretations, may have a disproportionate adverse effect on their business, financial structure or prospects compared to those of larger and more established companies; and • they may have difficulty accessing capital from other providers on favorable terms or at all.
If the market does not develop as a borrower expects, it could have a material adverse effect on its business; • we, our executive officers and directors and our Manager may, in the ordinary course of business, be named as defendants in litigation arising from our loans to such borrowers and may, as a result, incur significant costs and expenses in connection with such litigation and/or related indemnification obligations; 32 Table of Contents • changes in laws and regulations, as well as their interpretations, may have a disproportionate adverse effect on their business, financial structure or prospects compared to those of larger and more established companies; and • they may have difficulty accessing capital from other providers on favorable terms or at all.
We may face greater credit risk to the extent a large portion of our portfolio is concentrated in loans to multiple borrowers that share the same sponsor. 27 Table of Contents Our Existing Portfolio contains loans to companies with operations that are geographically concentrated in Arizona, Connecticut, Georgia, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New Mexico, New York, Ohio and Pennsylvania, and we will be subject to social, political and economic risks of doing business in those states and any other state in which we in the future have lending exposure.
We may face greater credit risk to the extent a large portion of our portfolio is concentrated in loans to multiple borrowers that share the same sponsor. 31 Table of Contents Our Existing Portfolio contains loans to companies with operations that are geographically concentrated in Arizona, Connecticut, Georgia, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New Mexico, New York, Ohio and Pennsylvania, and we will be subject to social, political and economic risks of doing business in those states and any other state in which we in the future have lending exposure.
This concentration of ownership may discourage, delay or prevent a change in control which could have the dual effect of depriving our shareholders from an opportunity to receive a premium for their equity as part of a sale of AFC Gamma, Inc. and otherwise reducing the price of such equity. 74 Table of Contents We are an “emerging growth company” and a “smaller reporting company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies will make shares of our common stock less attractive to investors.
This concentration of ownership may discourage, delay or prevent a change in control which could have the dual effect of depriving our shareholders from an opportunity to receive a premium for their equity as part of a sale of AFC Gamma, Inc. and otherwise reducing the price of such equity. 79 Table of Contents We are an “emerging growth company” and a “smaller reporting company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies will make shares of our common stock less attractive to investors.
Under such circumstances, cash flows of investments held by us may be adversely affected as any reduction in the mortgage payments or principal losses on liquidation of any mortgage loan may be applied to the class of mortgage-backed securities relating to such defaulted loans that we hold. 38 Table of Contents The market value of our investments could fluctuate materially over time as the result of changes in mortgage spreads, treasury bond interest rates, capital market supply and demand factors, and many other factors that affect high-yield fixed income products.
Under such circumstances, cash flows of investments held by us may be adversely affected as any reduction in the mortgage payments or principal losses on liquidation of any mortgage loan may be applied to the class of mortgage-backed securities relating to such defaulted loans that we hold. 41 Table of Contents The market value of our investments could fluctuate materially over time as the result of changes in mortgage spreads, treasury bond interest rates, capital market supply and demand factors, and many other factors that affect high-yield fixed income products.
However, we cannot predict the future growth rate or future market potential, and any negative outlook on the cannabis industry may adversely affect our business operations and the operations of our borrowers. 52 Table of Contents Large, well-funded industries that perceive cannabis products and services as competitive with their own, including but not limited to the pharmaceutical industry, adult beverage industry and tobacco industry, all of which have powerful lobbying and financial resources, may have strong economic reasons to oppose the development of the cannabis industry.
However, we cannot predict the future growth rate or future market potential, and any negative outlook on the cannabis industry may adversely affect our business operations and the operations of our borrowers. 55 Table of Contents Large, well-funded industries that perceive cannabis products and services as competitive with their own, including but not limited to the pharmaceutical industry, adult beverage industry and tobacco industry, all of which have powerful lobbying and financial resources, may have strong economic reasons to oppose the development of the cannabis industry.
Future research and clinical trials may draw different or negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing or other facts and perceptions related to medical cannabis, which could adversely affect social acceptance of cannabis and the demand for their products. 51 Table of Contents There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention, or other research findings or publicity will be favorable to the cannabis market or any particular cannabis product or will be consistent with earlier publicity.
Future research and clinical trials may draw different or negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing or other facts and perceptions related to medical cannabis, which could adversely affect social acceptance of cannabis and the demand for their products. 54 Table of Contents There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention, or other research findings or publicity will be favorable to the cannabis market or any particular cannabis product or will be consistent with earlier publicity.
Prohibitions or restrictions on our or others’ ability to acquire certain cannabis-related assets securing the loans of our borrowers could have a material adverse effect on our business, financial condition, liquidity and results of operations. 49 Table of Contents To the extent real estate collateral is still being used in cannabis-related activities, we will not foreclose and take title to such real estate to the extent doing so would violate Nasdaq listing standards.
Prohibitions or restrictions on our or others’ ability to acquire certain cannabis-related assets securing the loans of our borrowers could have a material adverse effect on our business, financial condition, liquidity and results of operations. 52 Table of Contents To the extent real estate collateral is still being used in cannabis-related activities, we will not foreclose and take title to such real estate to the extent doing so would violate Nasdaq listing standards.
To the extent that an owner of a property securing one of our loans becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect the value of the relevant loan held by us and our ability to make distributions to our shareholders. 50 Table of Contents If we foreclose on any properties securing our loans, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, thus harming our financial condition.
To the extent that an owner of a property securing one of our loans becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect the value of the relevant loan held by us and our ability to make distributions to our shareholders. 53 Table of Contents If we foreclose on any properties securing our loans, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, thus harming our financial condition.
In addition, our Management Agreement has limited restrictions on our Manager’s and its affiliates’ respective ability to engage in additional management or loan opportunities, which could result in our Manager or its affiliates engaging in management and investment activities that compete with us, and our conflict of interest policies acknowledge that such activities shall not be deemed a conflict of interest. 67 Table of Contents Our Manager is subject to extensive regulation as an investment adviser, which could adversely affect its ability to manage our business.
In addition, our Management Agreement has limited restrictions on our Manager’s and its affiliates’ respective ability to engage in additional management or loan opportunities, which could result in our Manager or its affiliates engaging in management and investment activities that compete with us, and our conflict of interest policies acknowledge that such activities shall not be deemed a conflict of interest. 72 Table of Contents Our Manager is subject to extensive regulation as an investment adviser, which could adversely affect its ability to manage our business.
Any event or circumstance that affects the medical or adult use cannabis industry and market could have a material adverse effect on our business, financial condition and results of operations, as well as the business, financial condition and results of operations of our borrowers. 45 Table of Contents Marketing constraints under regulatory frameworks may limit a borrower’s ability to compete for market share in a manner similar to that of companies in other industries.
Any event or circumstance that affects the medical or adult use cannabis industry and market could have a material adverse effect on our business, financial condition and results of operations, as well as the business, financial condition and results of operations of our borrowers. 48 Table of Contents Marketing constraints under regulatory frameworks may limit a borrower’s ability to compete for market share in a manner similar to that of companies in other industries.
New laws that are adverse to our borrowers may be enacted, and current favorable state or national laws or enforcement guidelines relating to cultivation, production and distribution of cannabis may be modified or eliminated in the future, which would impede our ability to grow our business under our current business plan and could materially adversely affect our business. • As a debt investor, we are often not in a position to exert influence on borrowers, and the shareholders and management of such companies may make decisions that could decrease the value of loans made to such borrower. • Our growth depends on external sources of capital, which may not be available on favorable terms or at all. • Interest rate fluctuations could increase our financing costs, which could lead to a significant decrease in our results of operations, cash flows and the market value of our loans. • Maintenance of our exemption from registration under the Investment Company Act of 1940 as amended (the “Investment Company Act”) may impose significant limits on our operation, and failure to maintain our exempt status under the Investment Company Act could have an adverse effect on our financial results. • Failure to qualify as a REIT for U.S. federal income tax purposes would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our shareholders. • We may incur significant debt, and our governing documents and current credit facility contain no limit on the amount of debt we may incur. 24 Table of Contents • We may in the future pay distributions from sources other than our cash flow from operations, including borrowings, offering proceeds or the sale of assets, which means we will have less funds available for investments or less income-producing assets and your overall return may be reduced.
New laws that are adverse to our borrowers may be enacted, and current favorable state or national laws or enforcement guidelines relating to cultivation, production and distribution of cannabis may be modified or eliminated in the future, which would impede our ability to grow our business under our current business plan and could materially adversely affect our business. • As a debt investor, we are often not in a position to exert influence on borrowers, and the shareholders and management of such companies may make decisions that could decrease the value of loans made to such borrower. • Our growth depends on external sources of capital, which may not be available on favorable terms or at all. • Interest rate fluctuations could increase our financing costs, which could lead to a significant decrease in our results of operations, cash flows and the market value of our loans. • Maintenance of our exemption from registration under the Investment Company Act may impose significant limits on our operation, and failure to maintain our exempt status under the Investment Company Act could have an adverse effect on our financial results. • Failure to qualify as a REIT for U.S. federal income tax purposes would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our shareholders. • We may incur significant debt, and our governing documents and current credit facility contain no limit on the amount of debt we may incur. 28 Table of Contents • We may in the future pay distributions from sources other than our cash flow from operations, including borrowings, offering proceeds or the sale of assets, which means we will have less funds available for investments or less income-producing assets and your overall return may be reduced.
As a result, federal prosecutors could and still can use their prosecutorial discretion to decide to prosecute even state-legal cannabis activities. Since the Sessions Memo was issued in early 2018, however, U.S. Attorneys have not prosecuted state law compliant entities. While not formally rescinding the Sessions Memo, former Attorney General William Barr took a softer position.
As a result, federal prosecutors could and still can use their prosecutorial discretion to decide to prosecute even state-regulated cannabis activities. Since the Sessions Memo was issued in early 2018, however, U.S. Attorneys have not prosecuted state law compliant entities. While not formally rescinding the Sessions Memo, former Attorney General William Barr took a softer position.
If we fail to satisfy such income test, unless we are entitled to relief under certain provisions of the Code, we could fail to qualify as a REIT. 70 Table of Contents The tax on prohibited transactions will limit our ability to engage in certain loans involving the sale or other disposition of property or that would otherwise subject us to a 100% penalty tax.
If we fail to satisfy such income test, unless we are entitled to relief under certain provisions of the Code, we could fail to qualify as a REIT. 75 Table of Contents The tax on prohibited transactions will limit our ability to engage in certain loans involving the sale or other disposition of property or that would otherwise subject us to a 100% penalty tax.
We operate according to specific underwriting criteria in a highly competitive market for lending and investment opportunities, both of which may limit our ability to originate or acquire desirable loans and investments in our target assets and/or our ability to yield a certain return on our investments. 39 Table of Contents Our Manager uses financial models and underwriting criteria, the effectiveness of which cannot be guaranteed.
We operate according to specific underwriting criteria in a highly competitive market for lending and investment opportunities, both of which may limit our ability to originate or acquire desirable loans and investments in our target assets and/or our ability to yield a certain return on our investments. 42 Table of Contents Our Manager uses financial models and underwriting criteria, the effectiveness of which cannot be guaranteed.
We may be a smaller reporting company even after we are no longer an emerging growth company. 75 Table of Contents In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming.
We may be a smaller reporting company even after we are no longer an emerging growth company. 80 Table of Contents In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming.
Our failure to meet investors’ expectations with regard to future earnings and cash distributions likely would materially and adversely affect the valuation of our equity. 73 Table of Contents Future offerings of debt securities, which would rank senior to our common stock upon a bankruptcy liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the value of our capital stock.
