Terra Secured Income Fund 5, LLC - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - Terra Secured Income Fund 5, LLC	tsif56301810-qex311.htm
EX-32 - EXHIBIT 32 - Terra Secured Income Fund 5, LLC	tsif56301810-qex32.htm
EX-31.2 - EXHIBIT 31.2 - Terra Secured Income Fund 5, LLC	tsif56301810-qex312.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, 2018



¨	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, 8^th 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 þ No ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ 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 8, 2018, the registrant had 6,655.9 units of limited liability company interests outstanding.

TABLE OF CONTENTS



		Page

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of June 30, 2018 (unaudited) and December 31, 2017	1

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)	2

	Consolidated Statements of Changes in Members’ Capital for the Six Months Ended June 30, 2018 and 2017 (unaudited)	3

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)	4

	Consolidated Schedules of Investments as of June 30, 2018 (unaudited) and December 31, 2017	5

	Notes to Consolidated Financial Statements as of June 30, 2018 (unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	34

Item 6.	Exhibits	34

Signatures		36

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Terra Secured Income Fund 5, LLC

Consolidated Statements of Financial Condition



	June 30, 2018		December 31, 2017
	(unaudited)
Assets
Equity investment in Terra Property Trust, Inc. at fair value — controlled (cost of $270,916,726 and $275,401,972, respectively)	$	270,767,953	$	275,428,953
Cash and cash equivalents	142,637		212,366
Other assets	26,820		3,864
Total assets	$	270,937,410	$	275,645,183

Liabilities and Members’ Capital
Liabilities
Accounts payable and accrued expenses	$	132,914	$	95,728
Total liabilities	132,914		95,728
Commitments and contingencies (Note 6)
Members’ capital:
Managing member	—		—
Non-managing members	270,804,496		275,549,455
Total members’ capital	270,804,496		275,549,455
Total liabilities and members’ capital	$	270,937,410	$	275,645,183

See notes to consolidated financial statements.

Terra Secured Income Fund 5, LLC

Consolidated Statements of Operations

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Investment income — controlled
Dividend income	$	6,808,108		$	5,123,787		$	12,341,913		$	11,254,379
Investment income
Other operating income	460			273			1,003			953
Total investment income	6,808,568			5,124,060			12,342,916			11,255,332
Operating expenses
Professional fees	99,290			232,022			207,836			327,365
Other	4,022			3,778			7,941			32,313
Total operating expenses	103,312			235,800			215,777			359,678
Net investment income	6,705,256			4,888,260			12,127,139			10,895,654
Net change in unrealized (depreciation) appreciation on investment — controlled	(63,131		)	(50,870		)	(175,754		)	491,994
Net increase in members’ capital resulting from operations	$	6,642,125		$	4,837,390		$	11,951,385		$	11,387,648

See notes to consolidated financial statements.

Terra Secured Income Fund 5, LLC

Consolidated Statements of Changes in Members’ Capital (Unaudited)

Six Months Ended June 30, 2018 and 2017



	Managing Member		Non-Managing Members			Total
Balance, January 1, 2018	$	—	$	275,549,455		$	275,549,455
Capital distributions	—		(15,017,413		)	(15,017,413		)
Capital redemptions	—		(1,678,931		)	(1,678,931		)
Increase in members’ capital resulting from operations:
Net investment income	—		12,127,139			12,127,139
Net change in unrealized depreciation on investment	—		(175,754		)	(175,754		)
Net increase in members’ capital resulting from operations	—		11,951,385			11,951,385
Balance, June 30, 2018	$	—	$	270,804,496		$	270,804,496



	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 appreciation 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

See notes to consolidated financial statements.

Terra Secured Income Fund 5, LLC

Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended June 30,
	2018			2017
Cash flows from operating activities:
Net increase in members’ capital resulting from operations	$	11,951,385		$	11,387,648
Adjustments to reconcile net increase in members’ capital resulting from operations to net cash provided by operating activities:
Return of capital on investment	4,485,246			5,319,918
Net change in unrealized depreciation (appreciation) on investment	175,754			(491,994		)

Changes in operating assets and liabilities:
Increase in other assets	(22,985		)	—
Increase (decrease) in accounts payable and accrued expenses	37,186			(223,499		)
Decrease in due to Terra Property Trust, Inc.	—			(438,249		)
Net cash provided by operating activities	16,626,586			15,553,824

Cash flows from financing activities:
Distributions paid	(15,017,384		)	(15,546,042		)
Payments for capital redemptions	(1,678,931		)	—
Net cash used in financing activities	(16,696,315		)	(15,546,042		)

Net (decrease) increase in cash and cash equivalents	(69,729		)	7,782
Cash and cash equivalents at beginning of period	212,366			41,520
Cash and cash equivalents at end of period	$	142,637		$	49,302

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

See notes to consolidated financial statements.

