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EX-32 - EXHIBIT 32 - Terra Secured Income Fund 5, LLCtsif63017ex32.htm
EX-31.2 - EXHIBIT 31.2 - Terra Secured Income Fund 5, LLCtsif63017ex312.htm
EX-31.1 - EXHIBIT 31.1 - Terra Secured Income Fund 5, LLCtsif563017ex311.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-55780
Terra Secured Income Fund 5, LLC
(Exact name of registrant as specified in its charter)
Delaware
 
90-0967526
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
805 Third Avenue, 8th Floor
New York, New York 10022
(Address of principal executive offices)

(212) 753-5100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company þ
 
Emerging growth company þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of August 11, 2017, the registrant had 6,826.5 units of limited liability company interests outstanding.




TABLE OF CONTENTS
 
 
Page
 
 
 
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 





2

 



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Terra Secured Income Fund 5, LLC
Consolidated Statements of Financial Condition

 
 
June 30, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
Assets
 
 
 
 
Equity investment in Terra Property Trust, Inc. at fair value — controlled (cost
   of $286,148,649 and $291,468,567, respectively)
 
$
285,591,393

 
$
290,419,317

Cash and cash equivalents
 
49,302

 
41,520

Other assets
 
5,853

 
7,447

Total assets
 
$
285,646,548

 
$
290,468,284

 
 
 
 
 
Liabilities and Members’ Capital
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
217,890

 
$
441,388

Due to Terra Property Trust, Inc.
 

 
438,249

Distributions payable
 

 
2,243

Total liabilities
 
217,890

 
881,880

Commitments and contingencies (Note 6)
 
 
 
 
Members’ capital:
 
 
 
 
Managing member
 

 

Non-managing members
 
285,428,658

 
289,586,404

Total members’ capital
 
285,428,658

 
289,586,404

Total liabilities and members’ capital
 
$
285,646,548

 
$
290,468,284


See notes to consolidated financial statements.



3

 



Terra Secured Income Fund 5, LLC
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Investment income — controlled
 
 
 
 
 
 
 
Dividend income
$
5,123,787

 
$
11,794,049

 
$
11,254,379

 
$
15,218,010

Investment income
 
 
 
 
 
 
 
Other operating income
273

 
637

 
953

 
7,957

Total investment income
5,124,060

 
11,794,686

 
11,255,332

 
15,225,967

Operating expenses
 
 
 
 
 
 
 
Merger transaction fees

 
71,835

 

 
384,027

Professional fees
232,022

 
167,082

 
327,365

 
279,576

Other
3,778

 
77,388

 
32,313

 
95,961

Total operating expenses
235,800

 
316,305

 
359,678

 
759,564

Net investment income
4,888,260

 
11,478,381

 
10,895,654

 
14,466,403

Net change in unrealized depreciation on
investment — controlled
(50,870
)
 
(1,694,489
)
 
491,994

 
(670,021
)
Net increase in members’ capital resulting
from operations
$
4,837,390

 
$
9,783,892

 
$
11,387,648

 
$
13,796,382



See notes to consolidated financial statements.



4

 



Terra Secured Income Fund 5, LLC
Consolidated Statements of Changes in Members’ Capital (Unaudited)
Six Months Ended June 30, 2017 and 2016

 
Managing
Member
 
Non-Managing Members
 
Total
Balance, January 1, 2017
$

 
$
289,586,404

 
$
289,586,404

Capital distributions

 
(15,545,394
)
 
(15,545,394
)
Increase in members’ capital resulting from operations:
 
 
 
 
 
Net investment income

 
10,895,654

 
10,895,654

Net change in unrealized depreciation on investment

 
491,994

 
491,994

Net increase in members’ capital resulting from operations

 
11,387,648

 
11,387,648

Balance, June 30, 2017
$

 
$
285,428,658

 
$
285,428,658


 
Managing
Member
 
Non-Managing Members
 
Total
Balance, January 1, 2016
$

 
$
122,208,698

 
$
122,208,698

Capital contributions from Merger

 
155,751,516

 
155,751,516

Capital contributions, net of selling commissions and dealer
   manager fees of $1,277,916

 
25,598,304

 
25,598,304

Capital distributions

 
(15,239,658
)
 
(15,239,658
)
Capital redemptions

 
(6,771,430
)
 
(6,771,430
)
Increase in members’ capital resulting from operations:
 
 
 
 

Net investment income

 
14,466,403

 
14,466,403

Net change in unrealized depreciation on investment

 
(670,021
)
 
(670,021
)
Net increase in members’ capital resulting from operations

 
13,796,382

 
13,796,382

Balance, June 30, 2016
$

 
$
295,343,812

 
$
295,343,812



See notes to consolidated financial statements.



5

 



Terra Secured Income Fund 5, LLC
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net increase in members’ capital resulting from operations
$
11,387,648

 
$
13,796,382

Adjustments to reconcile net increase in members’ capital resulting from
   operations to net cash provided by (used in) operating activities:
 
 
 
Purchase of common stock of Terra Property Trust, Inc.

 
(10,000,000
)
Cash transferred to Terra Property Trust, Inc.

 
(5,034,571
)
Return of capital on investment
5,319,918

 
498,481

Net change in unrealized depreciation on investment
(491,994
)
 
670,021

 
 
 
 
Changes in operating assets and liabilities:
 
 
 
Interest receivable

 
351,883

Other assets

 
(129,397
)
Due to Manager

 
(705,389
)
Accounts payable and accrued expenses
(223,499
)
 
(5,432,960
)
Due to Terra Property Trust, Inc.
(438,249
)
 
2,930,044

Taxes payable

 
(621,177
)
Interest payable

 
(172,051
)
Net cash provided by (used in) operating activities
15,553,824

 
(3,848,734
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from capital contributions, net of selling commissions and dealer
   manager fees

 
25,598,304

Distributions paid
(15,546,042
)
 
(15,178,178
)
Payment for capital redemptions

 
(10,198,413
)
Cash acquired in the Merger

 
3,480,981

Net cash (used in) provided by financing activities
(15,546,042
)
 
3,702,694

 
 
 
 
Net increase (decrease) in cash and cash equivalents
7,782

 
(146,040
)
Cash and cash equivalents at beginning of period
41,520

 
1,862,798

Cash and cash equivalents at end of period
$
49,302

 
$
1,716,758

 
 
 
 
Supplemental Disclosure of Cash Flows Information:
 
 
 
Cash paid for income taxes
$

 
$

Cash paid for interest
$

 
$
681,033




6

 



Terra Secured Income Fund 5, LLC
Consolidated Statements of Cash Flows (unaudited) (Continued)

Supplemental Non-Cash Investing and Financing Activities:
In December 2015, the members approved the merger of Terra Secured Income Fund, LLC (“Terra Fund 1”), Terra Secured Income Fund 2, LLC (“Terra Fund 2”), Terra Secured Income Fund 3, LLC (“Terra Fund 3”) and Terra Secured Income Fund 4, LLC (“Terra Fund 4”) with and into subsidiaries of the Company (individually, each a “Terra Fund” and collectively, the “Terra Funds”) through a series of separate mergers effective January 1, 2016 (collectively, the “Merger”). The following table summarizes the fair values of the assets acquired and liabilities assumed in the Merger:
Total Consideration:
 
 
Fair value of units issued
 
$
155,751,516

 
 