Our failure to meet investors’ expectations with regard to future earnings and cash distributions likely would materially and adversely affect the valuation of our equity. 78 Table of Contents Future offerings of debt securities, which would rank senior to our common stock upon a bankruptcy liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the value of our capital stock.
If our Management Agreement is terminated and we are unable to find a suitable replacement for our Manager, we may not be able to continue to execute our investment strategy. 65 Table of Contents Terminating our Management Agreement for unsatisfactory performance of our Manager or electing not to renew the Management Agreement may be difficult and terminating our Management Agreement in certain circumstances requires payment of a substantial termination fee.
If our Management Agreement is terminated and we are unable to find a suitable replacement for our Manager, we may not be able to continue to execute our investment strategy. 70 Table of Contents Terminating our Management Agreement for unsatisfactory performance of our Manager or electing not to renew the Management Agreement may be difficult and terminating our Management Agreement in certain circumstances requires payment of a substantial termination fee.
This could result in increased risk to the value of our portfolio. 66 Table of Contents Our Manager manages our portfolio in accordance with very broad investment guidelines and our Board does not approve each loan and financing decision made by our Manager, which may result in us making riskier loans than those currently comprising our Existing Portfolio.
This could result in increased risk to the value of our portfolio. 71 Table of Contents Our Manager manages our portfolio in accordance with very broad investment guidelines and our Board does not approve each loan and financing decision made by our Manager, which may result in us making riskier loans than those currently comprising our Existing Portfolio.
Therefore, we may not be able to seek the protection of the bankruptcy courts, and this could materially affect our business or our ability to obtain credit. 48 Table of Contents There may be difficulty enforcing certain of our commercial agreements and contracts. Courts will not enforce a contract deemed to involve a violation of law or public policy.
Therefore, we may not be able to seek the protection of the bankruptcy courts, and this could materially affect our business or our ability to obtain credit. 51 Table of Contents There may be difficulty enforcing certain of our commercial agreements and contracts. Courts will not enforce a contract deemed to involve a violation of law or public policy.
Shareholders are urged to consult tax advisers regarding the effect of this change on the effective tax rate with respect to REIT dividends. 71 Table of Contents If we were considered to have actually or constructively paid a “preferential dividend” to certain of our shareholders, our status as a REIT could be adversely affected.
Shareholders are urged to consult tax advisers regarding the effect of this change on the effective tax rate with respect to REIT dividends. 76 Table of Contents If we were considered to have actually or constructively paid a “preferential dividend” to certain of our shareholders, our status as a REIT could be adversely affected.
As of December 31, 2022, our portfolio consisted of loans to 12 different borrowers (such portfolio, our ‘‘Existing Portfolio’’). We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the value of your investment could decline substantially.
As of December 31, 2023, our portfolio consisted of loans to 12 different borrowers (such portfolio, our ‘‘Existing Portfolio’’). We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the value of your investment could decline substantially.
Because cannabis remains illegal under U.S. federal law, parties to contracts involving the state legal cannabis industry have argued that the agreement was void as federally illegal or against public policy. Some courts have accepted this argument in certain cases, usually against the company involved in commercial cannabis activity.
Because cannabis remains illegal under U.S. federal law, parties to contracts involving the state-regulated cannabis industry have argued that the agreement was void as federally illegal or against public policy. Some courts have accepted this argument in certain cases, usually against the company involved in commercial cannabis activity.
As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it could adversely affect the value of our common stock. 69 Table of Contents Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it could adversely affect the value of our common stock. 74 Table of Contents Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Risks Related to the Cannabis Industry and Related Regulations Cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis would likely result in our inability to execute our business plan. All but three U.S. states have legalized, to some extent, cannabis for medical purposes.
Risks Related to the Cannabis Industry and Related Regulations Cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis would likely result in our inability to execute our business plan. All but nine U.S. states have legalized, to some extent, cannabis for medical purposes.
General economic and industry-specific conditions, which are not predictable, can have an adverse impact on the reliability of projections. 68 Table of Contents Our Manager’s and its affiliates’ liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities.
General economic and industry-specific conditions, which are not predictable, can have an adverse impact on the reliability of projections. 73 Table of Contents Our Manager’s and its affiliates’ liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities.
Increased competition in providing capital may also preclude us from making those loans that would generate attractive returns to us. 25 Table of Contents If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer.
Increased competition in providing capital may also preclude us from making those loans that would generate attractive returns to us. 29 Table of Contents If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer.
In the unlikely event that the federal government were to reverse its long-standing hands-off approach to the state legal cannabis markets and start more broadly enforcing federal law regarding cannabis, we would likely be unable to execute our business plan, and our business and financial results would be adversely affected.
In the unlikely event that the federal government were to reverse its long-standing hands-off approach to the state-regulated cannabis markets and start more broadly enforcing federal law regarding cannabis, we would likely be unable to execute our business plan, and our business and financial results would be adversely affected.
While courts have enforced contracts related to activities by state-legal cannabis companies, and the trend is generally to enforce contracts with state-legal cannabis companies and their vendors, there remains doubt and uncertainty that we will be able to enforce our commercial agreements in court for this reason.
While courts have enforced contracts related to activities by state-regulated cannabis companies, and the trend is generally to enforce contracts with state-regulated cannabis companies and their vendors, there remains doubt and uncertainty that we will be able to enforce our commercial agreements in court for this reason.
While the timing of federal reform remains unknown, it is expected that federal policy on cannabis will continue becoming more, rather than less, permissive, and legislative efforts to legalize cannabis or cannabis banking at the national level are likely to continue in 2023.
While the timing of federal reform remains unknown, it is expected that federal policy on cannabis will continue becoming more, rather than less, permissive, and legislative efforts to legalize cannabis or cannabis banking at the national level are likely to continue in 2024.
The year ended December 31, 2022 has been characterized by steep declines and significant volatility in global markets, driven by investor concerns over inflation, rising interest rates, slowing economic growth and geopolitical uncertainty. Inflation across many key economies reached generational highs, prompting central banks to take monetary policy tightening actions that are likely to create headwinds to economic growth.
The year ended December 31, 2023 has been characterized by steep declines and significant volatility in global markets, driven by investor concerns over inflation, continued rising interest rates, slowing economic growth and geopolitical uncertainty. Inflation across many key economies reached generational highs, prompting central banks to take monetary policy tightening actions that are likely to create headwinds to economic growth.
We would likely be unable to execute our business plan if the federal government were to reverse its long-standing hands-off approach to the state legal cannabis markets, described below, and were to start strictly enforcing federal law regarding cannabis.
We would likely be unable to execute our business plan if the federal government were to reverse its long-standing hands-off approach to the state-regulated cannabis markets, described below, and were to start strictly enforcing federal law regarding cannabis.
Any one of these factors could slow or halt additional legislative authorization of cannabis, which could harm our business prospects. Our investment opportunities are limited by the current illegality of cannabis under U.S. federal law; changes in the laws, regulations and guidelines that impact the cannabis industry may cause adverse effects on our ability to make loans.
Any one of these factors could slow or halt additional legislative authorization of cannabis, which could harm our business prospects. 46 Table of Contents Our investment opportunities are limited by the current illegality of cannabis under U.S. federal law; changes in the laws, regulations and guidelines that impact the cannabis industry may cause adverse effects on our ability to make loans.
Any of these taxes would decrease cash available for distribution to our shareholders. REIT distribution requirements could adversely affect our ability to exercise our business plan and liquidity and may force us to borrow funds during unfavorable market conditions.
Any of these taxes would decrease cash available for distribution to our shareholders. REIT distribution requirements could adversely affect our ability to execute our business plan and liquidity and may force us to borrow funds during unfavorable market conditions.
We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 81 Table of Contents These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
COVID-19, or the future outbreak of any other highly infectious or contagious diseases, has had and could in the future have material and adverse effects on our borrowers and their operations, as well as on our performance, financial condition, results of operations and cash flows due to, among other factors: • a complete or partial closure of, or other operational issues at, one or more of our borrowers’ locations resulting from government or such company’s actions; • the temporary inability of consumers and patients to purchase our borrowers’ cannabis products due to a number of factors, including, but not limited to, illness, dispensary closures or limitations on operations, quarantine, financial hardship, and “stay at home” orders; • difficulty accessing equity and debt capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions that may affect our access to capital necessary to fund business operations and our borrowers’ ability to fund their business operations and meet their obligations to us; • because of the federal regulatory uncertainty relating to the regulated cannabis industry, our borrowers being ineligible for financial relief available to other businesses; • delays in construction at the properties of our borrowers, which may adversely impact their ability to commence operations and generate revenues from projects; and • the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, resulting in a deterioration in our ability to ensure business continuity during a disruption.
The future outbreak of any other epidemic, pandemic or highly infectious or contagious diseases (including future outbreaks of variants of COVID-19) could have material and adverse effects on our borrowers and their operations, as well as on our performance, financial condition, results of operations and cash flows due to, among other factors: • a complete or partial closure of, or other operational issues at, one or more of our borrowers’ locations resulting from government or such company’s actions; • the temporary inability of consumers and patients to purchase our borrowers’ cannabis products due to a number of factors, including, but not limited to, illness, dispensary closures or limitations on operations, quarantine, financial hardship, and “stay at home” orders; 39 Table of Contents • difficulty accessing equity and debt capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions that may affect our access to capital necessary to fund business operations and our borrowers’ ability to fund their business operations and meet their obligations to us; • because of the federal regulatory uncertainty relating to the regulated cannabis industry, our borrowers being ineligible for financial relief available to other businesses; • delays in construction at the properties of our borrowers, which may adversely impact their ability to commence operations and generate revenues from projects; and • the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, resulting in a deterioration in our ability to ensure business continuity during a disruption.
For over eight years, however, and despite varying positions by U.S. Attorney Generals, the U.S. government has not enforced those laws against cannabis companies complying with state law, or their vendors.
For over nine years, however, and despite varying positions by U.S. Attorney Generals, the U.S. government has not enforced those laws against cannabis companies complying with state law, or their vendors.
Further, we, our executive officers, directors and our Manager may, in the ordinary course of business, be named as defendants in litigation arising from our loans. 30 Table of Contents We may in the future foreclose and acquire properties without any recourse, or with only limited recourse, against the prior property owner with respect to contingent or unknown liabilities.
Further, we, our executive officers, directors and our Manager may, in the ordinary course of business, be named as defendants in litigation arising from our loans. We may in the future foreclose and acquire properties without any recourse, or with only limited recourse, against the prior property owner with respect to contingent or unknown liabilities.
There can be no assurance, however, that such type of legislation will be enacted or that we will otherwise be able to make loans that do not comply with U.S. federal law. 43 Table of Contents Risks related to the cannabis industry may directly or indirectly affect us or our borrowers engaged in the cannabis industry.
There can be no assurance, however, that such type of legislation will be enacted or that we will otherwise be able to make loans that do not comply with U.S. federal law. Risks related to the cannabis industry may directly or indirectly affect us or our borrowers engaged in the cannabis industry.
Similarly, the anticipated pricing of cannabis products may differ substantially from current levels given changes in the competitive and regulatory landscape. A borrower’s business model may be susceptible to erosion of profitability should cannabis and cannabis-related products experience secular pricing changes. Potential sources of pricing changes include overproduction, regulatory action, increased competition or the emergence of new competitors.
In the future, the pricing of cannabis products may differ substantially from current levels given changes in the competitive and regulatory landscape. A borrower’s business model may be susceptible to erosion of profitability should cannabis and cannabis-related products experience secular pricing changes. Potential sources of pricing changes include overproduction, regulatory action, increased competition or the emergence of new competitors.
Sales of substantial amounts of our equity by any large shareholder, or the perception that such sales could occur, may adversely affect the valuation of our equity. 76 Table of Contents If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
Sales of substantial amounts of our equity by any large shareholder, or the perception that such sales could occur, may adversely affect the valuation of our equity. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
Furthermore, cities and counties are being given broad discretion to ban certain cannabis activities. Even if these activities are legal under state law, specific cities and counties may ban them. Borrowers operating in a highly regulated business require significant resources. Our borrowers are involved in the production, distribution or sale of cannabis products and operate in a highly regulated business.