Terra Secured Income Fund 5, LLC

Consolidated Schedules of Investments

June 30, 2018 (unaudited) and December 31, 2017

As of June 30, 2018 and December 31, 2017, 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, 2018						December 31, 2017
Investment — Controlled	Date Acquired	Number of Shares of Common Stock	Cost		Fair Value		% of Members’ Capital		Cost		Fair Value		% of Members’ Capital
Terra Property Trust, Inc. — 100% Owned	1/1/2016 and 3/7/2016	14,912,990	$	270,916,726	$	270,767,953	100.0	%	$	275,401,972	$	275,428,953	100.0	%

The following table presents a schedule of loans held for investment by Terra Property Trust, Inc. (“Terra Property Trust”), the Company’s wholly-owned subsidiary, as of June 30, 2018:



Collateral Location	Portfolio Company	Structure	Property Type	Coupon Rate		Current Interest Rate		Acquisition Date	Maturity Date	Principal Amount		Amortized Cost		Fair Value ⁽¹⁾		% ⁽²⁾
	Loans held for investment — non-controlled:
US - AL	ASA Mgt. Holdings, LLC	Preferred equity investment	Multifamily	16.0	%	16.0	%	4/7/2012	8/1/2022	$	2,100,000	$	2,137,543	$	2,120,720	0.8	%
	SVA Mgt. Holdings, LLC	Preferred equity investment	Multifamily	16.0	%	16.0	%	4/7/2012	8/1/2022	1,600,000		1,630,651		1,615,787		0.6	%
	Total US - AL									3,700,000		3,768,194		3,736,507		1.4	%
US - CA	2539 Morse, LLC	Mezzanine loan	Student housing	11.0	%	11.0	%	10/20/2017	11/1/2020	4,666,666		4,702,673		4,706,900		1.8	%
	City Gardens 333 LLC ^(6)(7)(8)	Preferred equity investment	Student housing	LIBOR + 9.95% with LIBOR floor of 2.0%		12.0	%	4/11/2018	4/1/2021	15,099,351		15,099,351		15,099,351		5.6	%
	Maguire Partners-1733 Ocean, LLC ⁽³⁾	First mortgage	Office	LIBOR + 8.5% with a LIBOR floor of 0.5%		10.6	%	3/7/2016	3/9/2018	54,000,000		54,540,000		54,535,445		20.1	%
	L.A. Warner Hotel Partners, LLC ^(4)(5)(6)	Preferred equity investment	Hotel	12.0	%	12.0	%	7/25/2014	8/4/2018	32,100,000		32,570,149		32,413,954		12.0	%
	Orange Grove Property Investors, LLC ⁽⁶⁾⁽⁷⁾	Preferred equity investment	Condominium	LIBOR + 8.0% with LIBOR floor of 4.0%		12.0	%	5/24/2018	6/1/2021	8,044,977		8,101,476		8,105,062		3.0	%
	TSG-Parcel 1, LLC ^(4)(6)(7)	First mortgage	Infill land	LIBOR + 10.0% with a LIBOR floor of 2.0%		12.0	%	7/10/2015	12/31/2018	18,000,000		18,180,000		18,178,193		6.7	%
	SparQ Mezz Borrower, LLC	Mezzanine loan	Multifamily	12.0	%	12.0	%	9/29/2017	10/1/2020	7,620,000		7,678,012		7,685,477		2.8	%
	Windy Hill PV Seven CM, LLC	Preferred equity investment	Office	10.0% current 2.5% PIK		12.5	%	1/9/2018	1/9/2021	10,921,177		11,000,182		11,000,182		4.1	%
	Total US - CA									150,452,171		151,871,843		151,724,564		56.1	%
US - DE	BPG Office Partners III/IV LLC ^(4)(5)(6)	Mezzanine loan	Office	13.5	%	13.5	%	6/5/2015	9/4/2018	10,000,000		10,100,000		10,098,872		3.7	%
US - FL	CGI 1100 Biscayne Management Holdco, LLC ^(6)(7)(8)	Mezzanine loan	Hotel	12.0% current 4.0% PIK		16.0	%	11/17/2017	5/17/2019	25,040,167		25,267,711		25,277,064		9.4	%
	37 Gables Member LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Multifamily	13.0	%	13.0	%	6/16/2016	6/16/2019	5,750,000		5,800,693		5,806,875		2.1	%
	Greystone Gables Holdings Member LLC ⁽⁵⁾⁽⁶⁾	Preferred equity investment	Multifamily	13.0	%	13.0	%	6/16/2016	6/16/2019	500,000		504,409		504,946		0.2	%
	Total US - FL									31,290,167		31,572,813		31,588,885		11.7	%

Terra Secured Income Fund 5, LLC

Consolidated Schedule of Investments (Continued)

June 30, 2018 (unaudited) and December 31, 2017

Terra Property Trust Schedule of Loans Held for Investment as of June 30, 2018 (Continued):