155,751,516

Assets Acquired at Fair Value
 
 
Investments, at fair value
 
142,768,001

Investments through participation interests, at fair value
 
7,771,619

Equity investment in Terra Park Green Member, LLC, at fair value
 
16,900,000

Restricted cash
 
7,119,078

Interest receivable
 
1,412,840

Other assets
 
35,695

Liabilities Assumed at Fair Value
 
 
Obligations under participation agreements
 
(8,154,822
)
Interest reserve and other deposits held on loans
 
(7,119,078
)
Accounts payable and accrued expenses
 
(3,113,022
)
Redemption liability
 
(3,426,983
)
Due to Manager
 
(1,343,020
)
Taxes payable
 
(232,040
)
Interest payable
 
(80,807
)
Other liabilities
 
(266,926
)
Net assets acquired excluding cash
 
152,270,535

Cash acquired in the Merger
 
$
3,480,981

Following the Merger, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust, Inc. (“Terra Property Trust”), a newly-formed and wholly-owned subsidiary of the Company, in exchange for the common shares of Terra Property Trust. The following table summarizes the fair values of the net assets contributed to Terra Property Trust:
Total Consideration:
 
 
Fair value of common stock of Terra Property Trust received
 
$
288,259,804

 
 
288,259,804

Assets Contributed at Fair Value
 
 
Investments, at fair value
 
276,746,475

Investments through participation interests, at fair value
 
13,789,884

Equity investment in Terra Park Green Member, LLC, at fair value
 
16,900,000

Restricted cash
 
21,421,501

Interest receivable
 
2,382,546

Due from related parties
 
438,249

Other assets
 
35,695

Liabilities Transferred at Fair Value
 
 
Obligations under participation agreements
 
(24,147,097
)
Interest reserve and other deposits held on loans
 
(21,421,501
)
Due to Manager
 
(2,011,003
)
Other liabilities
 
(909,516
)
Net assets transferred excluding cash
 
283,225,233

Cash transferred to Terra Property Trust
 
$
5,034,571


See notes to consolidated financial statements.


7

 



Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments
June 30, 2017 (unaudited) and December 31, 2016

As of June 30, 2017 and December 31, 2016, the Company’s only investment is its equity interest in a wholly-owned subsidiary as presented below:
 
 
 
 
Number of Shares of Common Stock
 
June 30, 2017
 
December 31, 2016
Investment — Controlled
 
Date Acquired
 
 
Cost
 
Fair Value
 
% of Net Assets
 
Cost
 
Fair Value
 
% of Net Assets
Terra Property Trust, Inc. — 100% Owned
 
1/1/2016 and 3/7/2016
 
14,912,990

 
$
286,148,649

 
$
285,591,393

 
100.1
%
 
$
291,468,567

 
$
290,419,317

 
100.3
%

The following table presents a schedule of investments held by Terra Property Trust, the Company’s wholly-owned subsidiary, as of June 30, 2017:
Collateral Location
Portfolio Company
Structure
Property
Type
Interest
Rate
Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 
Investments — non-controlled:
 
 
 
 
 
 
 
 
US - AL
ASA Mgt. Holdings, LLC
Preferred equity investment
Multifamily
16.0
%
4/7/2012
8/1/2022
$
2,100,000

$
2,142,457

$
2,120,720

0.7
%
 
SVA Mgt. Holdings, LLC
Preferred equity investment
Multifamily
16.0
%
4/7/2012
8/1/2022
1,600,000

1,634,896

1,615,787

0.6
%
 
Total US - AL
 
 
 
 
 
3,700,000

3,777,353

3,736,507

1.3
%
US - CA
Palmer City-Core Stockton Street, LLC
Preferred equity investment
Hotel
12.0
%
1/17/2014
12/17/2017
4,325,000

4,368,250

4,365,888

1.5
%
 
Maguire Partners-1733 Ocean, LLC
First mortgage
Office
LIBOR+8.5%

3/7/2016
3/9/2018
51,883,191

52,368,713

52,716,750

18.5
%
 
L.A. Warner Hotel Partners, LLC (3)(4)(5)(6)
Preferred equity investment
Hotel
13.3
%
7/25/2014
8/4/2017
20,000,000

20,515,864

20,197,786

7.1
%
 
TSG-Parcel 1, LLC (3)(5)(7)
First mortgage
Land
12.0
%
7/10/2015
10/10/2017
18,000,000

18,180,000

18,174,047

6.4
%
 
Total US - CA
 
 
 
 
 
94,208,191

95,432,827

95,454,471

33.5
%
US - DE
BPG Office Partners III/IV LLC (3)(4)(5)
Mezzanine loan
Office
13.5
%
6/5/2015
6/5/2018
10,000,000

10,088,104

10,093,411

3.5
%
US - FL
Beach Resort Management, LLC (8)
Mezzanine loan
Hotel
13.0
%
7/16/2012
8/1/2017
4,500,000

4,502,693

4,504,576

1.6
%
 
1100 Biscayne Management
   Holdco, LLC (3)(5)
Mezzanine loan
Hotel
12.0% current
3.0% PIK

4/24/2015
10/9/2017
15,652,271

15,791,368

15,626,292

5.5
%
 
37 Gables Member LLC (4)(5) 
Mezzanine loan
Multifamily
13.0
%
6/16/2016
6/16/2019
5,750,000

5,794,465

5,800,107

2.0
%
 
Greystone Gables Holdings Member
   LLC (4)(5)
Preferred equity investment
Multifamily
13.0
%
6/16/2016
6/16/2019
500,000

503,867

504,357

0.2
%
 
RS JZ 2700 NW2, LLC
First mortgage
Land
12.0
%
9/1/2016
12/1/2017
21,360,000

21,563,025

21,569,263

7.6
%
 
Total US - FL
 
 
 
 
 
47,762,271

48,155,418

48,004,595

16.9
%
US - GA
YMP Georgia Portfolio Mezzanine, LLC
Mezzanine loan
Multifamily
14.0
%
12/19/2013
1/6/2019
4,250,000

4,526,537

4,302,013

1.5
%
 
OHM Atlanta Owner, LLC (7)
First mortgage
Land
12.0
%
6/20/2017
6/20/2018
24,500,000

24,717,798

24,717,798

8.7
%
 
Total US - GA
 
 
 
 
 
28,750,000

29,244,335

29,019,811

10.2
%
US - IN
Muncie Mezz, LLC
Mezzanine loan
Student
housing
13.0
%
8/29/2013
9/6/2023
2,700,000

2,686,748

3,061,501

1.1
%
US - NC
Milestone Greensboro Holdings,
   LLC (4)(5)
Mezzanine loan
Hotel
14.0
%
3/1/2013
3/1/2018
3,500,000

3,544,047

3,534,591

1.2
%




8

 



Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments (Continued)
June 30, 2017 (unaudited) and December 31, 2016


Terra Property Trust Schedule of Investments as of June 30, 2017 (Continued):
Collateral Location
Portfolio Company
Structure
Property
Type
Interest
Rate
Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 
Investments — non-controlled:
 
 
 
 
 
 
 
 
US - NY
Cape Church Mezz, LLC (4)(5)
Mezzanine loan
Multifamily
12.0
%
3/15/2016
7/15/2019
16,157,667

16,288,397

16,205,575

5.7
%
 
140 Schermerhorn Street Mezz LLC (5)(7)
Mezzanine loan
Hotel
12.0
%
11/16/2016
12/1/2019
15,000,000

15,111,916

15,126,318

5.3
%
 
QPT 24th Street Development LLC (3)(5)(7)(9)
First mortgage
Land
9.3
%
2/21/2017
6/15/2017
50,600,000

50,600,000

50,600,000

17.7
%
 
575 CAD I LLC
Mezzanine loan
Land
12.0% current
2.5% PIK

1/31/2017
8/1/2019
9,218,528

9,285,968

9,287,631

3.3
%
 
WWML96MEZZ, LLC
Mezzanine loan
Multifamily
13.0
%
12/18/2015
12/31/2018
6,209,979