Furthermore, cities and counties are being given broad discretion to ban certain cannabis activities, even if these activities are legal under state law. Borrowers operating in a highly regulated business require significant resources. Our borrowers are involved in the production, distribution or sale of cannabis products and operate in a highly regulated business.
The valuation process can be particularly challenging, especially if market events make valuations of certain assets more difficult, unpredictable and volatile. 31 Table of Contents Declines in market prices and liquidity in the capital markets can result in significant net unrealized depreciation of our portfolio, which in turn would reduce our net asset value.
The valuation process can be particularly challenging, especially if market events make valuations of certain assets more difficult, unpredictable and volatile. Declines in market prices and liquidity in the capital markets can result in significant net unrealized depreciation of our portfolio, which in turn would reduce our net asset value.
Our inability to do any of the foregoing likely would materially and adversely affect our business and our ability to make distributions to our shareholders. 26 Table of Contents Our loans’ lack of liquidity may adversely affect our business.
Our inability to do any of the foregoing likely would materially and adversely affect our business and our ability to make distributions to our shareholders. 30 Table of Contents Our loans’ lack of liquidity may adversely affect our business.
This session has seen additional incremental reform bills, including a bill that would direct the Attorney General of the United States to amend the CSA to move cannabis from Schedule I to Schedule III of the Act (the “Marijuana 1 to 3 Act”), and a bill to allow medical cannabis patients to purchase and possess firearms (the “Second Amendment Protection Act”).
These sessions has seen additional incremental reform bills, including a bill that would direct the Attorney General of the United States to amend the CSA to move cannabis from Schedule I to Schedule III of the Act (the “Marijuana 1 to 3 Act”), and a bill to allow medical cannabis patients to purchase and possess firearms (the “Second Amendment Protection Act”).
Additionally, (i) many of our officers and directors are equity holders of AFC Warehouse, which invested in the equity of certain of our borrowers, (ii) Mr.
Additionally, (i) some of our officers and directors are equity holders of AFC Warehouse, which invested in the equity of certain of our borrowers, (ii) Mr.
However, in the future, cannabis producers may produce more cannabis than is needed to satisfy the collective demand of the adult-use and medical markets, as applicable, and they currently are unable to export that oversupply into other markets where cannabis use is fully legal under all applicable jurisdictional laws.
Likewise, cannabis producers may produce more cannabis than is needed to satisfy the collective demand of the adult-use and medical markets, as applicable, and they currently are unable to export that oversupply into other markets where cannabis use is fully legal under all applicable jurisdictional laws.
These market and economic disruptions, the potential trade war with China and the military conflict between Russia and Ukraine have affected, and may in the future affect, the U.S. capital markets, which could adversely affect our business, financial condition or results of operations.
These market and economic disruptions, the potential trade war with China and the military conflicts between Russia and Ukraine and Israel and Hamas have affected, and may in the future affect, the U.S. capital markets, which could adversely affect our business, financial condition or results of operations.
There can be no assurance that any procedural protections will be sufficient to ensure 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. 64 Table of Contents Fees and expenses .
There can be no assurance that any procedural protections will be sufficient to ensure 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. Fees and expenses .
In addition, in order to meet the REIT qualification requirements or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold certain assets through one or more to-be-formed taxable REIT subsidiaries that will be subject to corporate-level income tax at regular rates.
In addition, in order to meet the REIT qualification requirements or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we currently hold certain assets through TRS1, a taxable REIT subsidiary, and may hold additional assets through TRS1 or one or more to-be-formed taxable REIT subsidiaries that will be subject to corporate-level income tax at regular rates.
United States , 141 S. Ct. 2236, 2238 (2021). Recent statements made by Attorney General Garland suggest that the DOJ may issue further guidance on cannabis enforcement, though the content and timing of such guidance remains unknown. During his campaign, President Biden promised federal reform on cannabis, including decriminalization generally.
United States , 141 S. Ct. 2236, 2238 (2021). Certain statements made by Attorney General Garland suggest that the DOJ may issue further guidance on cannabis enforcement, though the content and timing of such guidance remains unknown. 44 Table of Contents During his campaign, President Biden promised federal reform on cannabis, including decriminalization generally.
The current political climate has also intensified concerns about (i) a potential trade war between the U.S. and China in connection with each country’s recent or proposed tariffs on the other country’s products and (ii) military conflict between Russia and Ukraine.
The current political climate has also intensified concerns about (i) a potential trade war between the U.S. and China in connection with each country’s recent or proposed tariffs on the other country’s products and (ii) military conflicts between Russia and Ukraine and Israel and Hamas.
This waiver and our ownership limitations could have the effect of discouraging a takeover or other transaction in which our shareholders might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.
These ownership limitations could have the effect of discouraging a takeover or other transaction in which our shareholders might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.
In addition, we may have to acquire additional assets that we might not otherwise have acquired or may have to forego opportunities to acquire assets that we would otherwise want to acquire and would be important to our investment strategy. 61 Table of Contents A failure by us to maintain this exemption would require us to significantly restructure our investment strategy.
In addition, we may have to acquire additional assets that we might not otherwise have acquired or may have to forego opportunities to acquire assets that we would otherwise want to acquire and would be important to our investment strategy. A failure by us to maintain this exemption would require us to significantly restructure our investment strategy.
Our business could also be impacted by volatility caused by geopolitical events, such as the conflict in Ukraine. Such reductions may disproportionately affect our revenue. In addition, if the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive.
Our business could also be impacted by volatility caused by geopolitical events, such as the conflicts in Ukraine and between Israel and Hamas. Such reductions may disproportionately affect our revenue. In addition, if the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive.
Thirty-eight states, the District of Columbia, Puerto Rico and Guam have legalized some form of whole-plant cannabis cultivation, sales and use for certain medical purposes. Twenty-one of those states and the District of Columbia and Northern Mariana have also legalized cannabis for adults for non-medical purposes.
Forty-one states, the District of Columbia, Puerto Rico and Guam have legalized some form of whole-plant cannabis cultivation, sales and use for certain medical purposes. Twenty-four of those states and the District of Columbia and Northern Mariana have also legalized cannabis for adults for non-medical purposes.
We cannot assure you that we will be able to effect any of these actions on commercially reasonable terms, or at all. Monetary policy actions by the United States Federal Reserve could adversely impact both our borrowers and our financial condition.
We cannot assure you that we will be able to effect any of these actions on commercially reasonable terms, or at all. 59 Table of Contents Monetary policy actions by the Federal Reserve could adversely impact both our borrowers and our financial condition.
Our portfolio of loans is, and in the future may be, concentrated in certain property types or in particular industries, such as cannabis or commercial real estate, that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations.
Our portfolio of loans is, and in the future may be, concentrated in certain property types or in particular industries, such as cannabis or commercial real estate (until the anticipated Spin-Off effective date), that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations.
Because the operations of our borrowers are heavily dependent on retail sales, many of our borrowers may be susceptible to economic downturns or recessions and, during such periods, may be unable to satisfy their debt service obligations to us.
Economic recessions or downturns could impair our borrowers and harm our operating results. Because the operations of our borrowers are heavily dependent on retail sales, many of our borrowers may be susceptible to economic downturns or recessions and, during such periods, may be unable to satisfy their debt service obligations to us.
Our Manager and its affiliates endeavor to allocate loan opportunities in a fair and equitable manner, subject to their internal policies.
Allocation of loans . Our Manager and its affiliates endeavor to allocate loan opportunities in a fair and equitable manner, subject to their internal policies.
If we or our borrowers are forced to go without such insurance, it may prevent us from entering into certain business sectors, may inhibit our growth, may expose us to additional risk and financial liabilities and, in the case of an uninsured loss, may result in the loss of anticipated cash flow or the value of our loan.
If we or our borrowers are forced to go without such insurance, it may prevent us from entering into certain business sectors, may inhibit our growth, may expose us to additional risk and financial liabilities and, in the case of an uninsured loss, may result in the loss of anticipated cash flow or the value of our loan. 37 Table of Contents Our insurance policies may not cover all losses.
Our insurance policies may not cover all losses. There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, which may be uninsurable or not economically insurable.
There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, which may be uninsurable or not economically insurable.
Similarly, in a period of declining interest rates, our interest income on floating-rate loans would decrease, while any decrease in the interest we are charged on our floating-rate debt may not compensate for such decrease in interest income and interest we are charged on our fixed-rate debt would not change.
Similarly, in a period of declining interest rates, our interest income on floating-rate loans would decrease, while any decrease in the interest we are charged on our floating-rate debt may not compensate for such decrease in interest income and interest we are charged on our fixed-rate debt would not change. Any such scenario could materially and adversely affect us.
Under the MGCL, “business combinations” between a Maryland corporation and an “interested stockholder” or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder.
We are a Maryland corporation and subject to the Maryland General Corporation Law (“MGCL”). Under the MGCL, “business combinations” between a Maryland corporation and an “interested stockholder” or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder.
If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our loans in the future, the value of our loans could significantly decline, which would adversely affect the value of our portfolio and could result in losses upon disposition or, in the case of our loans, otherwise imply a potential failure of borrowers to satisfy their debt service obligations to us. 32 Table of Contents Economic recessions or downturns could impair our borrowers and harm our operating results.
If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our loans in the future, the value of our loans could significantly decline, which would adversely affect the value of our portfolio and could result in losses upon disposition or, in the case of our loans, otherwise imply a potential failure of borrowers to satisfy their debt service obligations to us.
As of December 31, 2022, our total consolidated indebtedness, including that of our subsidiaries, was approximately $160.0 million (excluding debt issuance costs and accrued interests), including $60.0 million that we had drawn under our Revolving Credit Facility.
As of December 31, 2023, our total consolidated indebtedness, including that of our subsidiaries, was approximately $132.0 million (excluding debt issuance costs and accrued interests), including $42.0 million that we had drawn under our Revolving Credit Facility.
Since 2014, versions of the U.S. omnibus spending bill have included a provision, known as the Joyce Amendment prohibiting the DOJ, which includes the Drug Enforcement Administration, from using appropriated funds to prevent states from implementing their medical-use cannabis laws. In USA vs. McIntosh , the U.S.
Congress has repeatedly enacted legislation to protect the medical marijuana industry from prosecution. Since 2014, versions of the U.S. omnibus spending bill have included a provision, known as the Joyce Amendment prohibiting the DOJ, which includes the Drug Enforcement Administration, from using appropriated funds to prevent states from implementing their medical-use cannabis laws. In USA vs. McIntosh , the U.S.
There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of borrower management’s attention and resources or have a material adverse impact on their and our business, financial condition and results of operations.
There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of borrower management’s attention and resources or have a material adverse impact on their and our business, financial condition and results of operations. Loans to cannabis businesses may be forfeited to the federal government.
These updates change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value. The CECL Standard replaces the “incurred loss” approach under existing guidance with an “expected loss” model for instruments measured at amortized cost.
This update changed how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value. The CECL Standard replaced the “incurred loss” approach under existing guidance with an “expected loss” model for instruments measured at amortized cost.
These changes could adversely affect our financial condition, results of operations, the market price of our equity and our ability to make distributions to our shareholders. 34 Table of Contents Changes in laws or regulations governing our operations, including laws and regulations governing cannabis and REITs, changes in the interpretation thereof or newly enacted laws or regulations and any failure by us to comply with these laws or regulations, could require changes to certain of our business practices, negatively impact our operations, cash flow or financial condition, impose additional costs on us or otherwise adversely affect our business.