Collateral Location	Portfolio Company	Structure	Property Type	Coupon Rate		Current Interest Rate		Acquisition Date	Maturity Date	Principal Amount		Amortized Cost		Fair Value ⁽¹⁾		% ⁽²⁾
	Loans held for investment — non-controlled:
US - GA	OHM Atlanta Owner, LLC ^(6)(7)(8)	First mortgage	Infill land	LIBOR + 9.0% with LIBOR floor of 3.0%		12.0	%	6/20/2017	6/20/2018	$	27,500,000	$	27,775,000	$	27,772,240	10.3	%
US - NC	Stonewall Station Mezz LLC ⁽⁶⁾⁽⁷⁾	Mezzanine loan	Hotel	12.0% current 2.0% PIK		14.0	%	6/1/2018	5/20/2021	4,257,103		4,285,374		4,289,518		1.6	%
US - MA	150 Blackstone River Road, LLC	Mezzanine loan	Industrial	8.5	%	8.5	%	9/21/2017	9/6/2027	7,000,000		7,000,000		7,000,000		2.6	%
US - NY	140 Schermerhorn Street Mezz LLC ^(4)(6)(7)	Mezzanine loan	Hotel	12.0	%	12.0	%	11/16/2016	12/1/2019	15,000,000		15,126,318		15,147,871		5.6	%
	221 W. 17th Street Owner, LLC	Mezzanine loan	Condominium	12.8	%	12.8	%	1/19/2018	3/31/2019	4,700,000		4,742,679		4,743,604		1.8	%
	575 CAD I LLC ^(4)(5)(6)	Mezzanine loan	Condominium	12.0% current 2.5% PIK		14.5	%	1/31/2017	7/31/2019	14,411,211		14,530,666		14,533,611		5.4	%
	REEC Harlem Holdings Company, LLC	Preferred equity investment	Infill land	LIBOR + 12.5% with no LIBOR floor		14.5	%	3/9/2018	3/9/2023	20,619,375		20,619,375		20,619,375		7.6	%
	RS JZ Driggs, LLC ⁽⁶⁾⁽⁷⁾	Preferred equity investment	Multifamily	12.3	%	12.3	%	5/1/2018	5/1/2020	2,000,000		2,015,940		2,015,940		0.7	%
	WWML96MEZZ, LLC	Mezzanine loan	Condominium	13.0	%	13.0	%	12/18/2015	12/31/2018	13,202,918		13,326,571		13,333,513		4.9	%
	WWML96, LLC	Preferred equity investment	Condominium	13.0	%	13.0	%	12/18/2015	12/31/2018	1,549,420		1,563,931		1,564,746		0.6	%
	Total US - NY									71,482,924		71,925,480		71,958,660		26.6	%
US - OR	Pollin Hotels PDX Mezzanine, LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Hotel	13.0	%	13.0	%	9/23/2013	10/6/2018	5,000,000		5,093,605		5,116,844		1.9	%
US - PA	Millennium Waterfront Associates, L.P.	First mortgage	Infill land	12.0	%	12.0	%	7/2/2015	12/28/2018	14,325,000		14,468,250		14,466,812		5.3	%
US - SC	High Pointe Mezzanine Investments, LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Student housing	13.0	%	13.0	%	12/27/2013	1/6/2024	3,000,000		3,352,208		3,342,942		1.2	%
US - TN	Kingsport 925-Mezz LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Multifamily	13.0	%	13.0	%	1/6/2014	12/5/2018	3,000,000		3,068,622		3,057,690		1.1	%
US - TX	Northland Museo Member, LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Multifamily	12.0	%	12.0	%	11/22/2013	12/6/2018	4,000,000		3,988,429		4,004,955		1.5	%
	Austin H. I. Owner LLC ⁽⁴⁾⁽⁶⁾	Mezzanine loan	Hotel	12.5	%	12.5	%	9/30/2015	10/6/2020	3,500,000		3,526,300		3,508,541		1.3	%
	AHF-Heritage #1, LLC	Mezzanine loan	Multifamily	14.0	%	14.0	%	7/30/2012	8/11/2022	1,131,243		1,214,630		1,142,423		0.4	%
	Total US - TX									8,631,243		8,729,359		8,655,919		3.2	%
US - UT	NB Factory JV, LLC ⁽⁶⁾⁽⁷⁾	Preferred equity investment	Student housing	15.0	%	15.0	%	6/29/2017	6/26/2020	3,595,670		3,595,670		3,595,670		1.3	%
US - WA	The Bristol at Southport, LLC ⁽⁶⁾⁽⁸⁾	Preferred equity investment	Multifamily	10.0% current 2.0% PIK		12.0	%	9/22/2017	9/22/2022	22,856,447		22,991,317		23,059,788		8.5	%
US - Various	Nelson Brothers Professional Real Estate, LLC	Facility	Various	14.0	%	14.0	%	8/31/2016	2/1/2019	14,000,000		14,140,000		14,138,363		5.2	%
	Total loans held for investment — non-controlled:									380,090,725		383,737,735		383,603,274		141.7	%

Terra Secured Income Fund 5, LLC

Consolidated Schedule of Investments (Continued)

June 30, 2018 (unaudited) and December 31, 2017



Collateral Location	Portfolio Company	Structure	Property Type	Coupon Rate		Current Interest Rate		Acquisition Date	Maturity Date	Principal Amount			Amortized Cost			Fair Value ⁽¹⁾			% ⁽²⁾
	Loan held for investment through participation interest — non-controlled ⁽⁹⁾:
US - PA	KOP Hotel XXXI Mezz LP ^(4)(6)(9)	Participation in mezzanine loan	Hotel	13.0	%	13.0	%	11/24/2015	12/6/2022	$	1,800,000		$	1,805,033		$	1,809,205		0.6	%
US - CA	LD Milipitas Mezz, LLC ^(9)(10)	Participation in mezzanine loan	Hotel	LIBOR +10.25% with a LIBOR floor of 2.75%		13.0	%	6/27/2018	6/27/2021	—			—			—			—	%
	Total loan held for investment through participation interest — non-controlled									1,800,000			1,805,033			1,809,205			0.6	%