6,260,994

6,244,602

2.2
%
 
WWML96, LLC
Preferred equity investment
Multifamily
13.0
%
12/18/2015
12/31/2018
1,391,637

1,403,069

1,387,589

0.5
%
 
Total US - NY
 
 
 
 
 
98,577,811

98,950,344

98,851,715

34.7
%
US - OR
Pollin Hotels PDX Mezzanine, LLC (4)(5)
Mezzanine loan
Hotel
13.0
%
9/23/2013
10/6/2018
5,000,000

5,268,964

5,282,419

1.8
%
US - PA
Millennium Waterfront Associates,
   L.P. (6)
First mortgage
Land
12.0
%
7/2/2015
7/2/2017
14,150,000

14,291,500

14,287,190

5.0
%
US - SC
High Pointe Mezzanine Investments,
   LLC (4)(5)
Mezzanine loan
Student
housing
13.0
%
12/27/2013
1/6/2024
3,000,000

3,411,811

3,441,249

1.2
%
US - TN
Kingsport 925-Mezz LLC (4)(5)
Mezzanine loan
Multifamily
13.0
%
1/6/2014
12/5/2018
3,000,000

3,161,783

3,140,506

1.1
%
US - TX
Northland Museo Member, LLC (4)(5)
Mezzanine loan
Multifamily
12.0
%
11/22/2013
12/6/2018
4,000,000

3,960,657

4,090,580

1.4
%
 
Austin H. I. Owner LLC (3)(5)
Mezzanine loan
Hotel
12.5
%
9/30/2015
10/6/2020
3,500,000

3,523,185

3,545,594

1.2
%
 
AHF-Heritage #1, LLC
Mezzanine loan
Multifamily
14.0
%
7/30/2012
8/11/2022
2,689,038

2,930,131

2,737,959

1.0
%
 
Total US - TX
 
 
 
 
 
10,189,038

10,413,973

10,374,133

3.6
%
US - UT
NB Factory JV, LLC (7)
Preferred equity
   investment
Student
   housing
15.0
%
6/29/2017
6/26/2020
5,000,000

5,000,000

5,000,000

1.7
%
US - Various
Capital Square Realty Advisors, LLC (8)
Facility
Various
13.0
%
12/17/2013
7/29/2017
16,000,000

16,157,974

16,157,974

5.7
%
 
Nelson Brothers Professional Real
   Estate, LLC (6)
Facility
Various
15.0
%
8/31/2016
7/27/2017
8,000,000

8,079,098

8,078,999

2.8
%
 
Total US - Various
 
 
 
 
 
24,000,000

24,237,072

24,236,973

8.5
%
 
Total investments — non-controlled:
 
 
 
 
353,537,311

357,664,279

357,519,072

125.3
%




9

 




Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments (Continued)
June 30, 2017 (unaudited) and December 31, 2016
 
Terra Property Trust Schedule of Investments as of June 30, 2017 (Continued):

Collateral Location
Portfolio Company
Structure
Property
Type
Interest
Rate
Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 
Investments through participation interests — non-controlled (10):
 
 
 
 
 
 
 
 
US - NY
QPT 24th Street Mezz LLC (3)(5)(9)
Participation in
   mezzanine loan
Land
12.0% current
2.0% PIK

12/15/2015
6/15/2017
12,863,770

12,863,770

12,863,771

4.5
 %
US - PA
KOP Hotel XXXI Mezz LP (3)(5)
Participation in
   mezzanine loan
Hotel
13.0
%
11/24/2015
12/6/2022
1,800,000

1,804,415

1,824,241

0.6
 %
 
Total investments through participation interest — non-controlled
 
 
 
 
14,663,770

14,668,185

14,688,012

5.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Total gross investments
 
 
 
 
 
368,201,081

372,332,464

372,207,084

130.3
 %
 
Obligations under participation agreements (3)(4)(5)(7)
 
 
 
 
(77,914,792
)
(78,480,646
)
(78,729,079
)
(27.6
)%
 
Net investments
 
 
 
 
 
$
290,286,289

$
293,851,818

$
293,478,005

102.7
 %

___________________________ 
(1)
Because there is no readily available market for these investments, the fair values of these investments are approved in good faith by Terra Income Advisors, LLC (the “Manager”) pursuant to Terra Property Trust’s valuation policy.
(2)
Percentages are based on the fair value of the Company’s investment in Terra Property Trust of $285.6 million as of June 30, 2017.
(3)
Terra Property Trust sold a portion of its interests in these investments via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by the Manager.
(4)
Terra Property Trust sold a portion of its interests in these investments via participation agreements to Terra Income Fund International, an affiliated fund advised by the Manager.
(5)
The loan participations from Terra Property Trust do not qualify for sale accounting under Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing, and therefore, the gross amount of these loans remain in the Consolidated Schedule of Investments.
(6)
The maturity of this loan was extended subsequent to June 30, 2017.
(7)
Terra Property Trust sold a portion of its interest in this investment through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by the Manager.
(8)
This loan was repaid subsequent to June 30, 2017.
(9)
For the three months ended June 30, 2017, Terra Property Trust suspended interest income accrual on these two loans and wrote off the related past due interest receivable and exit fee accrual for an aggregate amount of $1.4 million, net of interest expense on obligations under participation agreements, because recovery of such income and fee was doubtful. In July 2017, the principal balances of the loans were repaid in full.
(10)
Terra Property Trust purchased its interests in these investments from Terra Income Fund 6, Inc. via participation agreements.

    


10

 



Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments (Continued)
June 30, 2017 (unaudited) and December 31, 2016
    
The following table presents a schedule of investments held by Terra Property Trust as of December 31, 2016:
Collateral Location
Portfolio Company
Structure
Property
Type
Interest
Rate
Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 
Investments — non-controlled:
 
 
 
 
 
 
 
 
US - AL
ASA Mgt. Holdings, LLC
Preferred equity investment
Multifamily
15.0
%
4/7/2012
8/1/2022
$
2,100,000

$
2,145,498

$
2,120,737

0.7
%
 
SVA Mgt. Holdings, LLC
Preferred equity investment
Multifamily
15.0
%
4/7/2012
8/1/2022
1,600,000

1,637,463

1,615,800

0.6
%
 
Total US - AL
 
 
 
 
 
3,700,000

3,782,961

3,736,537

1.3
%
US - CA
Palmer City-Core Stockton Street, LLC
Preferred equity investment
Hotel
12.0
%
1/17/2014
12/17/2017
4,325,000

4,368,250

4,369,096

1.5
%
 
Encino Courtyard Mezzanine, LLC (3)
Mezzanine loan
Retail
13.5
%
12/19/2012
1/6/2023
2,500,000

2,609,852

2,529,828

0.9
%
 
Maguire Partners-1733 Ocean, LLC
First mortgage
Office
LIBOR+8.5%

3/7/2016
3/9/2018
50,450,061

50,902,766

50,924,056

17.4
%
 
L.A. Warner Hotel Partners, LLC (4)(5)
Preferred equity investment
Hotel
13.3
%
7/25/2014
8/4/2017
20,000,000

20,579,513

20,201,344

7.0
%
 
SD Carmel Hotel Partners, LLC (3)(4)(5)
Preferred equity investment
Hotel
12.0
%
3/13/2015
1/31/2017
6,000,000

6,059,398

6,059,398

2.1
%
 
TSG-Parcel 1, LLC (4)(5)(6)
First mortgage
Land
12.0
%
7/10/2015
4/10/2017
18,000,000

18,180,000

18,178,193

6.3
%
 
Total US - CA
 
 
 
 
 
101,275,061

102,699,779

102,261,915

35.2
%
US - DE
BPG Office Partners III/IV LLC (4)(5)
Mezzanine loan
Office
13.0
%
6/5/2015
6/5/2018
10,000,000