Changes in laws or regulations governing our operations, including laws and regulations governing cannabis and REITs, changes in the interpretation thereof or newly enacted laws or regulations and any failure by us to comply with these laws or regulations, could require changes to certain of our business practices, negatively impact our operations, cash flow or financial condition, impose additional costs on us or otherwise adversely affect our business.
Notwithstanding the comments made by Attorney General Garland, there is no guarantee that the current presidential administration will not change its stated policy regarding the low-priority enforcement of U.S. federal cannabis laws that conflict with state laws. The Biden administration could reverse course and decide to enforce U.S. federal cannabis laws vigorously.
Notwithstanding the comments made by Attorney General Garland, there is no guarantee that the current presidential administration will not change its stated policy regarding the low-priority enforcement of U.S. federal cannabis laws that conflict with state laws.

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Item 2. Properties

Properties — owned and leased real estate

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Kalikow operates out of New York from property that he owns and is reimbursed by the Manager for certain expenses relating to such office (including our pro-rata portion of telephone, printing, mailing, utilities, office furniture, equipment machinery and other office, internal and overhead expenses), as well as expenses relating to disaster backup recovery sites and, in turn, pursuant to the terms of our Management Agreement, we reimburse the Manager for such expenses.
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We do not have to reimburse our Manager for rent for the use of this office space. We consider our current office space adequate for our current operations.

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 become involved in litigation or other legal proceedings relating to claims arising from the ordinary course of business. Furthermore, third-parties may try to seek to impose liability on us in connection with our loans. As of December 31, 2022, we were not subject to any material legal proceedings. Item 4.
Biggest changeItem 3. Legal Proceedings From time to time, we may become involved in litigation or other legal proceedings relating to claims arising from the ordinary course of business. Furthermore, third parties may try to seek to impose liability on us in connection with our loans. As of December 31, 2023 , we were not subject to any material legal proceedings.
Mine Safety Disclosures Not applicable. 77 Table of Contents PART II
Item 4. Mine Safety Disclosures Not applicable. PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeIf we distribute less than the sum of (i) 85% of our ordinary income for the calendar year, (ii) 95% of our capital gain net income for the calendar year, and (iii) any undistributed shortfall from our prior calendar year (the “Required Distribution”) to our shareholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay a non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed.
Biggest changeIf we distribute less than the sum of (i) 85% of our ordinary income for the calendar year, (ii) 95% of our capital gain net income for the calendar year, and (iii) any undistributed shortfall from our prior calendar year (the “Required Distribution”) to our shareholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay a non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. 83 Table of Contents As a result, in order to satisfy the requirements for us to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to our shareholders out of assets legally available therefor.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed for trading on the Nasdaq Stock Market under the symbol “AFCG.” On March 1, 2023, the closing price of our common stock, as reported on the Nasdaq, was $15.59 per share.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed for trading on the Nasdaq Stock Market under the symbol “AFCG.” On March 1, 2024, the closing price of our common stock, as reported on the Nasdaq, was $11.52 per share.
There were 32 holders of record of our common stock as of March 1, 2023. This number does not include beneficial owners who hold shares of our common stock in street name.
There were 52 holders of record of our common stock as of March 1, 2024. This number does not include beneficial owners who hold shares of our common stock in street name.
Equity Compensation Plan Information See Note 11 to our consolidated financial statements for information regarding our 2020 Stock Incentive Plan. Sale of Unregistered Securities None. Issuer Purchases of Equity Securities None. Item 6. Reserved None. 78 Table of Contents
Equity Compensation Plan Information See Note 11 to our consolidated financial statements for the year ending December 31, 2023 included in this Annual Report for information regarding our 2020 Stock Incentive Plan. Recent Sales of Unregistered Securities None.
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As a result, in order to satisfy the requirements for us to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to our shareholders out of assets legally available therefor.
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Issuer Purchases of Equity Securities On June 13, 2023, our Board authorized a share repurchase program providing for the repurchase of up to $20.0 million of our outstanding common stock (the “Repurchase Program”). The timing, price, and volume of repurchases will be based on our stock price, general market conditions, applicable legal requirements and other factors.
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The repurchase of our common stock may be made from time to time in the open market, in privately negotiated transactions or otherwise in compliance with Rule 10b-18 and Rule 10b5-1 under the Exchange Act.
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We expect to finance any share repurchases under the Repurchase Program using cash on hand, capacity available under our Revolving Credit Facility and cash flows from operations. The Repurchase Program is authorized until December 31, 2025 and may be discontinued, modified or suspended at any time.
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During the three months December 31, 2023, we did not repurchase any shares of our common stock pursuant to the Repurchase Program.
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Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program October 1, 2023 to October 31, 2023 — $ — — $ 20,000,000 November 1, 2023 to November 30, 2023 — — — 20,000,000 December 1, 2023 to December 31, 2023 — — — 20,000,000 — — Item 6.

Item 7. Management's Discussion & Analysis

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

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Biggest changeDividends Declared Per Share For the years ended December 31, 2022 and 2021, we paid the following cash dividends: Date Declared Payable to Shareholders of Record at the Close of Business on Date Paid Amount per Share Aggregate Amount Paid March 12, 2021 March 15, 2021 March 31, 2021 $0.36 $2.2 million May 7, 2021 June 15, 2021 June 30, 2021 0.38 5.1 million September 15, 2021 September 30, 2021 October 15, 2021 0.43 7.1 million December 15, 2021 December 31, 2021 January 14, 2022 0.50 8.2 million 2021 Period Subtotal $1.67 $22.6 million March 10, 2022 March 31, 2022 April 15, 2022 $0.55 $10.9 million June 15, 2022 June 30, 2022 July 15, 2022 0.56 11.1 million September 15, 2022 September 30, 2022 October 14, 2022 0.56 11.4 million December 15, 2022 December 31, 2022 January 13, 2023 0.56 11.4 million 2022 Period Subtotal $2.23 $44.8 million Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our shareholders and meet other general business needs.
Biggest changeDividends Declared Per Share For the years ended December 31, 2023 and 2022, we paid the following cash dividends: Date Declared Payable to Shareholders of Record at the Close of Business on Date Paid Amount per Share Aggregate Amount Paid March 10, 2022 March 31, 2022 April 15, 2022 $ 0.55 $ 10.9 million June 15, 2022 June 30, 2022 July 15, 2022 0.56 11.1 million September 15, 2022 September 30, 2022 October 14, 2022 0.56 11.4 million December 15, 2022 December 31, 2022 January 13, 2023 0.56 11.4 million 2022 Period Subtotal $ 2.23 $ 44.8 million March 2, 2023 March 31, 2023 April 14, 2023 $ 0.56 $ 11.5 million June 15, 2023 June 30, 2023 July 14, 2023 0.48 9.8 million September 15, 2023 September 30, 2023 October 13, 2023 0.48 9.8 million December 15, 2023 December 31, 2023 January 12, 2024 0.48 9.8 million 2023 Period Subtotal $ 2.00 $ 40.9 million Recent Developments On December 29, 2023, we drew $42.0 million on our Revolving Credit Facility.
Interest rates will vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, some of which cannot be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers.
Interest rates will vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, some of which cannot be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by our borrowers.
As the cannabis industry continues to evolve and to the extent that additional states legalize cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets. We expect the principal amount of the loans we originate for cannabis operators to increase. We also expect that our expanded investment focus to require additional capital.
As the cannabis industry continues to evolve and to the extent that additional states legalize cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets. We expect the principal amount of the loans we originate for cannabis operators to increase. We also expect our expanded investment focus to require additional capital.
Any of these taxes would decrease cash available for distribution to our shareholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our shareholders and pay tax at regular corporate rates on the retained net capital gain.
Any of these taxes would decrease cash available for distribution to our shareholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our shareholders and pay tax at regular corporate rates on the retained net capital gain.
Any of these taxes would decrease cash available for distribution to our shareholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our shareholders and pay tax at regular corporate rates on the retained net capital gain.
Any of these taxes would decrease cash available for distribution to our shareholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our shareholders and pay tax at regular corporate rates on the retained net capital gain.
If it is determined that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned.
If it is determined that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned.
The balance as of December 31, 2022 was approximately $14.3 million, or 4.97%, of our total loans held at carrying value and loans receivable held at carrying value balance of approximately $287.4 million and was bifurcated between (i) the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value and loans receivable at carrying value of approximately $13.5 million and (ii) a liability for unfunded commitments of approximately $0.8 million.
The balance as of December 31, 2022 was approximately $14.3 million, or 4.97%, of our total loans held at carrying value and loan receivable held at carrying value balance of approximately $287.4 million and was bifurcated between (i) the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value and loan receivable held at carrying value of approximately $13.5 million and (ii) a liability for unfunded commitments of approximately $0.8 million.
Expenses Our primary operating expenses are the payment of Base Management Fees and Incentive Compensation under our Management Agreement with our Manager and the allocable portion of overhead and other expenses paid or incurred on our behalf, including reimbursing our Manager for a certain portion of the compensation of certain personnel of the Manager who assist in the management of the Company’s affairs, excepting only those expenses that are specifically the responsibility of our Manager pursuant to our Management Agreement.
Expenses Our primary operating expenses are the payment of Base Management Fees and Incentive Compensation under our Management Agreement with our Manager and the allocable portion of overhead and other expenses paid or incurred on our behalf, including reimbursing our Manager for a certain portion of the compensation of certain personnel of the Manager who assist in the management of our affairs, excepting only those expenses that are specifically the responsibility of our Manager pursuant to our Management Agreement.
Distributable Earnings In addition to using certain financial metrics prepared in accordance with GAAP to evaluate our performance, we also use Distributable Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments we believe are not necessarily indicative of our current loan activity and operations.
Non-GAAP Metrics Distributable Earnings In addition to using certain financial metrics prepared in accordance with GAAP to evaluate our performance, we also use Distributable Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments we believe are not necessarily indicative of our current loan activity and operations.
Furthermore, if we distribute less than the sum of (i) 85% of our ordinary income for the calendar year, (ii) 95% of our capital gain net income for the calendar year and (iii) any undistributed shortfall from our prior calendar year (the "Required Distribution") to our shareholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed.
Furthermore, if we distribute less than the sum of (i) 85% of our ordinary income for the calendar year, (ii) 95% of our capital gain net income for the calendar year and (iii) any undistributed shortfall from our prior calendar year (the “Required Distribution”) to our shareholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed.
To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change. Estimated YTM is calculated using the interest rate as of December 31, 2022 applied through maturity. Actual results could differ from those estimates and assumptions.
To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change. Estimated YTM is calculated using the interest rate as of December 31, 2023 applied through maturity. Actual results could differ from those estimates and assumptions.
We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) stock-based compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss); provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) provision for current expected credit losses, (v) TRS (income) loss and (vi) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors.
We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) stock-based compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss); provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) increase (decrease) in provision for current expected credit losses, (v) TRS (income) loss, net of any dividends received from TRS and (vi) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors.
We bear all other costs and expenses of our operations and transactions, including (without limitation) fees and expenses relating to: • organizational and offering expenses; • quarterly valuation expenses; 80 Table of Contents • fees payable to third parties relating to, or associated with, making loans and valuing loans (including third-party valuation firms); • fees and expenses associated with investor relations and marketing efforts (including attendance at investment conferences and similar events); • federal and state registration fees; • any exchange listing fees; • federal, state and local taxes; • independent directors’ fees and expenses; • brokerage commissions; • costs of proxy statements, shareholders’ reports and notices; and • costs of preparing government filings, including periodic and current reports with the SEC.