	Total gross loans held for investment									381,890,725			385,542,768			385,412,479			142.3	%
	Obligations under participation agreements ^{(4)(5)(6)(7)(8)}									(86,354,064		)	(87,291,408		)	(87,227,961		)	(32.2	)%
	Allowance for loan losses									—			(375,603		)	—			—	%
	Net loans held for investment									$	295,536,661		$	297,875,757		$	298,184,518		110.1	%

^{___________________________}


(1)	Because there is no readily available market for these loans, the fair values of these loans were approved in good faith by Terra REIT Advisors, LLC (“Terra REIT Advisors”), Terra Property Trust’s manager beginning on February 8, 2018, 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 $270.8 million as of June 30, 2018.


(3)	As of June 30, 2018, the principal balance of this loan was past due. On July 30, 2018, Terra Property Trust foreclosed on the real estate property encumbering the loan.


(4)	Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by Terra REIT Advisors beginning on February 8, 2018.


(5)	Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Income Fund International, an affiliated fund advised by Terra REIT Advisors beginning on February 8, 2018.


(6)	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 statements of financial condition.


(7)	Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by Terra Income Advisors, LLC (“Terra Income Advisors”), an affiliate of our sponsor and Terra Property Trust’s manager prior to February 8, 2018.


(8)	Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Property Trust 2, Inc., an affiliated fund managed by Terra REIT Advisors beginning on February 8, 2018.


(9)	Terra Property Trust purchased its interest in this loan from Terra Income Fund 6, Inc. through a participation agreement.


(10)	On June 27, 2018, Terra Property Trust entered into a participation agreement with Terra Income Fund 6, Inc. to purchase a 25% interest, or $4.3 million, in a mezzanine loan. As of June 30, 2018, none of the commitment has been funded.

Terra Secured Income Fund 5, LLC

Consolidated Schedule of Investments (Continued)

June 30, 2018 (unaudited) and December 31, 2017

The following table presents a schedule of loans held for investment held by Terra Property Trust as of December 31, 2017:



Collateral Location	Portfolio Company	Structure	Property Type	Coupon Rate		Acquisition Date	Maturity Date	Principal Amount		Amortized Cost		Fair Value ⁽¹⁾		% ⁽²⁾
	Loans held for investment — non-controlled:
US - AL	ASA Mgt. Holdings, LLC	Preferred equity investment	Multifamily	16.0	%	4/7/2012	8/1/2022	$	2,100,000	$	2,139,967	$	2,120,720	0.8	%
	SVA Mgt. Holdings, LLC	Preferred equity investment	Multifamily	16.0	%	4/7/2012	8/1/2022	1,600,000		1,632,749		1,615,787		0.6	%
	Total US - AL							3,700,000		3,772,716		3,736,507		1.4	%
US - CA	2539 Morse, LLC	Mezzanine loan	Student housing	11.0	%	10/20/2017	11/1/2020	2,333,333		2,350,365		2,352,364		0.9	%
	Palmer City-Core Stockton Street, LLC ⁽³⁾	Preferred equity investment	Hotel	12.0	%	1/17/2014	1/17/2018	4,325,000		4,368,250		4,367,816		1.6	%
	Maguire Partners-1733 Ocean, LLC	First mortgage	Office	LIBOR+8.5%		3/7/2016	3/9/2018	53,749,794		54,277,021		54,282,803		19.7	%
	L.A. Warner Hotel Partners, LLC ^(4)(5)(6)	Preferred equity investment	Hotel	12.0	%	7/25/2014	8/4/2018	32,100,000		32,640,675		32,417,778		11.8	%
	TSG-Parcel 1, LLC ^(4)(6)(7)	First mortgage	Infill land	12.0	%	7/10/2015	4/10/2018	18,000,000		18,180,000		18,178,193		6.6	%
	SparQ Mezz Borrower, LLC ⁽⁸⁾	Mezzanine loan	Multifamily	12.0	%	9/29/2017	10/1/2020	449,140		452,358		452,772		0.2	%
	Total US - CA							110,957,267		112,268,669		112,051,726		40.8	%
US - DE	BPG Office Partners III/IV LLC ^(4)(5)(6)	Mezzanine loan	Office	13.5	%	6/5/2015	6/5/2018	10,000,000		10,094,309		10,098,872		3.7	%
US - FL	CGI 1100 Biscayne Management Holdco, LLC ^(6)(7)(9)	Mezzanine loan	Hotel	12.0% current 4.0% PIK		11/17/2017	5/17/2019	24,522,523		24,717,857		24,734,246		9.0	%
	37 Gables Member LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Multifamily	13.0	%	6/16/2016	6/16/2019	5,750,000		5,797,477		5,804,127		2.1	%
	Greystone Gables Holdings Member LLC ⁽⁵⁾⁽⁶⁾	Preferred equity investment	Multifamily	13.0	%	6/16/2016	6/16/2019	500,000		504,129		504,707		0.2	%
	RS JZ 2700 NW2, LLC ⁽⁴⁾⁽⁶⁾	First mortgage	Land	12.0	%	9/1/2016	3/1/2018	21,360,000		21,573,600		21,571,456		7.8	%
	Total US - FL							52,132,523		52,593,063		52,614,536		19.1	%
US - GA	YMP Georgia Portfolio Mezzanine, LLC	Mezzanine loan	Multifamily	14.0	%	12/19/2013	1/6/2019	3,500,000		3,663,309		3,535,027		1.3	%
	OHM Atlanta Owner, LLC ^(6)(7)(9)	First mortgage	Land	12.0	%	6/20/2017	6/20/2018	27,500,000		27,759,721		27,759,721		10.1	%
	Total US - GA							31,000,000		31,423,030		31,294,748		11.4	%
US - IN	Muncie Mezz, LLC	Mezzanine loan	Student housing	13.0	%	8/29/2013	9/6/2023	2,700,000		2,689,608		3,033,655		1.1	%
US - MA	150 Blackstone River Road, LLC	Mezzanine loan	Industrial	8.5	%	9/21/2017	9/6/2027	7,000,000		7,000,000		7,000,000		2.5	%
US - NC	Milestone Greensboro Holdings, LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Hotel	14.0	%	3/1/2013	3/1/2018	3,500,000		3,537,223		3,534,591		1.3	%