10,082,308

10,123,340

3.5
%
US - FL
Beach Resort Management, LLC
Mezzanine loan
Hotel
13.0
%
7/16/2012
8/1/2017
4,500,000

4,518,850

4,517,228

1.6
%
 
CGI Mezz 55MM, LLC (3)(4)(5)
Mezzanine loan
Mixed use
12.0% current
2.0% PIK

8/21/2014
9/6/2019
3,593,947

3,619,217

3,610,816

1.2
%
 
1100 Biscayne Management
   Holdco, LLC (4)(5)
Mezzanine loan
Hotel
12.0% current
3.0% PIK

4/24/2015
10/9/2017
15,359,671

15,488,644

15,257,412

5.2
%
 
Caton Mezz, LLC (3)(4)(5)
Mezzanine loan
Office
12.0% current
2.0% PIK

7/27/2015
1/27/2017
5,160,404

5,210,404

5,189,222

1.8
%
 
37 Gables Member LLC
Mezzanine loan
Multifamily
13.0
%
6/16/2016
6/16/2019
5,750,000

5,791,644

5,797,477

2.0
%
 
Greystone Gables Holdings Member LLC
Preferred equity investment
Multifamily
13.0
%
6/16/2016
6/16/2019
500,000

503,621

504,128

0.2
%
 
RS JZ 2700 NW2, LLC
First mortgage
Land
12.0
%
9/1/2016
12/1/2017
19,620,000

19,795,534

19,800,927

6.8
%
 
Total US - FL
 
 
 
 
 
54,484,022

54,927,914

54,677,210

18.8
%
US - GA
YMP Georgia Portfolio Mezzanine, LLC
Mezzanine loan
Multifamily
14.0
%
12/19/2013
1/6/2019
4,250,000

4,604,941

4,387,683

1.5
%
US - IN
Muncie Mezz, LLC
Mezzanine loan
Student
housing
13.0
%
8/29/2013
9/6/2023
2,700,000

2,683,938

3,039,674

1.0
%
US - MA
Phoenix CR 2012A, LLC, Phoenix CR
   2012B, LLC, & Phoenix CR 2012C,
   LLC
Mezzanine loan
Multifamily
12.0
%
7/27/2012
8/11/2022
4,000,000

4,112,275

4,071,618

1.4
%




11

 



Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments (Continued)
June 30, 2017 (unaudited) and December 31, 2016


Terra Property Trust Schedule of Investments as of December 31, 2016 (Continued):
Collateral Location
Portfolio Company
Structure
Property
Type
Interest
Rate
Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 
Investments — non-controlled:
 
 
 
 
 
 
 
 
US - NC
Milestone Greensboro Holdings, LLC
Mezzanine loan
Hotel
14.0
%
3/1/2013
3/1/2018
$
3,500,000

$
3,551,028

$
3,550,732

1.2
%
US - NJ
Essence 144 Urban Renewal, LLC
First mortgage
Multifamily
12.0
%
1/14/2015
3/14/2017
22,639,955

22,865,291

22,864,082

7.9
%
US - NY
Cape Church Mezz, LLC
Mezzanine loan
Multifamily
12.0
%
3/15/2016
7/15/2019
15,207,664

15,323,482

15,341,724

5.3
%
 
140 Schermerhorn Street Mezz LLC
Mezzanine loan
Hotel
12.0
%
11/16/2016
12/1/2019
15,000,000

15,105,343

15,118,900

5.2
%
 
WWML96MEZZ, LLC
Mezzanine loan
Multifamily
13.0
%
12/18/2015
12/31/2018
4,075,585

4,106,941

4,104,596

1.4
%
 
WWML96, LLC
Preferred equity investment
Multifamily
13.0
%
12/18/2015
12/31/2018
1,303,583

1,313,612

1,281,507

0.4
%
 
Total US - NY
 
 
 
 
 
35,586,832

35,849,378

35,846,727

12.3
%
US - OR
Pollin Hotels PDX Mezzanine, LLC
Mezzanine loan
Hotel
13.0
%
9/23/2013
10/6/2018
5,000,000

5,356,923

5,324,812

1.8
%
US - PA
PHL Hotel Partners, LLC
Preferred equity investment
Hotel
13.0
%
10/8/2013
11/1/2017
3,742,000

3,779,420

3,772,758

1.3
%
 
Millennium Waterfront Associates, L.P.
First mortgage
Land
12.0
%
7/2/2015
1/2/2017
13,980,000

14,119,800

14,118,397

4.9
%
 
Total US - PA
 
 
 
 
 
17,722,000

17,899,220

17,891,155

6.2
%
US - SC
High Pointe Mezzanine
   Investments, LLC
Mezzanine loan
Student
housing
13.0
%
12/27/2013
1/6/2024
3,000,000

3,441,697

3,176,165

1.1
%
US - TN
Kingsport 925-Mezz LLC
Mezzanine loan
Multifamily
13.0
%
1/6/2014
12/5/2018
3,000,000

3,208,266

3,111,362

1.1
%
 
315 JV, LLC (6)
Mezzanine loan
Office
12.0% current
3.0% PIK

11/15/2013
5/28/2017
6,877,843

6,971,219

6,935,693

2.4
%
 
Total US - TN
 
 
 
 
 
9,877,843

10,179,485

10,047,055

3.5
%
US - TX
Northland Museo Member, LLC
Mezzanine loan
Multifamily
12.0
%
11/22/2013
12/6/2018
4,000,000

3,946,771

4,051,342

1.4
%
 
Austin H. I. Owner LLC (4)(5)
Mezzanine loan
Hotel
12.5
%
9/30/2015
10/6/2020
3,500,000

3,521,769

3,549,105

1.2
%
 
AHF-Heritage #1, LLC
Mezzanine loan
Multifamily
14.0
%
7/30/2012
8/11/2022
2,689,038

2,951,669

2,794,286

1.0
%
 
Total US - TX
 
 
 
 
 
10,189,038

10,420,209

10,394,733

3.6
%
US - Various
Capital Square Realty Advisors, LLC
Facility
Various
13%-14%

12/17/2013
7/29/2017
15,500,000

15,643,328

15,643,328

5.4
%
 
Nelson Brothers Professional Real
   Estate, LLC
Facility
Various
15.0
%
8/31/2016
7/27/2017
8,000,000

8,073,342

8,073,342

2.8
%
 
Total US - Various
 
 
 
 
 
23,500,000

23,716,670

23,716,670

8.2
%
 
Total investments — non-controlled:
 
 
 
 
311,424,751

316,174,017

315,110,108

108.5
%






12

 



Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments (Continued)
June 30, 2017 (unaudited) and December 31, 2016

Terra Property Trust Schedule of Investments as of December 31, 2016 (Continued):

Collateral Location
Portfolio Company
Structure
Property
Type
Interest
Rate
Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 
Investments through participation interests — non-controlled (7):
 
 
 
 
 
 
 
 
US - NY
QPT 24th Street Mezz LLC (4)(5)
Participation in
   mezzanine loan
Land
12.0% current
2.0% PIK

12/15/2015
6/15/2017
12,780,220

12,897,391

12,897,392

4.5
 %
US - PA
KOP Hotel XXXI Mezz LP (4)(5)
Participation in
   mezzanine loan
Hotel
13.0
%
11/24/2015
12/6/2022
1,800,000

1,804,135

1,847,839

0.6
 %
 
Total investments through participation interest — non-controlled
 
 
 
 
14,580,220

14,701,526

14,745,231

5.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Total gross investments
 
 
 
 
 
326,004,971

330,875,543

329,855,339

113.6
 %
 
Obligations under participation agreements (4)(6)
 
 
 
 
(32,635,785
)
(32,986,194
)
(32,904,955
)
(11.3
)%
 
Net investments
 
 
 
 
 
$
293,369,186

$
297,889,349

$
296,950,384

102.3
 %

___________________________ 
(1)
Because there is no readily available market for these investments, the fair values of these investments are approved in good faith by the Manager pursuant to Terra Property Trust’s valuation policy.
(2)
Percentages are based on the fair value of the Company’s investment in Terra Property Trust of $290.4 million as of December 31, 2016.
(3)
This investment was repaid in full.
(4)
Terra Property Trust sold a portion of its interests in these investments via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by the Manager.
(5)
The loan participations from Terra Property Trust do not qualify for sale accounting under ASC Topic 860, Transfers and Servicing, and therefore, the gross amount of these loans remain in the Consolidated Schedule of Investments.
(6)
Terra Property Trust sold a portion of its interest in this investment through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by the Manager.
(7)
Terra Property Trust purchased its interests in these investments from Terra Income Fund 6, Inc. via participation agreements.