We bear all other costs and expenses of our operations and transactions, including (without limitation) fees and expenses relating to: • organizational and offering expenses; • quarterly valuation expenses; • fees payable to third parties relating to, or associated with, making loans and valuing loans (including third-party valuation firms); • fees and expenses associated with investor relations and marketing efforts (including attendance at investment conferences and similar events); • federal and state registration fees; • any exchange listing fees; • federal, state and local taxes; • independent directors’ fees and expenses; • brokerage commissions; • costs of proxy statements, shareholders’ reports and notices; and • costs of preparing government filings, including periodic and current reports with the SEC.
Prior to the consummation of our IPO, we were not obligated to reimburse our Manager or its affiliates, as applicable, for any compensation paid to Mr. Tannenbaum, Mr. Kalikow or Mrs. Tannenbaum. For the years ended December 31, 2022 and 2021, our Manager did not seek reimbursement for our allocable share of Mr. Kalikow and Mr.
Prior to the consummation of our IPO, we were not obligated to reimburse our Manager or its affiliates, as applicable, for any compensation paid to Mr. Tannenbaum, Mr. Kalikow or Mrs. Tannenbaum. For the years ended December 31, 2023 and 2022 , our Manager did not seek reimbursement for our allocable share of Mr. Kalikow and Mr.
Non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current. The Company may make exceptions to placing a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection.
Non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current. We may make exceptions to placing a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection.
We intend to use the net proceeds from the issuance of the 2027 Senior Notes (i) to fund loans related to unfunded commitments to existing borrowers, (ii) to originate and participate in commercial loans to companies operating in the cannabis industry that are consistent with our investment strategy and (iii) for working capital and other general corporate purposes.
We used the net proceeds from the issuance of the 2027 Senior Notes (i) to fund loans related to unfunded commitments to existing borrowers, (ii) to originate and participate in commercial loans to companies operating in the cannabis industry that are consistent with our investment strategy and (iii) for working capital and other general corporate purposes.
These loans are generally held for investment and are secured by real estate, equipment, value associated with licenses (where applicable) and/or other assets of the loan parties to the extent permitted by the applicable laws and the regulations governing such loan parties. We generate revenue primarily in the form of interest income on loans.
These loans are generally held for investment and are secured by real estate, equipment, value associated with licenses (where applicable) and/or other assets of the loan parties to the extent permitted by the applicable laws and the regulations governing such loan parties. 85 Table of Contents We generate revenue primarily in the form of interest income on loans.
There were no other payments, premiums or penalties required to be paid in connection with the termination. 2027 Senior Notes On November 3, 2021, we issued $100.0 million in aggregate principal amount of the 2027 Senior Notes. The 2027 Senior Notes accrue interest at a rate of 5.750% per annum.
There were no other payments, premiums or penalties that were required to be paid in connection with the termination. 2027 Senior Notes On November 3, 2021, we issued $100.0 million in aggregate principal amount of the 2027 Senior Notes. The 2027 Senior Notes accrue interest at a rate of 5.75% per annum.
Interest on the 2027 Senior Notes is due semi-annually on May 1 and November 1 of each year, beginning on May 1, 2022. The net proceeds from the issuance of the 2027 Senior Notes were approximately $97.0 million, after deducting the initial purchasers’ discounts and commissions and estimated offering fees and expenses payable by us.
Interest on the 2027 Senior Notes is due semi-annually on May 1 and November 1 of each year, which began on May 1, 2022. The net proceeds from the issuance of the 2027 Senior Notes were approximately $97.0 million, after deducting the initial purchasers’ discounts and commissions and estimated offering fees and expenses payable by us.
In connection with the termination, we paid the outstanding amounts remaining in connection with the commitment fee of approximately $0.1 million and accelerated the remaining deferred financing costs of approximately $0.1 million in the second quarter of 2022.
In connection with the termination, we paid the remaining amount of the commitment fee outstanding of approximately $0.1 million and accelerated the remaining deferred financing costs of approximately $0.1 million in the second quarter of 2022.
As of December 31, 2022, we believe that our cash on hand, capacity available under our line of credit and cash flows from operations for the next twelve months will be sufficient to satisfy the operating requirements of our business through at least the next twelve months.
As of December 31, 2023, we believe that our cash on hand, capacity available under our line of credit and cash flows from operations will be sufficient to satisfy the operating requirements of our business through at least the next twelve months.
(2) The difference between the carrying value and the outstanding principal amount of the loans consists of unaccreted OID and loan origination costs. (3) Weighted average remaining life is calculated based on the fair value of the loans as of December 31, 2022 and 202 1.
(2) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted OID and loan origination costs. (3) Weighted average remaining life is calculated based on the fair value of the loans as of December 31, 2023 and 2022.
(5) Cash interest and PIK interest rates for Private Company A represent a blended rate of differing cash interest and PIK interest rates applicable to each of the tranches to which the Company is a lender under the senior secured term loan credit facility with Private Company A (as may be amended, restated, and supplemented or otherwise modified from time to time, the ‘‘Private Company A Credit Facility’’).
(5) Cash interest and PIK interest rates for Private Company A represent a blended rate of differing cash interest and PIK interest rates applicable to each of the tranches to which the Company is a lender under the senior secured term loan credit facility with Private Company A (as may be amended, restated, and supplemented or otherwise modified from time to time, the “Private Company A Credit Facility”).
In March 2023, we ente red into a forbearance and modification agreement with Private Company B, pursuant to which we agreed to, subject to additional 4.0% capitalized PIK interest and certain other terms and conditions, forbear from exercising our rights and remedies with respect to specified defaults under the applicable Private Company B loan documents until the earlier of (i) March 31, 2023, (ii) certain refinancing or cash equity contribution events, and (iii) any new event of default thereunder.
In March 2023, we entered into a forbearance and modification agreement with Private Company B, pursuant to which we agreed to, subject to additional 4.0% capitalized PIK interest and certain other terms and conditions, forbear from exercising our rights and remedies with respect to specified defaults under the applicable Private Company B loan documents until the earlier of (i) April 30, 2023, (ii) certain refinancing or cash equity contribution events, and (iii) any new event of default thereunder.
(2) Weighted average remaining life is calculated based on the carrying value of the loans as of December 31, 2022 and 2021.
(2) Weighted average remaining life is calculated based on the carrying value of the loans as of December 31, 2023 and 2022 .
Commencing on the six-month anniversary of the closing date, the Revolving Credit Facility has an unused line fee of 0.25% per annum, to be paid semi-annually in arrears, which is included within interest expense in our consolidated statements of operations.
Commencing on the six-month anniversary of the closing date, the Revolving Credit Facility has an unused line fee of 0.25% per annum, payable semi-annually in arrears, which is included within interest expense in our consolidated statements of operations.
As of December 31, 2022, our portfolio had a weighted-average estimated YTM of approximately 21% and was secured by various types of assets of our borrowers, including real property and personal property, such as the value associated with licenses (where applicable), equipment, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers.
As of December 31, 2023, our portfolio had a weighted-average estimated YTM of approximately 21% and was secured by various types of assets of our borrowers, including real property and personal property, such as the value associ ated with licenses (where applicable), equipment, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers.
The Shelf Registration Statement also included a prospectus for an at-the-market offering program to sell up to an aggregate of $75.0 million of shares of our common stock (the “ATM Program”) that may be issued and sold from time to time under the Sales Agreement, dated April 5, 2022 (the “Sales Agreement”), with Jefferies LLC and JMP Securities LLC, as Sales Agents.
The Shelf Registration Statement also included a prospectus for the ATM Program to sell up to an aggregate of $75.0 million of shares of our common stock that may be issued and sold from time to time under the Sales Agreement, dated April 5, 2022 (the “Sales Agreement”), with Jefferies LLC and JMP Securities LLC, as Sales Agents.
The annual expense is calculated in accordance with applicable tax regulations. Excise tax expense is included in the line item income tax expense. 100 Table of Contents Our wholly-owned subsidiary, TRS1, operates as a TRS and began operating in July 2021.
The annual expense is calculated in accordance with applicable tax regulations. Excise tax expense is included in the line item income tax expense. Our wholly-owned subsidiary, TRS1, operates as a TRS and began operating in July 2021.
Results of Operations For the years ended December 31, 2022 and 2021 Our net income allocable to our common shareholders for the year ended December 31, 2022 was approximately $35.9 million or $1.80 per basic weighted average common share compared to net income allocable to our common shareholders of $21.0 million or $1.57 per basic weighted average common share for the year ended December 31, 2021.
Results of Operations f or the years ended December 31, 2023 and 2022 Our net income allocable to our common shareholders for the year ended December 31, 2023, was approximately $21.0 million or $1.02 per basic weighted average common share, compared to net income allocable to our common shareholders of approximately $35.9 million or $1.80 per basic weighted average common share for the year ended December 31, 2022.
The table below sets forth the material terms of our outstanding senior notes as of the date of this Annual Report: Senior Notes Issue Date Amount Outstanding Interest Rate Coupon Maturity Date Interest Due Dates Optional Redemption Date 2027 Senior Notes November 3, 2021 $100.0 million 5.750% May 1, 2027 May 1 and November 1 February 1, 2027 Other Credit Facilities, Warehouse Facilities and Repurchase Agreements In the future, we may also use other sources of financing to fund the origination or acquisition of our target investments, including other credit facilities and other secured and unsecured forms of borrowing.
Following this transaction, as of December 31, 2023, we had $90.0 million in principal amount of the 2027 Senior Notes outstanding. 100 Table of Contents The table below sets forth the material terms of our outstanding senior notes as of the date of this Annual Report: Senior Notes Issue Date Amount Outstanding Interest Rate Coupon Maturity Date Interest Due Dates Optional Redemption Date 2027 Senior Notes November 3, 2021 $90.0 million 5.75% May 1, 2027 May 1 and November 1 February 1, 2027 Other Credit Facilities, Warehouse Facilities and Repurchase Agreements In the future, we may also use other sources of financing to fund the origination or acquisition of our target investments, including other credit facilities and other secured and unsecured forms of borrowing.
We monitor performance of our loans held for investment portfolio under the following methodology: (i) borrower review, which analyzes the borrower’s ability to execute on its original business plan, reviews its financial condition, assesses pending litigation and considers its general level of responsiveness and cooperation; (ii) economic review, which considers underlying collateral (i.e., leasing performance, unit sales and cash flow of the collateral and its ability to cover debt service, as well as the residual loan balance at maturity); (iii) property review, which considers current environmental risks, changes in insurance costs or coverage, current site visibility, capital expenditures and market perception; and (iv) market review, which analyzes the collateral from a supply and demand perspective of similar property types, as well as from a capital markets perspective.
We monitor performance of our loans held for investment portfolio under the following methodology: (i) borrower review, which analyzes the borrower’s ability to execute on its original business plan, reviews its financial condition, assesses pending litigation and considers its general level of responsiveness and cooperation; (ii) economic review, which considers underlying collateral (i.e., leasing performance, unit sales and cash flow of the collateral and its ability to cover debt service, as well as the residual loan balance at maturity); (iii) property review, which considers current environmental risks, changes in insurance costs or coverage, current site visibility, capital expenditures and market perception; and (iv) market review, which analyzes the collateral from a supply and demand perspective of similar property types, as well as from a capital markets perspective. 103 Table of Contents We accrete or amortize any discounts or premiums on loans held for investment over the life of the related loan held for investment utilizing the effective interest method.
To the best of our knowledge, as of December 31, 2022, we were in compliance in all material respects with all covenants contained in our Revolving Credit Agreement. 94 Table of Contents Termination of AFC Finance Credit Facility On April 29, 2022, upon our entry into the Revolving Credit Facility, we terminated the AFCF Revolving Credit Facility with AFC Finance, LLC.
To the best of our knowledge, as of December 31, 2023, we were in compliance in all material respects with all covenants contained in our Revolving Credit Agreement. Termination of AFC Finance Revolving Credit Facility On April 29, 2022, upon our entry into the Revolving Credit Facility, we terminated that certain revolving credit facility with AFC Finance, LLC.