Terra Secured Income Fund 5, LLC

Consolidated Schedule of Investments (Continued)

June 30, 2018 (unaudited) and December 31, 2017

Terra Property Trust Schedule of Loans Held for Investment as of December 31, 2017 (Continued):



Collateral Location	Portfolio Company	Structure	Property Type	Coupon Rate		Acquisition Date	Maturity Date	Principal Amount			Amortized Cost			Fair Value ⁽¹⁾			% ⁽²⁾
	Loans held for investment — non-controlled:
US - NY	Cape Church Mezz, LLC ^(5)(6)(10)	Mezzanine loan	Condominium	12.0	%	3/15/2016	7/15/2019	$	17,178,883		$	17,321,426		$	17,348,948		6.3	%
	140 Schermerhorn Street Mezz LLC ^(4)(6)(7)	Mezzanine loan	Hotel	12.0	%	11/16/2016	12/1/2019	15,000,000			15,118,900			15,131,264			5.5	%
	575 CAD I LLC	Mezzanine loan	Condominium	12.0% current 2.5% PIK		1/31/2017	8/1/2019	12,512,370			12,609,885			12,612,289			4.6	%
	WWML96MEZZ, LLC	Mezzanine loan	Condominium	13.0	%	12/18/2015	12/31/2018	9,925,340			10,012,399			10,023,515			3.6	%
	WWML96, LLC	Preferred equity investment	Condominium	13.0	%	12/18/2015	12/31/2018	1,486,171			1,499,206			1,500,871			0.5	%
	Total US - NY							56,102,764			56,561,816			56,616,887			20.5	%
US - OR	Pollin Hotels PDX Mezzanine, LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Hotel	13.0	%	9/23/2013	10/6/2018	5,000,000			5,181,187			5,196,794			1.9	%
US - PA	Millennium Waterfront Associates, L.P.	First mortgage	Infill land	12.0	%	7/2/2015	12/28/2018	14,325,000			14,468,250			14,466,812			5.3	%
US - SC	High Pointe Mezzanine Investments, LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Student housing	13.0	%	12/27/2013	1/6/2024	3,000,000			3,381,980			3,416,021			1.2	%
US - TN	Kingsport 925-Mezz LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Multifamily	13.0	%	1/6/2014	12/5/2018	3,000,000			3,115,146			3,099,690			1.1	%
US - TX	Northland Museo Member, LLC ⁽⁵⁾⁽⁶⁾	Mezzanine loan	Multifamily	12.0	%	11/22/2013	12/6/2018	4,000,000			3,974,543			4,054,106			1.5	%
	Austin H. I. Owner LLC ⁽⁴⁾⁽⁶⁾	Mezzanine loan	Hotel	12.5	%	9/30/2015	10/6/2020	3,500,000			3,524,694			3,527,956			1.3	%
	AHF-Heritage #1, LLC	Mezzanine loan	Multifamily	14.0	%	7/30/2012	8/11/2022	1,131,243			1,223,634			1,142,423			0.4	%
	Total US - TX							8,631,243			8,722,871			8,724,485			3.2	%
US - UT	NB Factory JV, LLC ⁽⁶⁾⁽⁷⁾	Preferred equity investment	Student housing	15.0	%	6/29/2017	6/26/2020	3,595,670			3,595,670			3,595,670			1.2	%
US - WA	The Bristol at Southport, LLC ⁽⁶⁾⁽⁹⁾	Preferred equity investment	Multifamily	10.0% current 2.0% PIK		9/22/2017	9/22/2022	22,616,528			22,743,477			22,807,927			8.3	%
US - Various	Nelson Brothers Professional Real Estate, LLC	Preferred equity investment	Student housing	14.0	%	8/31/2016	2/1/2019	14,000,000			14,140,000			14,138,248			5.1	%
	Total loans held for investment — non-controlled:							351,260,995			355,289,015			355,427,169			129.1	%