See notes to consolidated financial statements.



13

 

Notes to Consolidated Financial Statements (Unaudited)

Terra Secured Income Fund 5, LLC
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2017

Note 1. Business
 
Terra Secured Income Fund 5, LLC (and, together with its consolidated subsidiaries, the “Company”), a Delaware limited liability company, commenced operations on August 8, 2013. The Company was formed to originate, acquire and structure real estate-related loans, including mezzanine loans, first and second mortgage loans, subordinated mortgage loans, bridge loans, preferred equity investments and other loans related to high quality commercial real estate. The Company completed its original offering on January 31, 2015 and raised approximately $142 million in gross proceeds. The Company’s investment strategy is to invest substantially all of the net proceeds of membership interests in, and manage a diverse portfolio of, real estate-related loans. The Company seeks to create and maintain a portfolio of investments that generates a low volatility income stream for attractive and consistent cash distributions. The real-estate loans are typically investments between $3 million and $25 million, with unlevered yields on subordinated positions and levered yields on senior positions ranging from 12% to 16% and maturities between one to ten years.

In December 2015, the members approved the merger of Terra Fund 1, Terra Fund 2, Terra Fund 3 and Terra Fund 4 with and into subsidiaries of the Company through a series of separate mergers effective January 1, 2016. Following the Merger, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust, a newly-formed and wholly-owned subsidiary of the Company that elected to be taxed as a real estate investment trust (“REIT”), in exchange for the common shares of Terra Property Trust. Upon completion of the Merger, the Company became the parent company of Terra Funds 1 through 4 and the direct and indirect sole common stockholder of, and began conducting substantially all of its real estate lending business through, Terra Property Trust. The Company does not consolidate Terra Property Trust as Terra Property Trust is not an investment company.

The Company’s investment activities are externally managed by Terra Income Advisors, LLC, a private investment firm affiliated with the Company. The Company does not currently have any employees and does not expect to have any employees. Services necessary for the Company’s business are provided by individuals who are employees of the Manager or by individuals who were contracted by the Company or by the Manager to work on behalf of the Company pursuant to the terms of the operating agreement, as amended.

The Company will continue in existence until December 31, 2023 and expects to be terminated or to consummate an alternative liquidity transaction on or prior to the five-year anniversary of the completion of the Company’s original offering, which was January 31, 2015, unless extended for up to a maximum of two one-year extensions at the discretion of the Manager, in order to facilitate an orderly liquidation or to consummate such alternative liquidity transaction.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include all of the Company’s accounts and those of its consolidated subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the Company’s results of operations and financial condition as of and for the periods presented. All intercompany balances and transactions have been eliminated. The accompanying interim financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. The Company is an investment company, as defined under U.S. GAAP, and applies accounting and reporting guidance in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 946, Financial Services - Investment Companies.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of gains (losses), income and expenses during the reporting period. Actual results could significantly differ from those estimates. The most significant estimates inherent in the preparation of the Company’s consolidated financial statements is the valuation of investments.



14

 

Notes to Consolidated Financial Statements (Unaudited)

Equity Investment in Terra Property Trust

Equity investment in Terra Property Trust represents the Company’s equity interest in Terra Property Trust, which was initially recorded at cost. Subsequent to the asset contribution, the equity investment is reported, at each reporting date, at fair value on the consolidated statements of financial condition. Change in fair value is reported in net change in unrealized depreciation on
investment on the consolidated statements of operations.

Revenue Recognition

Revenue is accounted for under ASC 605, Revenue Recognition, which provides among other things that revenue be recognized when there is persuasive evidence an arrangement exists, delivery and services have been rendered, price is fixed and determinable and collectability is reasonably assured.

Dividend Income: Dividend income associated with the Company’s ownership of Terra Property Trust is recognized on the record date as declared by Terra Property Trust. Any excess of dividends over Terra Property Trust’s net income are recorded as return of capital.

Other Operating Income: All other income is recognized when earned.

Cash and Cash Equivalents

The Company considers all highly liquid investments, with original maturities of ninety days or less when purchased, as cash equivalents. Cash and cash equivalents are exposed to concentrations of credit risk. The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
 
Income Taxes

No provision for U.S. federal and state income taxes has been made in the accompanying consolidated financial statements, as individual members are responsible for their proportionate share of the Company’s taxable income.

Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the consolidated financial statements and tax basis assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Such deferred tax assets and liabilities were not material.

The Company did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, Income Taxes, nor did the Company have any unrecognized tax benefits as of the periods presented herein. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its consolidated statements of operations. For the three and six months ended June 30, 2017 and 2016, the Company did not incur any interest or penalties. Although the Company files federal and state tax returns, its primary tax jurisdiction is federal. The Company’s inception-to-date federal tax years remain subject to examination by the Internal Revenue Service.

Recent Accounting Pronouncements
    
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. The Company will adopt this standard on January 1, 2018 using either the retrospective or cumulative effect transition method. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements and disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for the Company beginning on January 1, 2018. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.



15

 

Notes to Consolidated Financial Statements (Unaudited)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new standard also replaces existing sale-leaseback guidance with a new model applicable to both lessees and lessors. Additionally, the new standard requires extensive quantitative and qualitative disclosures. ASU 2016-02 is effective for U.S. GAAP public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application will be permitted for all entities. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparative period presented. This ASU is not expected to have any impact on the Company’s consolidated financial statements as the Company does not have any lease arrangements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a Consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”).  ASU 2016-15 provides guidance on how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The guidance requires application using a retrospective transition method. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements and disclosure.

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended rules (together, “final rules”) interned to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X was August 1, 2017. The Company does not expect the adoption of the amendments to Regulation S-X to have a material impact on its consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a “set,” that is a business usually has outputs, outputs are not required to be present. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Management is currently evaluating the impact of this change will have on the Company’s consolidated financial statements and disclosures.

Note 3. Investment and Fair Value

Equity Investment in Terra Property Trust

The Company invests substantially all of its equity capital in the purchase of common shares of Terra Property Trust and its primary investment position is the common shares of Terra Property Trust.

The following table presents a summary of the Company’s investment at June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
December 31, 2016
Investment
 
Cost
 
Fair Value
 
% of Net Assets
 
Cost
 
Fair Value
 
% of Net Assets
14,912,990 common shares
   of Terra Property Trust, Inc.
 
$
286,148,649

 
$
285,591,393

 
100.1
%
 
$
291,468,567

 
$
290,419,317

 
100.3
%

For the three months ended June 30, 2017 and 2016, the Company received approximately $7.8 million and $12.3 million of dividends from Terra Property Trust, respectively, of which $2.7 million and $0.5 million was a return of capital, respectively. For the six months ended June 30, 2017 and 2016, the Company received approximately $16.6 million and $15.7 million of dividends from Terra Property Trust, respectively, of which $5.3 million and $0.5 million was a return of capital, respectively.