As of December 31, 2022 and 2021, three loans held for investment were carried at fair value within loans held at fair value in our consolidated balance sheets, with changes in fair value recorded through earnings. Refer to Note 14 to our annual consolidated financial statements for more information on the valuations of the loans.
As of December 31, 2023 and 2022, two and three loans held for investment were carried at fair value within loans held at fair value in our consolidated balance sheets, respectively, with changes in fair value recorded through earnings. Refer to Note 14 to our consolidated financial statements titled “Fair Value” for more information on the valuations of the loans.
Prior to February 1, 2027, we may redeem the 2027 Senior Notes at any time, in whole or from time to time in part, at a redemption price equal to the greater of 100% of the principal amount thereof or a make-whole premium set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
Prior to February 1, 2027, we may redeem the 2027 Senior Notes in whole or in part, at a price equal to the greater of 100% of the principal amount of the 2027 Senior Notes being redeemed or a make-whole premium set forth in the Indenture, plus accrued and unpaid interest thereon to, but excluding, the applicable redemption date.
Subsequent to the transfer of our investment in the senior secured loan to Private Company I to TRS1 on April 1, 2022, TRS1 was added as a subsidiary guarantor under the Indenture. As of December 31, 2022, the 2027 Senior Notes were guaranteed by TRS1.
Subsequent to the transfer of our investment in the senior secured loan to Private Company I to TRS1 on April 1, 2022, TRS1 was added as a subsidiary guarantor under the Indenture.
The book value per share of our common stock as of December 31, 2022 and 2021 was approximately $16.65 and $16.61, respectively.
The book value per share of our common stock as of December 31, 2023 and 2022 was approximately $15.64 and $16.65, respectively.
Net Cash (Used in) Provided by Investing Activities Net cash used in investing activities during the year ended December 31, 2022 was approximately $16.3 million, compared to approximately $248.5 million for the year ended December 31, 2021.
Net Cash Provided by (Used in) Investing Activities Net cash provided by investing activities during the year ended December 31, 2023 was approximately $28.5 million, compared to net cash used in investing activities of approximately $(16.3) million for the same period in 2022.
The balance as of December 31, 2021 was approximately $3.1 million, or 1.20%, of our total loans held at carrying value and loans receivable held at carrying value balance of approximately $259.7 million and was bifurcated between (i) the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value and loans receivable at carrying value of approximately $2.4 million and (ii) a liability for unfunded commitments of approximately $0.7 million.
The balance as of December 31, 2023 was approximatel y $26.4 million , or 8.71%, of our total loans held at carrying value and loan receivable held at carrying value balance of approximately $303.3 million and was bifurcated between (i) the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value and loan receivable held at carrying value of approximately $26.3 million and (ii) a liability for unfunded commitments of approximately $0.1 million .
Dividends We have elected to be taxed as a REIT for United States federal income tax purposes and, as such, intend to annually distribute to our shareholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid and excluding our net capital gain.
This policy is subject to change by management and our Board. 102 Table of Contents Dividends We have elected to be taxed as a REIT for United States federal income tax purposes and, as such, intend to annually distribute to our shareholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid and excluding our net capital gain.
In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below: • Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. • Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. • Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. 98 Table of Contents If inputs used to measure fair value fall into different levels of the fair value hierarchy, a loan’s level is based on the lowest level of input that is significant to the fair value measurement.
In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below: • Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. • Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. • Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Accrued and unpaid interest is generally reversed against interest income in the period the loan is placed on non-accrual status. Interest payments received on non-accrual loans are generally recognized on a cash basis and may be recognized as income or applied to principal depending upon management’s judgment regarding the borrower’s ability to make pending principal and interest payments.
Interest payments received on non-accrual loans are generally recognized on a cash basis and may be recognized as income or applied to principal depending upon management’s judgment regarding the borrower’s ability to make pending principal and interest payments.
Current Expected Credit Loss Reserve (“CECL”) We estimate our CECL Reserve using a model that considers multiple datapoints and methodologies that may include the likelihood of default and expected loss given default for each individual loan, discounted cash flows (“DCF”), and other inputs which may include the risk rating of the loan, how recently the loan was originated compared to the measurement date, and expected prepayment if applicable.
We use inputs that are current as of the measurement date, which may fall within periods of market dislocation, during which price transparency may be reduced. 104 Table of Contents Current Expected Credit Loss Reserve (“CECL”) We estimate our CECL Reserve using a model that considers multiple datapoints and methodologies that may include the likelihood of default and expected loss given default for each individual loan, discounted cash flows (“DCF”), and other inputs which may include the risk rating of the loan, how recently the loan was originated compared to the measurement date, and expected prepayment if applicable.
For the year ended December 31, 2022, we gross funded approximately $26.6 million of additional principal of loans held at fair value and we had principal repayments of approximately $6.5 million of loans held at fair value. As of December 31, 2022 and 2021, none of our loans held at fair value had floating interest rates.
For the year ended December 31, 2023, we funded approximately $1.9 million of additional principal and had approximately $34.9 million of principal repayments of loans held at fair value. As of December 31, 2023 and 2022 , none of our loans held at fair value had floating interest rates.
Our primary sources of cash generally consist of unused borrowing capacity under our Revolving Credit Facility, the net proceeds of future debt or equity offerings, including in connection with the ATM Program, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. 93 Table of Contents Our net cash provided by operating activities for the year ended December 31, 2022 of approximately $31.3 million was less than our dividend payments of $41.6 million made during the same period due to earned OID of $11.8 million and PIK repayments of $1.2 million related to repayments from Private Company D, Private Company F and Private Company E during such period.
Our primary sources of cash generally consist of unused borrowing capacity under our Revolving Credit Facility, the net proceeds of future debt or equity offerings, including in connection with the ATM Program, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. 98 Table of Contents Our net cash provided by operating activities for the year ended December 31, 2023 of approximately $21.2 million was less than our dividend payments of $42.5 million million made during the same period due to earned OID of $6.1 million, gain on extinguishment of debt of $2.0 million, the net change in interest reserve of $4.7 million and PIK repayments of $1.5 million related to the repayment from Private Company I and Private Company A during such period.
The aggregate originated commitment under these loans was approximately $104.3 million and $75.9 million as of December 31, 2022 and 2021, respectively, and outstanding principal was approximately $102.4 million and $77.6 million as of December 31, 2022 and 2021, respectively.
The aggregate originated commitment under these loans was approximately $94.2 million and $104.3 million, respectively, and outstanding principal was approximately $71.9 million and $102.4 million as of December 31, 2023 and 2022 , respectively.
As of December 31, 2022 and 2021, approximately 73% and 48%, respectively, of our loans held at carrying value have floating interest rates.
As of December 31, 2023 and 2022 , approximately 84% and 73%, respectively, of our loans held at carrying value had floating interest rates.
In January 2023, TRS1 agreed with Private Company I, subject to certain terms and conditions (including payment of full cash interest, rather than partial PIK interest, which was previously agreed to), to defer an upcoming principal payment.
Developments During the Year Ended December 31, 2023: Updates to Our Loan Portfolio During the Year Ended December 31, 2023 In January 2023, TRS1 agreed with Private Company I, subject to certain terms and conditions (including payment of full cash interest, rather than partial PIK interest, which was previously agreed to), to defer an upcoming principal payment.
We caution readers that our methodology for calculating Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our reported Distributable Earnings may not be comparable to similar measures presented by other REITs. 92 Table of Contents The following table provides a reconciliation of GAAP net income to Distributable Earnings: Year ended December 31, 2022 2021 Net income $ 35,932,397 $ 21,000,497 Adjustments to net income: Stock-based compensation expense 1,338,469 1,745,872 Depreciation and amortization — — Unrealized losses, (gains) or other non-cash items 3,593,095 (619,821) Provision for current expected credit losses 11,177,470 2,649,338 TRS (income) loss (2,170,348) (93,969) One-time events pursuant to changes in GAAP and certain non-cash charges — — Distributable Earnings $ 49,871,083 $ 24,681,917 Basic weighted average shares of common stock outstanding (in shares) 19,842,222 13,373,778 Distributable earnings per basic weighted average share $ 2.51 $ 1.85 Book Value Per Share We believe that book value per share is helpful to shareholders in evaluating our growth as we scale our equity capital base and continue to invest in our target investments.
We caution readers that our methodology for calculating Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our reported Distributable Earnings may not be comparable to similar measures presented by other REITs. 92 Table of Contents The following table provides a reconciliation of GAAP net income to Distributable Earnings: Years ended December 31, 2023 2022 Net income $ 20,951,999 $ 35,932,397 Adjustments to net income: Stock-based compensation expense 1,008,148 1,338,469 Depreciation and amortization — — Unrealized (gains) losses, or other non-cash items 8,513,364 3,593,095 Increase (decrease) in provision for current expected credit losses 12,132,718 11,177,470 TRS (income) loss, net of dividends (1,158,946) (2,170,348) One-time events pursuant to changes in GAAP and certain non-cash charges — — Distributable earnings $ 41,447,283 $ 49,871,083 Basic weighted average shares of common stock outstanding (in shares) 20,321,091 19,842,222 Distributable earnings per basic weighted average share $ 2.04 $ 2.51 Book Value Per Share We believe that book value per share is helpful to shareholders in evaluating our growth as we scale our equity capital base and continue to invest in our target investments.
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the consummation of our IPO, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the consummation of our IPO, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. 106 Table of Contents Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023 - 07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.
In connection with such forbearance and modification agreement, the Company also agreed to, subject to certain terms and conditions, waive compliance with certain covenants for one fiscal quarter and defer specified principal payments.
In connection with such forbearance and modification agreement, the Company also agreed to, subject to certain terms and conditions, waive compliance with certain covenants for one fiscal quarter and defer specified principal payments. The maturity date passed on the credit facility to Private Company B without repayment.
Loans Held at Fair Value We originate commercial real estate debt and related instruments generally to be held for investment. Although we generally hold our target investments as long-term loans, we may occasionally classify some of our loans as held for sale. We may carry our loans at fair value or amortized cost in our consolidated balance sheet.
Although we generally hold our target investments as long-term loans, we may occasionally classify some of our loans as held for sale. We may carry our loans at fair value or amortized cost in our consolidated balance sheet.
ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. We have elected the ASC 825-10 option to report selected financial assets and liabilities at fair value. We also follow ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), which expands the application of fair value accounting.
ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. We have elected the ASC 825-10 option to report selected financial assets and liabilities at fair value.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and related notes that are included elsewhere in this Annual Report.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and our accompanying notes and other information included in this Annual Report.
The majority of our loans currently accrue interest at a fixed rate. As of December 31, 2022, six of our loans, representing approximately 54% of our portfolio based on aggregate outstanding principal balances, paid interest at a variable rate tied to either LIBOR, SOFR, or U.S. prime rate.
The majority of our loans currently accrue interest at a variable rate. As of December 31, 2023, seven of our loans, representing approximately 68% of our portfolio based on aggregate outstanding principal balances, paid interest at a variable rate tied to either SOFR or U.S. prime rate. Interest on our loans is generally payable monthly or quarterly.
To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured, or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities. 97 Table of Contents Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with GAAP which requires the use of estimates and assumptions that involve the exercise of judgment as to future uncertainties.
To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured, or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities.
ASC 820-10 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosure of fair value measurements. ASC 820-10 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date.
ASC 820-10 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date.
Interest expense increased approximately $5.7 million, or 504.7%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Interest expense decreased approximately $(0.5) million, or (6.7)%, for the year ended December 31, 2023, as compared to the year ended December 31, 2022.
In March 2023, TRS1 agreed, subject to certain terms and conditions, to defer an upcoming principal payment and permit a portion of an upcoming cash interest payment to instead be paid in kind.