	Loan held for investment through participation interest — non-controlled ⁽¹¹⁾:
US - PA	KOP Hotel XXXI Mezz LP ⁽⁴⁾⁽⁶⁾	Participation in mezzanine loan	Hotel	13.0	%	11/24/2015	12/6/2022	1,800,000			1,804,715			1,807,503			0.7	%
	Total loan held for investment through participation interest — non-controlled							1,800,000			1,804,715			1,807,503			0.7	%

	Total gross loans held for investment							353,060,995			357,093,730			357,234,672			129.7	%
	Obligations under participation agreements ^{(4)(5)(6)(7)(9)}							(75,077,891		)	(76,053,279		)	(75,991,436		)	(27.6	)%
	Net loans held for investment							$	277,983,104		$	281,040,451		$	281,243,236		102.1	%

Terra Secured Income Fund 5, LLC

Consolidated Schedule of Investments (Continued)

June 30, 2018 (unaudited) and December 31, 2017

Terra Property Trust Schedule of Loans Held for Investment as of December 31, 2017 (Continued):

^{___________________________}


(1)	Because there is no readily available market for these loans, the fair values of these loans were approved in good faith by Terra Income Advisors, Terra Property Trust’s manager prior to February 8, 2018, 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 $275.4 million as of December 31, 2017.


(3)	This loan was repaid on January 17, 2018.


(4)	Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by Terra Income Advisors prior to February 8, 2018.


(5)	Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Income Fund International, an affiliated fund advised by Terra Income Advisors prior to February 8, 2018.


(6)	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 statements of financial condition.


(7)	Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by Terra Income Advisors.


(8)	On September 29, 2017, Terra Property Trust entered into agreement with the borrower to provide funding commitment of up to $8.7 million. As of December 31, 2017, $0.4 million has been funded.


(9)	Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Property Trust 2, Inc., an affiliated fund managed by a subsidiary of Terra Income Advisors prior to February 8, 2018.


(10)	This loan was repaid on January 26, 2018.


(11)	Terra Property Trust purchased its interest in this loan from Terra Income Fund 6, Inc. through a participation agreement.

See notes to consolidated financial statements.

Notes to Consolidated Financial Statements (unaudited)

Terra Secured Income Fund 5, LLC

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2018

Note 1. Business

Terra Secured Income Fund 5, LLC (and, together with its consolidated subsidiaries, the “Company”), is a specialized real estate finance company that originates, structures, funds and manages high yielding commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States. The Company’s investments finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. The Company focuses on smaller, middle market loans in the approximately $3 million to $50 million range which are financing properties in primary and secondary markets because it believes these loans are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. The Company was formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. The Company makes substantially all of its investments and conduct substantially all of its real estate lending business through Terra Property Trust, which has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. The Company’s objectives are to (i) preserve its members’ capital contributions, (ii) realize income from its investments and (iii) make monthly distributions to its members from cash generated from investments. There can be no assurances that the Company will be successful in meeting its objectives.

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”). 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 REIT, in exchange for the shares of common stock 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 were externally managed by Terra Income Advisors, a private investment firm affiliated with the Company until February 8, 2018 when Terra Capital Partners, LLC (“Terra Capital Partners”), the Company’s sponsor, caused a new subsidiary of Terra Capital Partners, Terra Fund Advisors, LLC (“Terra Fund Advisors”), to be admitted as the replacement manager of the Company. When used herein the term “Manager” refers to Terra Income Advisors for periods prior to February 8, 2018 and refers to Terra Fund Advisors beginning on such date. 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 its affiliates or by individuals who were contracted by the Company or by the Manager or its affiliates 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; however, the Company 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. 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

Notes to Consolidated Financial Statements (unaudited)

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 (Note 3).

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 appreciation or depreciation on investment on the consolidated statements of operations.

Revenue Recognition

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. The Company, however, may be liable for New York City Unincorporated Business Tax (the “NYC UBT”) and similar taxes of various other municipalities. New York City imposes the NYC UBT at a statutory rate of 4% on net income generated from ordinary business activities carried on in New York City. For the three and six months ended June 30, 2018 and 2017, none of the Company’s income was subject to the NYC UBT.

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, 2018 and 2017, 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 Pronouncement

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 adopted this standard on January 1, 2018 using the cumulative effect transition method. The adoption of ASU 2014-09 did not 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

Notes to Consolidated Financial Statements (unaudited)

of financial instruments. The Company adopted this standard on January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on its consolidated financial statements and disclosures.

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 and disclosures 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 adopted this standard on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on its 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, 2018 and December 31, 2017:



	June 30, 2018						December 31, 2017
Investment	Cost		Fair Value		% of Members’ Capital		Cost		Fair Value		% of Members’ Capital
14,912,990 common shares of Terra Property Trust, Inc.	$	270,916,726	$	270,767,953	100.0	%	$	275,401,972	$	275,428,953	100.0	%

For the three months ended June 30, 2018 and 2017, the Company received approximately $9.1 million and $7.8 million of distributions from Terra Property Trust, respectively, of which $2.3 million and $2.7 million was a return of capital, respectively. For the six months ended June 30, 2018 and 2017, the Company received approximately $16.8 million and $16.6 million of distributions from Terra Property Trust, respectively, of which $4.5 million and $5.3 million were returns of capital, respectively.