16

 

Notes to Consolidated Financial Statements (Unaudited)

The following tables present the summarized financial information of Terra Property Trust:
 
 
June 30, 2017
 
December 31, 2016
Carrying value of investments
 
$
372,332,464

 
$
330,683,840

Other assets
 
71,707,974

 
53,966,401

Total assets
 
444,040,438

 
384,650,241

Mortgage loan payable and obligations under participation agreements
 
(112,475,848
)
 
(66,855,038
)
Accounts payable, accrued expenses and other liabilities
 
(45,300,395
)
 
(26,203,277
)
Total liabilities
 
(157,776,243
)
 
(93,058,315
)
Stockholder’s equity
 
$
286,264,195

 
$
291,591,926

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues
 
$
8,263,429

 
$
12,085,962

 
$
18,545,597

 
$
22,987,138

Expenses
 
(3,119,142
)
 
(4,207,899
)
 
(7,781,178
)
 
(7,909,500
)
Realized gain on investments
 
4,500

 
132,795

 
489,960

 
140,375

Net income
 
$
5,148,787

 
$
8,010,858

 
$
11,254,379

 
$
15,218,013


Fair Value Measurements

The Company adopted the provisions of ASC 820, Fair Value Measurement (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows:

        Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.

        Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.

        Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of investments. Fair value for these investments are determined using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.
       
     In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
    


17

 

Notes to Consolidated Financial Statements (Unaudited)

Assets and Liabilities Reported at Fair Value

The following table summarizes the Company’s equity investment in Terra Property Trust at fair value on a recurring basis as of June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
Investment:
 
 
 
 
 
 
 
Equity investment in Terra Property Trust
$

 
$

 
$
285,591,393

 
$
285,591,393


 
December 31, 2016
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
Investment:
 
 
 
 
 
 
 
Equity investment in Terra Property Trust
$

 
$

 
$
290,419,317

 
$
290,419,317


Changes in Level 3 investment for the six months ended June 30, 2017 and 2016 were as follows:
 
 
Equity Investment in Terra Property Trust
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Beginning balance
 
$
290,419,317

 
$

Shares of Terra Property Trust common stock received in exchange for the Company’s
   consolidated portfolio of net assets
 

 
288,259,804

Shares of Terra Property Trust common stock purchased
 

 
10,000,000

Return of capital
 
(5,319,918
)
 
(498,481
)
Net change in unrealized depreciation on investment
 
491,994

 
(670,021
)
Ending balance
 
$
285,591,393

 
$
297,091,302

Net change in unrealized depreciation on investment for the period relating to those
   Level 3 assets that were still held by the Company
 
$
491,994

 
$
(670,021
)

Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the six months ended June 30, 2017 and 2016, there were no transfers.

The Company estimated that its other financial assets and liabilities had fair values that approximated their carrying values at June 30, 2017 and December 31, 2016 due to their short-term nature.

Valuation Process for Fair Value Measurement

Market quotations are not readily available for the Company’s real estate-related investments through Terra Property Trust, all of which are included in Level 3 of the fair value hierarchy, and therefore these investments are valued utilizing a yield approach, i.e. a discounted cash flow methodology to arrive at an estimate of the fair value of each respective investment in the portfolio using an estimated market yield. In following this methodology, investments are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of the Company’s investments, relevant factors, including available current market data on applicable yields of comparable debt/preferred equity instruments; market credit spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions, the portfolio company’s ability to make payments, its net operating income, debt-service coverage ratio (“DSCR”), the nature, quality, and realizable value of any collateral (and loan-to-value ratio); and the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates, replacement costs and the anticipated duration of each real estate-related loan investment.



18

 

Notes to Consolidated Financial Statements (Unaudited)

The Manager designates a valuation committee to oversee the entire valuation process of the Company’s Level 3 investments. The valuation committee is comprised of members of the Manager’s senior management, deal and portfolio management teams, who meet on a quarterly basis, or more frequently as needed, to review the Company investments being valued as well as the inputs used in the proprietary valuation model. Valuations determined by the valuation committee are supported by pertinent data and, in addition to a proprietary valuation model, are based on market data, industry accepted third-party valuation models and discount rates or other methods the valuation committee deems to be appropriate.

The following tables summarize the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 investments as of June 30, 2017 and December 31, 2016. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
 
 
Fair Value
Primary Valuation Technique
 
Unobservable Inputs
 
June 30, 2017
Asset Category
 
 
 
Minimum
Maximum
Weighted Average
Assets:
 
 
 
 
 
 
 
 
 
 
Equity investment in Terra Property Trust
 
$
285,591,393

 
Discounted cash flow
 
Discount rate
 
2.56
%
16.00
%
12.57
%
 
 
Fair Value
Primary Valuation Technique
 
Unobservable Inputs
 
December 31, 2016
Asset Category
 
 
 
Minimum
Maximum
Weighted Average
Assets:
 
 
 
 
 
 
 
 
 
 
Equity investment in Terra Property Trust
 
$
290,419,317

 
Discounted cash flow
 
Discount rate
 
9.09
%
15.96
%
12.19
%

Note 4. Related Party Transactions

Merger

In December 2015, the members approved the merger of Terra Fund 1, Terra Fund 2, Terra Fund 3 and Terra Fund 4 with and into subsidiaries of the Company through a series of separate mergers effective January 1, 2016. Following the Merger, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust in exchange for the common shares of Terra Property Trust. Upon completion of the Merger, the Company became the parent company of Terra Funds 1 through 4 and the direct and indirect sole common stockholder of, and began conducting substantially all of its real estate lending business through, Terra Property Trust.

Consent Solicitation

Terra Capital Markets, LLC (“Terra Capital Markets”), an affiliate of the manager, served as the dealer manager for the consent solicitation on the Merger, and was paid a voting advisory fee of $750 per initial unit sold to members in the Terra Funds and a dealer manager fee of 0.5% of the aggregate offering price of the units originally issued by the Terra Funds. Most of these fees were re-allowed to participating dealers. The Terra Funds also incurred costs for legal, accounting, and other professional services in connection with the consent solicitation. For the three and six months ended June 30, 2016, the Company incurred $0.1 million and $0.4 million of merger transaction costs, respectively.

Rights Offering

In connection with the Merger, the Company offered existing members of the Terra Funds the opportunity to invest in the Company through purchase of additional membership units (the “Rights Offering”). Terra Capital Markets served as the dealer manager for the sale of the Company’s membership units and received compensation of 3% in selling commission, 1% in dealer manager fees and a 1% broker dealer fee. Most of these fees are re-allowed to independent broker dealers and financial advisors. These fees amounted to approximately $1.3 million for the six months ended June 30, 2016 and have been deducted from capital contributions received as selling commissions and dealer manager fees.

Operating Agreement

The Company entered into an operating agreement, as amended, with the Manager whereby the Manager is responsible for the Company’s day-to-day operations. The operating agreement, as amended is scheduled to terminate on December 31, 2023 unless the Company is dissolved earlier. Starting January 1, 2016, the Company conducts all of its real estate lending business through Terra Property Trust. As such, Terra Property Trust is responsible for management compensation paid and operating expenses reimbursed to the Manager pursuant to a management agreement with the Manager.


19

 

Notes to Consolidated Financial Statements (Unaudited)


Due to Terra Property Trust

As of June 30, 2017, there was no amount due to Terra Property Trust. As of December 31, 2016, approximately $0.4 million was due to Terra Property Trust, as reflected on the consolidated statements of financial condition, primarily related to an adjustment to the contribution of the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust on January 1, 2016.
    