In March 2023, TRS1 agreed, subject to certain terms and conditions, to defer an upcoming principal payment and permit a portion of an upcoming cash interest payment to instead be paid in kind. In May 2023, Private Company I failed to pay its full principal and interest payments due May 1, 2023.
The increase in the provision for current expected credit losses for the year ended December 31, 2022 compared to the year ended December 31, 2021 was due to changes in macroeconomic factors, changes to the loan portfolio including new commitments and repayments, and changes in other data points we use in estimating the reserve.
The change in the provision for current expected credit losses for the year ended December 31, 2023 compared to the year ended December 31, 2022 was due to changes in macroeconomic factors, changes to the loan portfolio including new commitments and repayments, and changes in other data points we use in estimating the reserve. 94 Table of Contents Loan Portfolio As of December 31, 2023 , our portfolio was comprised of loans to 12 different borrowers.
In many cases, our interest income includes a paid-in-kind (“PIK”) component for a portion of the total interest. The PIK interest, computed at the contractual rate specified in each applicable loan agreement, is accrued in accordance with the terms of such loan agreement and added to the principal balance of the loan and recorded as interest income.
The PIK interest, computed at the contractual rate specified in each applicable loan agreement, is accrued in accordance with the terms of such loan agreement and added to the principal balance of the loan and recorded as interest income. The PIK interest added to the principal balance is typically amortized and paid in accordance with the applicable loan agreement.
Leverage is primarily used to provide capital for forward commitments until additional equity is raised or additional medium- to long-term financing is arranged. This policy is subject to change by management and our Board.
Leverage is primarily used to provide capital for forward commitments until additional equity is raised or additional medium- to long-term financing is arranged.
The originated commitment under this loan was $4.0 million and outstanding principal was approximately $2.2 million and $2.5 million as of December 31, 2022 and 2021, respectively. During the years ended December 31, 2022 and 2021, we received repayments of approximately $0.3 million and $0.8 million of outstanding principal, respectively.
The originated commitment under this loan was $4.0 million and outstanding principal was approximately $2.0 million and $2.2 million as of December 31, 2023 and 2022 , respectively. During the year ended December 31, 2023, we received approximately $0.2 million of principal repayments of loan receivable held at carrying value.
The income tax provision is included in the line item income tax expense, including excise tax in the consolidated statements of operations included in this Annual Report on Form 10-K.
The annual expense is calculated in accordance with applicable tax regulations. The income tax provision is included in the line item income tax expense, including excise tax in the consolidated statements of operations included in this Annual Report.
In February 2023, the Company entered into an amendment with Private Company K, which reduced its total loan commitment under the credit facility with Private Company K from approximately $25.2 million to $14.5 million.
As of December 31, 2023, our outstanding principal balance was approximately $3.8 million, which is fully funded . In February 2023, the Company entered into an amendment with Private Company K, which reduced its total loan commitment under the credit facility with Private Company K from approximately $25.2 million to $14.5 million.
JOBS Act Accounting Election As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards.
Accrued interest and penalties, if any, are included within other liabilities in the consolidated balance sheets. JOBS Act Accounting Election As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards.
During the year ended December 31, 2022 , the Company sold an aggregate of 621,398 shares of the Company’s common stock under the Sales Agreement at an average price of $18.30 per share generating net proceeds of approximately $10.4 million. On April 29, 2022, we entered into the Revolving Credit Facility.
During the year ended December 31, 2022 , we sold an aggregate of 621,398 shares of our common stock under the Sales Agreement at an average price of $18.30 per share generating net proceeds of approximately $10.4 million . On June 13, 2023, our Board authorized the Repurchase Program.
Under the terms of the Sales Agreement, we have agreed to pay the Sales Agents a commission of up to 3.0% of the gross proceeds from each sale of common stock under the Sales Agreement.
Under the terms of the Sales Agreement, we have agreed to pay the Sales Agents a commission of up to 3.0% of the gross proceeds from each sale of common stock under the Sales Agreement. During the year ended December 31, 2023, we did not sell any shares of our common stock under the Sales Agreement.
We may also access liquidity through our ATM Program, which was established in April 2022, pursuant to which we may sell, from time to time, up to $75.0 million of our common stock.
We may also access liquidity through our ATM Program, which was established in April 2022, pursuant to which we may sell, from time to time, up to $75.0 million of our common stock. During the year ended December 31, 2023, we did not sell any shares of our common stock under the Sales Agreement.
In addition, as a REIT, we may also be subject to a 100% excise tax on certain transactions between us and our TRS that are not conducted on an arm’s-length basis.
In addition, as a REIT, we may also be subject to a 100% excise tax on certain transactions between us and our TRS that are not conducted on an arm’s-length basis. The income tax provision is included in the line item income tax expense, including excise tax in the consolidated statements of operations included in this Annual Report.
The following tables summarizes our loans held at fair value as of December 31, 2022 and 2021: As of December 31, 2022 Fair Value (1) Carrying Value (2) Outstanding Principal (2) Weighted Average Remaining Life (Years) (3) Senior term loans $ 99,226,051 $ 100,635,985 $ 102,376,546 1.2 Total loans held at fair value $ 99,226,051 $ 100,635,985 $ 102,376,546 1.2 85 Table of Contents As of December 31, 2021 Fair Value (1) Carrying Value (2) Outstanding Principal (2) Weighted Average Remaining Life (Years) (3) Senior term loans $ 77,096,319 $ 74,913,157 $ 77,630,742 2.2 Total loans held at fair value $ 77,096,319 $ 74,913,157 $ 77,630,742 2.2 (1) Refer to Note 14 to our annual consolidated financial statements titled “Fair Value” .
The following tables summarize our loans held at fair value as of December 31, 2023 and 2022 : As of December 31, 2023 Fair Value (1) Carrying Value (2) Outstanding Principal (2) Weighted Average Remaining Life (Years) (3)(4) Senior term loans $ 61,720,705 $ 71,644,003 $ 71,883,402 0.4 Total loans held at fair value $ 61,720,705 $ 71,644,003 $ 71,883,402 0.4 As of December 31, 2022 Fair Value (1) Carrying Value (2) Outstanding Principal (2) Weighted Average Remaining Life (Years) (3) Senior term loans $ 99,226,051 $ 100,635,985 $ 102,376,546 1.2 Total loans held at fair value $ 99,226,051 $ 100,635,985 $ 102,376,546 1.2 (1) Refer to Note 14 to our consolidated financial statements titled “Fair Value” .
We have analyzed our various federal and state filing positions and believe that our income tax filing positions and deductions are well documented and supported as of December 31, 2022. Based on our evaluation, there is no reserve for any uncertain income tax positions. Accrued interest and penalties, if any, are included within other liabilities in the consolidated balance sheets.
We have analyzed our various federal and state filing positions and believe that our income tax filing positions and deductions are well documented and supported as of December 31, 2023. Based on our evaluation, there is no reserve for an y uncertain income tax positions.
The income tax provision is included in the line item income tax expense, including excise tax in the consolidated statements of operations included in this Annual Report on Form 10-K. 81 Table of Contents Factors Impacting our Operating Results The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest margin, the market value of our assets and the supply of, and demand for, commercial real estate debt and other financial assets in the marketplace.
Factors Impacting our Operating Results The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest margin, the market value of our assets and the supply of, and demand for, commercial real estate debt and other financial assets in the marketplace.
Business Overview AFC Gamma, Inc. is an institutional lender to the commercial real estate sector that was founded in July 2020 by a veteran team of investment professionals.
Unless the context otherwise requires, as used in this section the terms “we,” “us,” “our,” or “AFCG,” refers to AFC Gamma, Inc. Business Overview AFC Gamma, Inc. is an institutional lender to the commercial real estate sector that was founded in July 2020 by a veteran team of investment professionals.
The increase from December 31, 2021 to December 31, 2022 was due to an increase in net income of approximately $14.9 million, offset by an increase in accretion of OID of approximately $(6.2) million, an increase in PIK interest of approximately $(3.8) million, an increase in provision for current expected credit losses of approximately $8.5 million, an increase in unrealized losses (gains) on loans held at fair value of approximately $4.2 million and an increase in interest reserve of approximately $4.0 million.
The decrease of approximately $(10.1) million during the year ended December 31, 2022 to December 31, 2023 was primarily due to a decrease in net income of approximately $(15.0) million, increase in PIK interest of approximately $(2.6) million, decrease in interest reserve of approximately $(2.7) million, offset by an increase in the change in unrealized (gains) losses on loans held at fair value of approximately $4.9 million and a decrease in accretion of OID of approximately $5.6 million, respectively.
Incentive fees increased approximately $6.3 million, or 105.3%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, which was driven by the increase in Core Earnings, as defined in the Management Agreement.
Incentive fees decreased approximately $(2.0) million, or (16.0)%, for the year ended December 31, 2023, as compared to the year ended December 31, 2022, driven by lower Core Earnings (as defined in the Management Agreement).
Cash Flows The following table sets forth changes in cash and cash equivalents for the years ended December 31, 2022 and 2021: December 31, 2022 2021 Net income $ 35,932,397 $ 21,000,497 Adjustments to reconcile net income to net cash (used in) provided by operating activities and changes in operating assets and liabilities (4,610,424) (11,461,935) Net cash provided by (used in) operating activities 31,321,973 9,538,562 Net cash (used in) provided by investing activities (16,343,685) (248,458,088) Net cash provided by (used in) financing activities 16,148,505 338,541,754 Change in cash and cash equivalents $ 31,126,793 $ 99,622,228 Net Cash Provided by (Used in) Operating Activities Net cash provided by operating activities during the year ended December 31, 2022 was approximately $31.3 million, compared to approximately $9.5 million for the year ended December 31, 2021.
Cash Flows The following table sets forth changes in cash and cash equivalents for the years ended December 31, 2023 and 2022: December 31, 2023 2022 Net income $ 20,951,999 $ 35,932,397 Adjustments to reconcile net income to net cash (used in) provided by operating activities and changes in operating assets and liabilities 276,935 (4,610,424) Net cash provided by (used in) operating activities 21,228,934 31,321,973 Net cash provided by (used in) investing activities 28,519,379 (16,343,685) Net cash (used in) provided by financing activities (68,494,701) 16,148,505 Change in cash and cash equivalents $ (18,746,388) $ 31,126,793 Net Cash Provided by (Used in) Operating Activities Net cash provided by operating activities during the year ended December 31, 2023 was approximately $21.2 million, compared to approximately $31.3 million for the same period in 2022.
Some of our cannabis-related borrowers have their equity securities listed for public trading on the Canadian Securities Exchange (“CSE”) in Canada and/or over-the-counter (“OTC”) in the United States. We have expanded our investment guidelines to invest in attractive commercial real estate financing opportunities emerging from the current interest rate environment.
Some of our cannabis-related borrowers have their equity securities listed for public trading on the Canadian Securities Exchange (“CSE”) in Canada and/or over-the-counter (“OTC”) in the United States.
The term loans under the Subsidiary of Public Company M Credit Facility accrue interest at a fixed rate per annum of 9.5%. In August 2022, we committed an additional $8.1 million under the credit agreement with Subsidiary of Private Company G.
The term loans under the Subsidiary of Public Company M Credit Facility accrue interest at a fixed rate per annum of 9.5%.
OID relates to cash withheld by the Company upon funding of its investments and is included under the ‘Supplemental disclosure of non-cash activity’ on the Consolidated Statements of Cash Flows.
OID relates to cash withheld by the Company upon funding of its investments and is included under the ‘Supplemental disclosure of non-cash activity’ on the Consolidated Statements of Cash Flows. As of December 31, 2023 and 2022, all of our cash was unrestricted and totaled approximately $121.6 million and $140.4 million, respectively.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeFor further information on the risks associated with the elimination of LIBOR, please see “ Risk Factors—Risks Related to Our Business and Growth Strategy—Changes to, or the elimination of, LIBOR may adversely affect interest expense related to our loans and investments .” Interest Rate Mismatch Risk We may fund a portion of our origination of loans, or of loans that we may in the future acquire, with borrowings that are based on various benchmarks, while the interest rates on these assets may be fixed or indexed to LIBOR, SOFR, U.S. prime rate, or another index rate.