The following tables present the summarized financial information of Terra Property Trust:



	June 30, 2018			December 31, 2017
Carrying value of investments	$	385,167,165		$	357,093,730
Other assets	53,848,115			51,899,445
Total assets	439,015,280			408,993,175
Mortgage loan payable and obligations under participation agreements	(121,293,056		)	(110,175,525		)
Accounts payable, accrued expenses and other liabilities	(46,705,576		)	(23,307,944		)
Total liabilities	(167,998,632		)	(133,483,469		)
Stockholder’s equity	$	271,016,648		$	275,509,706

Notes to Consolidated Financial Statements (unaudited)



	Three Months Ended June 30,						Six Months Ended June 30, 2018
	2018			2017			2018			2017
Revenues	$	12,570,307		$	8,263,429		$	22,962,992		$	18,545,597
Expenses	(5,762,199		)	(3,119,142		)	(10,621,079		)	(7,781,178		)
Realized gain on investments	—			4,500			—			489,960
Net income	$	6,808,108		$	5,148,787		$	12,341,913		$	11,254,379

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.

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, 2018 and December 31, 2017:



	June 30, 2018
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Investment:
Equity investment in Terra Property Trust	$	—	$	—	$	270,767,953	$	270,767,953

Notes to Consolidated Financial Statements (unaudited)



	December 31, 2017
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Investment:
Equity investment in Terra Property Trust	$	—	$	—	$	275,428,953	$	275,428,953

Changes in Level 3 investment for the six months ended June 30, 2018 and 2017 were as follows:



	Equity Investment in Terra Property Trust
	Six Months Ended June 30,
	2018			2017
Beginning balance	$	275,428,953		$	290,419,317
Return of capital	(4,485,246		)	(5,319,918		)
Net change in unrealized (depreciation) appreciation on investment	(175,754		)	491,994
Ending balance	$	270,767,953		$	285,591,393
Net change in unrealized (depreciation) appreciation on investment for the period relating to those Level 3 assets that were still held by the Company	$	(175,754	)	$	491,994

Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the three and six months ended June 30, 2018 and 2017, 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, 2018 and December 31, 2017 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”); construction progress reports and construction budget analysis; 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.

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, 2018 and December 31, 2017. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.

Notes to Consolidated Financial Statements (unaudited)

Fair Value

Primary Valuation Technique

Unobservable Inputs

June 30, 2018

Asset Category

Minimum

Maximum

Weighted Average

Assets:

Equity investment in Terra Property Trust

270,767,953

Discounted cash flow

Discount rate

7.30

16.00

12.96

Fair Value

Primary Valuation Technique

Unobservable Inputs

December 31, 2017

Asset Category

Minimum

Maximum

Weighted Average

Assets:

Equity investment in Terra Property Trust

275,428,953

Discounted cash flow

Discount rate

2.56

16.00

13.50

Note 4. Related Party Transactions

Axar Transaction

On February 8, 2018, Terra Capital Partners caused (i) a new subsidiary of Terra Capital Partners, Terra REIT Advisors to become the external manager of Terra Property Trust, (ii) a new subsidiary of Terra Capital Partners, Terra Fund Advisors, to be admitted as the replacement manager of the Company and the equity interests in Terra Fund Advisors to be distributed to the equity owners of Terra Capital Partners on a pro rata basis and (iii) the equity interests in another subsidiary of Terra Capital Partners, Terra Income Advisors, which also serves as the external advisor to Terra Income Fund 6, Inc. (“Terra Fund 6”), to be distributed to the equity owners of Terra Capital Partners on a pro rata basis. After the completion of the above steps, an affiliate of Axar Capital Management L.P. (“Axar”) entered into an investment agreement with Terra Capital Partners and its affiliates (which is referred to collectively as the “Axar Transaction”), pursuant to which an affiliate of Axar acquired from the respective owners thereof: (i) a 49% economic interest in the Terra Fund Advisors; (ii) a 65.7% economic and voting interest in Terra Capital Partners (and thereby Terra REIT Advisors); and (iii) an initial 49% economic interest in Terra Income Advisors, with an agreement to acquire an additional 16.7% economic interest, and for the entire 65.7% stake to become a voting interest in Terra Income Advisors, subject to requisite approval by a majority of the outstanding voting securities (as defined by the Investment Company Act of 1940, as amended) of Terra Fund 6 of a new advisory and administrative services agreement between Terra Income Advisors and Terra Fund 6 and upon the satisfaction of certain other conditions.

Operating Agreement

The Company had an operating agreement, as amended, with Terra Income Advisors whereby Terra Income Advisors was responsible for the Company’s day-to-day operations. As part of the Axar Transaction, on February 8, 2018, Terra Income Advisors assigned all of its rights, title and interest in the Company pursuant to the Amended and Restated Limited Liability Company Agreement of the Company, dated January 1, 2016, to Terra Fund Advisors. 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 its manager pursuant to a management agreement with the manager.