Dividend Income
    
As discussed in Note 3, for the three months ended June 30, 2017 and 2016, the Company received approximately $7.8 million and $12.3 million of dividends from Terra Property Trust, respectively, of which $2.7 million and $0.5 million was a return of capital, respectively. For the six months ended June 30, 2017 and 2016, the Company received approximately $16.6 million and $15.7 million of dividends from Terra Property Trust, respectively, of which $5.3 million and $0.5 million was a return of capital, respectively.

Note 5. Significant Risk Factors

In the normal course of business, the Company enters into transactions in various financial instruments. The Company’s financial instruments are subject to, but are not limited to, the following risks:

Market Risk

The Company’s investments through Terra Property Trust are highly illiquid and there is no assurance that the Company will achieve its investment objectives, including targeted returns. Due to the illiquidity of the investments, valuation of the investments may be difficult, as there generally will be no established markets for these investments. As the Company’s investments were carried at fair value with fair value changes recognized in the consolidated statements of operations, all changes in market conditions would directly affect the Company’s members’ capital.

Credit Risk

Credit risk represents the potential loss that Terra Property Trust would incur if the borrowers failed to perform pursuant to the terms of their obligations to Terra Property Trust. Thus, the value of the underlying collateral, the creditworthiness of the borrower or other counterparty, and the priority of Terra Property Trust’s lien on the borrower’s assets are of importance. Terra Property Trust minimizes its exposure to credit risk by limiting exposure to any one individual borrower and any one asset class. Additionally, Terra Property Trust employs an asset management approach and monitors the portfolio of investments, through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value ratio, DSCR and the debt yield. Terra Property Trust also requires certain borrowers to establish a cash reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments.

Mezzanine loans and preferred equity investments are subordinate to senior mortgage loans and, therefore, involve a higher degree of risk. In the event of a default, mezzanine loans and preferred equity investments will be satisfied only after the senior lender’s investment is fully recovered. As a result, in the event of a default, Terra Property Trust may not recover all of its investment.

The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.

Concentration Risk

Terra Property Trust holds real estate related investments. Thus, the investment portfolio of Terra Property Trust may be subject to a more rapid change in value than would be the case if Terra Property Trust maintained a wide diversification among industries, companies and types of investments. The result of such concentration in real estate assets is that a loss in such investments could materially reduce Terra Property Trust’s capital.

Liquidity Risk

Liquidity risk represents the possibility that the Company may not be able to sell its positions at a reasonable price in times of low trading volume, high volatility and financial stress.



20

 

Notes to Consolidated Financial Statements (Unaudited)

Interest Rate Risk

Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in the fair value of Terra Property Trust’s interest-bearing financial instruments.

Prepayment Risk

Prepayments can either positively or adversely affect the yields on investments. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond Terra Property Trust’s control, and consequently, such prepayment rates cannot be predicted with certainty. If Terra Property Trust does not collect a prepayment fee in connection with a prepayment or is unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, Terra Property Trust may acquire assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios, Terra Property Trust may fail to recoup fully its cost of acquisition of certain investments.

Use of Leverage

As part of Terra Property Trust’s investment strategy, Terra Property Trust may borrow and utilize leverage. While borrowing and leverage present opportunities for increasing total return, they may have the effect of potentially creating or increasing losses.

Property Acquisitions

Terra Property Trust may find it necessary to take possession of collateral including, without limitation, an asset or a business, through a purchase or foreclosure action. Borrowers may resist mortgage foreclosure or sales actions by asserting numerous claims and defenses, which delay both repayments of existing loan investments and acquisition of the collateral and add cost to such actions.

There can be no assurance that Terra Property Trust will be able to successfully operate, hold or maintain the collateral in accordance with its expectations.

Further, there can be no assurance that there will be a ready market for resale of foreclosed or acquired properties because investments in real estate generally are not liquid and holding periods are difficult to predict. In addition, there may be significant expenditures associated with holding real property, including real estate taxes and maintenance costs. The liquidation proceeds upon sale of the real estate may be less than the amount invested in the loan, and its fair value and such differences could be material.

Note 6. Commitments and Contingencies

The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. The Manager has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.

The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations.

Note 7. Members’ Capital

As of June 30, 2017 and December 31, 2016, the Company had 6,826.5 units outstanding. The net asset value per unit was $41,812 and $42,423 as of June 30, 2017 and December 31, 2016, respectively.

Capital Contributions

As of January 31, 2015, the offering period ended and the Company stopped accepting capital contributions.

In connection with the Merger between the Terra Funds, original membership units of Terra Funds 1 through 4 were exchanged for 3,206.7 Continuing Income Units (regular units in the Company) and 463.6 Termination Units (membership interest in the


21

 



Company offered to members of Terra Funds 1 through 4 who wish to enter the liquidation phase of their investments). The Company also offered existing members of the Terra Funds the opportunity to invest in the Company through the Rights Offering. For the six months ended June 30, 2016, the Company sold 573.3 units and received capital contributions of approximately $25.6 million, net of selling commissions and dealer manager fees.

Capital Distributions

At the discretion of the Manager, the Company may make distributions from net cash flow from operations, net disposition proceeds, or other cash available for distribution. Distributions are made to holders of Continuing Income Units in proportion to their unit holdings until they receive a return of their initial Deemed Capital Contribution, as defined in the operating agreement, plus a preferred return ranging from 8.5% to 9.0% depending on the historical preferred return applicable to their Terra Fund units, after which time distributions are made 15% to the Manager and 85% to the holders of Continuing Income Units. The preferred return applicable to the Continuing Income Units sold in the Rights Offering is 8.5%. As of June 30, 2017 and December 31, 2016, there was no carried interest.

In addition, holders of Termination Units receive monthly distributions at a fixed rate of 6.0% per annum of the Unreturned Invested Capital, as defined in the operating agreement.

For the six months ended June 30, 2017 and 2016, the Company made total capital distribution to non-manager members of $15.5 million and $15.2 million, respectively.
 
Capital Redemptions

In the Merger, members of Terra Funds 1 through 4 who wished to enter the liquidation phase of their investments chose to receive Termination Units as merger consideration. These Termination Units will be redeemed on the original expected liquidation dates of the funds. For the six months ended June 30, 2017, the Company had no redemptions. For the six months ended June 30, 2016, 161.3 Termination Units of Terra Fund 1 were redeemed for approximately $6.8 million. These Termination Units were redeemed at book value as defined in the amended and restated operating agreement. Additionally, the Company paid $3.4 million to members the Manager was unable to establish their continuation to qualify as “accredited investors” under the Securities Act of 1933, as amended, and to members holding their interests through a qualified ERISA plan to redeem their units.

The following table presents a summary of the Termination Units outstanding as of June 30, 2017:
Fund
 
Number of
Units
 
Scheduled
Redemption Date
Terra Fund 3
 
120.5

 
September 2017
Terra Fund 4
 
50.4

 
July 2018
    
At the discretion of the Manager, a reserve of 5% of cash from operations may be established in order to repurchase units from non-managing members. The Manager is under no obligation to redeem non-managing members’ units. As of June 30, 2017 and December 31, 2016, no such reserve was established.

Allocation of Income (Loss)

Profits and losses are allocated to the members in proportion to the units held in a given calendar year.