Biggest changeInterest Rate Mismatch Risk We may fund a portion of our origination of loans, or of loans that we may in the future acquire, with borrowings that are based on various benchmarks, while the interest rates on these assets may be fixed or indexed to SOFR, U.S. prime rate, or another index rate.
Generally, with the guidance and experience of our Manager: • we manage our portfolio through an interactive process with our Manager and service our self-originated loans through our Manager’s servicer; • we invest in a mix of floating- and fixed-rate loans to mitigate the interest rate risk associated with the financing of our portfolio; 101 Table of Contents • we actively employ portfolio-wide and asset-specific risk measurement and management processes in our daily operations, including utilizing our Manager’s risk management tools such as software and services licensed or purchased from third-parties and proprietary analytical methods developed by our Manager; and • we seek to manage credit risk through our due diligence process prior to origination or acquisition and through the use of non-recourse financing, when and where available and appropriate.
Generally, with the guidance and experience of our Manager: • we manage our portfolio through an interactive process with our Manager and service our self-originated loans through our Manager’s servicer; • we invest in a mix of floating- and fixed-rate loans to mitigate the interest rate risk associated with the financing of our portfolio; • we actively employ portfolio-wide and asset-specific risk measurement and management processes in our daily operations, including utilizing our Manager’s risk management tools such as software and services licensed or purchased from third-parties and proprietary analytical methods developed by our Manager; and • we seek to manage credit risk through our due diligence process prior to origination or acquisition and through the use of non-recourse financing, when and where available and appropriate.
If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations. 102 Table of Contents We are exposed to market risks in the ordinary course of our business. These risks primarily relate to fluctuations in interest rates.
If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations. 108 Table of Contents We are exposed to market risks in the ordinary course of our business. These risks primarily relate to fluctuations in interest rates.
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, which replaced the incurred loss impairment methodology pursuant to GAAP with a methodology that reflects CECL on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broader range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the “CECL Reserve”).
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, which replaced the incurred loss impairment methodology pursuant to GAAP with a methodology that reflects current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broader range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the “CECL Reserve”).
We estimate that a hypothetical 100 basis points increase in the floating benchmark rate would result in an increase in annual interest income of approximately $2.2 million and a hypothetical 100 basis points decrease in the floating benchmark rate would result in a decrease in annual interest income of approximately $(2.2) million.
We estimate that a hypothetical 100 basis points increase in the floating benchmark rate would result in an increase in annual interest income of approximately $2.7 million and a hypothetical 100 basis points decrease in the floating benchmark rate would result in a decrease in annual interest income of approximately $(2.3) million.
Actual economic conditions or implementation of decisions by our Manager and our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results. 103 Table of Contents Credit Risk We are subject to varying degrees of credit risk in connection with our loans and interest receivable.
Actual economic conditions or implementation of decisions by our Manager and our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results. Credit Risk We are subject to varying degrees of credit risk in connection with our loans and interest receivable.
In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses.
In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. 110 Table of Contents
For additional information regarding the credit risk associated with our loans and interest receivables, see “ Risk Factors—Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve significant risks.” We expect to be subject to varying degrees of credit risk in connection with holding our portfolio of loans.
For additional information regarding the credit risk associated with our loans and interest receivables, see “ Risk Factors—Risks Related to Our Business and Growth Strategy—Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve significant risks.” We expect to be subject to varying degrees of credit risk in connection with holding our portfolio of loans.
If one of these floating benchmarks are no longer available, our applicable loan documents generally allow us to choose a new index based upon comparable information. However, if each of these benchmarks are no longer available, we may need to renegotiate some of our agreements to determine a replacement index or rate of interest.
If one of these floating benchmarks are no longer available, our applicable loan documents generally include fallback provisions that allow us to choose a new index based upon comparable information. However, if each of these benchmarks are no longer available, we may need to renegotiate some of our agreements to determine a replacement index or rate of interest.
As of December 31, 2022, a decrease of 50 bps or increase of 50 bps of the market yield would have resulted in a change in unrealized gain (loss) of approximately $0.5 million and $(0.5) million, respectively. As of December 31, 2022, we had six floating-rate loans, representing approximately 54% of our portfolio based on aggregate outstanding principal balances.
As of December 31, 2023, a decrease of 50 bps or increase of 50 bps of the market yield would have resulted in a change in unrealized gain (loss) of approximately $0.3 million and $(0.3) million, respectively. As of December 31, 2023, we had seven floating-rate loans, representing approximately 68% of our portfolio based on aggregate outstanding principal balances.
Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans; however, this is mitigated to the extent our loans bear interest at a floating rate.
Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans, while a decrease in revenue multiples and recovery rates may result in a decrease in the fair value of certain of our loans ; however, this is mitigated to the extent our loans bear interest at a floating rate.
We primarily provide loans to companies operating in the cannabis industry which involves significant risks, including the risk of strict enforcement against our borrowers of the federal illegality of cannabis, our borrowers’ inability to renew or otherwise maintain their licenses or other requisite authorizations for their cannabis operations, and such loans lack of liquidity, and we could lose all or part of any of our loans. 104 Table of Contents Our ability to grow or maintain our core business depends on state laws pertaining to the cannabis industry.
We primarily provide loans to companies operating in the cannabis industry which involves significant risks, including the risk of strict enforcement against our borrowers of the federal illegality of cannabis, our borrowers’ inability to renew or otherwise maintain their licenses or other requisite authorizations for their cannabis operations, and such loans lack of liquidity, and we could lose all or part of any of our loans.
The CECL Reserve related to unfunded commitments on loans held at carrying value is recorded within current expected credit loss reserve as a liability in our consolidated balance sheet. Refer to Note 6 to our annual consolidated financial statements for the year ended December 31, 2022 titled “ Current Expected Credit Losses ” for more information on CECL.
The CECL Reserve related to unfunded commitments on loans held at carrying value is recorded within current expected credit loss reserve as a liability in our consolidated balance sheet. Refer to Note 6 within our consolidated financial statements titled “Current Expected Credit Losses” for more information on CECL.
Changes in market yields may change the fair value of certain of our loans. Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans, however this is mitigated to the extent our loans bear interest at a floating rate.
Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans, while a decrease in revenue multiples and recovery rates may result in a decrease in the fair value of certain of our loans; however, this is mitigated to the extent our loans bear interest at a floating rate.
Our loan portfolio as of December 31, 2022 was concentrated with the top four borrowers representing approximately 70.8% of the aggregate outstanding principal balances and approximately 69.7% of the total loan commitments.
Our loan portfolio as of December 31, 2023 was concentrated with the top four borrowers representing approximately 69.4% of the aggregate outstanding principal balances and approximately 69.2% of the total loan commitments.
Our portion of the senior term loan provided to such borrower had a principal amount of $75.0 million outstanding as of December 31, 2022 and $15.0 million unfunded. This senior term loan accrues interest at a variable rate of U.S. prime rate plus 5.8%, subject to a U.S. prime rate floor of 5.5%.
Our portion of the senior term loan provided to such borrower has a principal amount of $84.0 million outstanding as of December 31, 2023, which is fully funded. This senior term loan accrues interest at a variable rate of U.S. prime rate plus 5.8%, subject to a U.S. prime rate floor of 5.5%.
Our largest credit facility represented approximately 18.7% of the aggregate outstanding principal balances of our portfolio and approximately 20.1% of the total loan commitments as of December 31, 2022.
Our largest credit facility represented approximately 21.6% of the aggregate outstanding principal balances of our portfolio and approximately 19.5% of our total loan commitments as of December 31, 2023.
Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers. Changes in market yields may change the fair value of certain of our loans.
Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers. Alternative valuation methodologies may be used as appropriate, and can include a market analysis, income analysis, or recovery analysis. Changes in market yields, revenue multiples, and recovery rates may change the fair value of certain of our loans.
As of December 31, 2022, three of our loans held for investment were carried at fair value within loans held at fair value in our consolidated balance sheets, with changes in fair value recorded through earnings. We evaluate our loans on a quarterly basis and fair value is determined by our Board through its independent Audit and Valuation Committee.
As of December 31, 2023 and 2022 , two and three of our loans held for investment were carried at fair value within loans held at fair value in our consolidated balance sheets, respectively, with changes in fair value recorded through earnings.
In addition, the elimination of LIBOR and/or changes to another index could result in mismatches with the interest rate of loans that we are financing.
In addition, changes to another index could result in mismatches with the interest rate of loans that we are financing. As of December 31, 2023 , none of our loans paid interest at a variable rate tied to LIBOR.
We use an independent third-party valuation firm to provide input in the valuation of all of our unquoted investments, which we consider along with other various subjective and objective factors in making our evaluations. Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers.
We evaluate our loans on a quarterly basis and fair value is determined by our Board through its independent Audit and Valuation Committee. We use an independent third-party valuation firm to provide input in the valuation of all of our unquoted investments, which we consider along with other various subjective and objective factors in making our evaluations.
These floating benchmark rates include one-month LIBOR subject to a weighted average floor of 1.0% and quoted at 4.392%, one-month Secured Overnight Financing Rate (“SOFR”) subject to a weighted average floor of 1.0%, and quoted at 4.358% and U.S. prime rate subject to a weighted average floor of 4.9% quoted at 7.500%.
These floating benchmark rates included one-month SOFR subject to a weighted average floor of 3.3% and quoted at 5.4% and U.S. prime rate subject to a weighted average floor of 5.0% and quoted at 8.5%.
Credit risk will also be addressed through our Manager’s on-going review, and loans will be monitored for variance from expected prepayments, defaults, severities, losses and cash flow on a quarterly basis.
Our Manager will seek to manage credit risk by performing deep credit fundamental analysis of potential assets and through the use of non-recourse financing, when and where available and appropriate. 109 Table of Contents Credit risk will also be addressed through our Manager’s ongoing review, and loans will be monitored for variance from expected prepayments, defaults, severities, losses and cash flow on a quarterly basis.
We will have exposure to credit risk on our commercial real estate loans and other targeted types of loans. Our Manager will seek to manage credit risk by performing deep credit fundamental analysis of potential assets and through the use of non-recourse financing, when and where available and appropriate.
We will have exposure to credit risk on our commercial real estate loans and other targeted types of loans.
Potential Impact of LIBOR Transition As of December 31, 2022, six of our loans, representing approximately 54% of our portfolio based on aggregate outstanding principal balances, paid interest at a variable rate tied to either LIBOR, SOFR, or U.S. prime rate.
On April 3, 2023, the FCA announced that it would compel the IBA to publish an unrepresentative synthetic USD LIBOR through September 30, 2024 for use in legacy contracts. 107 Table of Contents As of December 31, 2023 , seven of our loans, representing approximately 68% of our portfolio based on aggregate outstanding principal balances, paid interest at a variable rate tied to either SOFR or U.S. prime rate.
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LIBOR Transition In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) (the authority that regulates LIBOR) announced its intention to cease sustaining LIBOR by the end of 2021.
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The ICE Benchmark Administration (the “IBA”), which is supervised by the FCA, ended publication of the one-week and two-month USD LIBOR tenors on December 31, 2021, and the remaining USD LIBOR tenors (overnight, one-month, three-month, six-month and 12-month) ended following their publication on June 30, 2023.
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Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers. Alternative valuation methodologies may be used as appropriate, and can include a market analysis, income analysis, or recovery analysis.
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Changes in market yields, recovery rates, and revenue multiples may change the fair value of certain of our loans.
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Our ability to grow or maintain our core business depends on state laws pertaining to the cannabis industry.

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