22

 



Member Units

Each membership interest through the original offering was offered for a price of $50,000 per unit. The membership interests in Terra Funds 1 through 4 were exchanged for units of the Company at a price of $43,410 per unit, which was the exchange value per unit of the Company on December 31, 2015, and the units in the Rights Offering was offered at a price of $47,000 per unit. The following table provides a roll forward of the units outstanding of the Company for the six months ended June 30, 2017 and 2016:
 
 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
 
 
Managing
Member
 
Non-Managing Members
 
Total
 
Managing
Member
 
Non-Managing Members
 
Total
Units outstanding, beginning of period
 

 
6,826.5

 
6,826.5

 

 
2,878.9

 
2,878.9

Units issued in the Merger
 

 

 

 

 
3,670.4

 
3,670.4

Units admitted through the Rights
   Offering
 

 

 

 

 
573.3

 
573.3

Termination Units redeemed
 

 

 

 

 
(161.3
)
 
(161.3
)
Units outstanding, end of period
 

 
6,826.5

 
6,826.5

 

 
6,961.3

 
6,961.3


Note 8. Financial Highlights

The financial highlights represent the per unit operating performance, return and ratios for the non-managing members’ class, taken as a whole, for the six months ended June 30, 2017 and 2016. These financial highlights consist of the operating performance, the internal rate of return (“IRR”) since inception of the Company, and the expense and net investment income ratios.

The IRR, net of all fees and carried interest (if any), is computed based on actual dates of the cash inflows (capital contributions), outflows (capital distributions), and the ending capital at the end of the respective period (residual value) of the non-managing members’ capital account.

The following summarizes the Company’s financial highlights for the six months ended June 30, 2017 and 2016:
 
Six Months Ended June 30,
 
2017
 
2016
Per unit operating performance:
 
 
 
Net asset value per unit, beginning of period
$
42,423

 
$
42,451

Increase in members’ capital from operations (1):
 
 
 
Net investment income
1,596

 
2,089

Net change in unrealized depreciation on investment
72

 
(97
)
Total increase in members’ capital from operations
1,668

 
1,992

Distributions to member (2):
 
 
 
Capital distributions
(2,277
)
 
(2,201
)
Net decrease in members’ capital resulting from distributions
(2,277
)
 
(2,201
)
Capital share transactions:
 
 
 
Other (3)
(2
)
 
185

Net (decrease) increase in members’ capital resulting from capital share
   transactions
(2
)
 
185

Net asset value per unit, end of period
$
41,812

 
42,427





23

 



 
Six Months Ended June 30,
 
2017
 
2016
Ratios to average net assets:
 
 
 
Expenses
0.12
%
 
0.24
%
Net investment income
3.79
%
 
5.00
%
 
 
 
 
IRR, beginning of period
5.43
%
 
0.34
%
IRR, end of period
5.99
%
 
3.54
%
_______________
(1)
The per unit data was derived by using the weighted average units outstanding during the applicable periods, which were 6,826 units and 6,923 units for the six months ended June 30, 2017 and 2016, respectively.
(2)
The per unit data for distributions reflects the actual amount of distributions paid per share during the periods.
(3)
Represents the impact of the different unit amounts used in calculating per unit data as a result of calculating certain per unit data based upon the weighted average units outstanding during the period and certain per unit data based on the units outstanding as of a period end or transaction date.

Note 9. Subsequent Events

Management has evaluated subsequent events through the date the consolidated financial statements were available to be issued. Management has determined that there are no material events that would require adjustment to, or disclosure in, the Company’s consolidated financial statements.



24

 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto and other financial information included elsewhere in this quarterly report on Form 10-Q. In this report, “we,” “us” and “our” refer to Terra Secured Income Fund 5, LLC and its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this quarterly report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. The forward-looking statements contained in this quarterly report on Form 10-Q may include, but are not limited to, statements as to:
our expected financial performance, operating results and our ability to make distributions to our members in the future;
the availability of attractive risk-adjusted investment opportunities in our target asset class and other real estate-related investments that satisfy our investment objectives and strategies;
the acquisition of our targeted assets, including the timing of acquisitions;
volatility in our industry, interest rates and spreads, the debt or equity markets, the general economy or the real estate market specifically, whether the results of market events or otherwise;
changes in our investment objectives and business strategy;
the availability of financing on acceptable terms or at all;
the performance and financial condition of our borrowers;
changes in interest rates and the market value of our assets;
borrower defaults or decreased recovery rates from our borrowers;
changes in prepayment rates on our investments;
our use of financial leverage;
actual and potential conflicts of interest with any of the following affiliated entities: Terra Income Advisors, LLC (“Terra Income Advisors”, or the “Manager”); Terra Capital Partners, LLC (“Terra Capital Partners”), our sponsor; Terra Secured Income Fund, LLC (“Terra Fund 1”); Terra Secured Income Fund 2, LLC (“Terra Fund 2”); Terra Secured Income Fund 3, LLC (“Terra Fund 3”); Terra Secured Income Fund 4, LLC (“Terra Fund 4”); Terra Secured Income Fund 5 International; Terra Income Fund International; Terra Secured Income Fund 7, LLC; Terra Property Trust, Inc. (“Terra Property Trust”), our wholly-owned subsidiary; Terra Property Trust 2, Inc., a subsidiary of Terra Secured Income Fund 7, LLC; Terra Capital Advisors, LLC; Terra Capital Advisors 2, LLC; Terra Income Advisors 2, LLC; or any of their affiliates;
our dependence on our Manager and the availability of its senior management team and other personnel;
liquidity transactions that may be available to us in the future, including a liquidation of our assets, a sale of our company or an initial public offering and listing of the shares of common stock of Terra Property Trust on a national securities exchange, and the timing of any such transactions;
actions and initiatives of the U.S. federal, state and local government and changes to the U.S. federal, state and local government policies and the execution and impact of these actions, initiatives and policies;
limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our exclusion from registration under the Investment Company Act of 1940, as amended (the “1940 Act”), and Terra Property Trust to maintain its qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes; and
the degree and nature of our competition.
In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-


25

 



looking statements for any reason, including the factors set forth as “Risk Factors” in our registration statement on Form 10. Other factors that could cause actual results to differ materially include:
changes in the economy;
risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and
future changes in laws or regulations and conditions in our operating areas.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Members are advised to consult any additional disclosures that we may make directly to members or through reports that we may file in the future with the Securities and Exchange Commission (the SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
    
We are a specialized real estate finance company that originates, structures, funds and manages commercial real estate loans. We focus primarily on the origination of mezzanine loans, which are subordinate commercial real estate loans secured by ownership interests in the entity that owns commercial real estate. We also originate first mortgage loans, bridge loans and preferred equity investments, in each case to finance the acquisition, construction, development or redevelopment of high quality commercial real estate in the U.S. We make substantially all of our investments and conduct substantially all of our real estate lending business through our wholly-owned subsidiary, Terra Property Trust. Our objective is to continue to provide attractive risk-adjusted returns to members, primarily through distributions. There can be no assurances that we will be successful in meeting our objective.

On January 1, 2016, Terra Fund 1, Terra Fund 2, Terra Fund 3 and Terra Fund 4 merged with and into our subsidiaries (individually, each a “Terra Fund” and collectively, the “Terra Funds”) through a series of separate mergers (collectively, the “Merger”). Following the Merger, we contributed the consolidated portfolio of net assets of the Terra Funds to Terra Property Trust in exchange for the common shares of Terra Property Trust. We elected to engage in these transactions to continue our business as a REIT for U.S. federal income tax purposes, and to provide our members with a more broadly diversified portfolio of assets while at the same time providing us with enhanced access to capital and borrowings, lower operating costs and enhanced opportunities for growth.

Our investment activities are externally managed by our Manager, a subsidiary of Terra Capital Partners, a real estate finance and investment firm based in New York City that focus primarily on the origination and management of mezzanine loans, as well as first mortgage loans, bridge loans, and preferred equity investments in all major property types.
    
Portfolio Summary

The following tables provide a summary of Terra Property Trust’s loan portfolio as of June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
Fixed Rate
 
Floating
Rate
(1)
 
Total Gross Investments
 
Obligations under Participation Agreements
 
Total Net Investments
Number of investments
33

1

1

 
34

 
19