Management Agreement

As part of the Axar Transaction, Terra Income Advisors, Terra Property Trust’s manager prior to February 8, 2018, assigned all of its rights, title and interest in and to its then current external management agreement with Terra Property Trust to Terra REIT Advisors and immediately thereafter, Terra REIT Advisors and Terra Property Trust amended and restated such management agreement. Such amended and restated management agreement has the same economic terms and is in all material respects otherwise on the same terms as the management agreement between Terra Income Advisors and Terra Property Trust in effect immediately prior to the Axar Transaction, except for the identity of the manager.

Dividend Income

As discussed in Note 3, for the three months ended June 30, 2018 and 2017, the Company received approximately $9.1 million and $7.8 million of distributions from Terra Property Trust, respectively, of which $2.3 million and $2.7 million was a return of capital, respectively. For the six months ended June 30, 2018 and 2017, the Company received approximately $16.8 million and $16.6 million of distributions from Terra Property Trust, respectively, of which $4.5 million and $5.3 million was a return of capital, respectively.

Notes to Consolidated Financial Statements (unaudited)

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 loans 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 loans, valuation of the loans may be difficult, as there generally will be no established markets for these loans. As the Company’s loans 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 loans, 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 loans. Thus, the loan 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 loans. The result of such concentration in real estate assets is that a loss in such loans 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.

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 the Company’s interest-bearing financial instruments. With respect to Terra Property Trust’s business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to slow, and (v) to the extent Terra Property Trust enters into interest rate swap agreements as part of its hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to increase, and (v) to the extent Terra Property Trust enters into interest rate swap agreements as part of its hedging strategy, the value of these agreements to decrease.

Notes to Consolidated Financial Statements (unaudited)

Prepayment Risk

Prepayments can either positively or adversely affect the yields on loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond 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 loans.

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, 2018 and December 31, 2017, the Company had 6,655.9 units and 6,697.4 units outstanding, respectively, and the net asset value per unit was $40,686 and $41,143, respectively.

Capital Contributions

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

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 (regular units of limited liability company interest in the Company) 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 which the Company referred to as the carried interest distribution, and 85% to the holders of Continuing Income Units. The preferred return applicable to the Continuing Income Units sold in the offering concurrent with the Merger is 8.5%.

In addition, holders of Termination Units (membership interest in the Company that were issued to members of Terra Funds 1 through 4 who chose to enter the liquidation phase of their investments) 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, 2018 and 2017, the Company made total distribution to non-manager members of $15.0 million and $15.5 million, respectively. For the six months ended June 30, 2018 and 2017, the Company did not make any carried interest distributions to the Manager.

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, 2018, 3.6 Continuing Income Units were redeemed for $0.1 million and 37.9 Termination Units were redeemed for $1.6 million. For the six months ended June 30, 2017, the Company did not redeem any Continuing Income Units or Termination Units.

The following table presents a summary of the Termination Units outstanding as of June 30, 2018:



Fund	Number of Units	Scheduled Redemption Date
Terra Fund 4	12.5	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, 2018 and December 31, 2017, 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.

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 offering concurrent with the Merger 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, 2018 and 2017:



	Six Months Ended June 30, 2018					Six Months Ended June 30, 2017
	Managing Member	Non-Managing Members		Total		Managing Member	Non-Managing Members	Total
Units outstanding, beginning of period	—	6,697.4		6,697.4		—	6,826.5	6,826.5
Early redemption of Continuing Income Units	—	(3.6	)	(3.6	)	—	—	—
Termination Units redeemed	—	(37.9	)	(37.9	)	—	—	—
Units outstanding, end of period	—	6,655.9		6,655.9		—	6,826.5	6,826.5

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, 2018 and 2017. 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 which are annualized except for the non-recurring expenses.

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, 2018 and 2017:



	Six Months Ended June 30,
	2018			2017
Per unit operating performance:
Net asset value per unit, beginning of period	$	41,143		$	42,423
Increase in members’ capital from operations ⁽¹⁾:
Net investment income	1,815			1,596
Net change in unrealized (depreciation) appreciation on investment	(26		)	72
Total increase in members’ capital from operations	1,789			1,668
Distributions to member ⁽²⁾:
Capital distributions	(2,247		)	(2,277		)
Net decrease in members’ capital resulting from distributions	(2,247		)	(2,277		)
Capital share transactions:
Other ⁽³⁾	1			(2		)
Net increase in members’ capital resulting from capital share transactions	1			(2		)
Net asset value per unit, end of period	$	40,686		$	41,812

Ratios to average net assets:
Expenses	0.16		%	0.12		%
Net investment income	8.92		%	3.79		%

IRR, beginning of period	6.26		%	5.43		%
IRR, end of period	6.62		%	5.99		%

_______________


(1)	The per unit data was derived by using the weighted average units outstanding during the applicable periods, which were 6,683 units and 6,826 units for the six months ended June 30, 2018 and 2017, 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 other than the event described below that would require adjustment to, or disclosure in, the Company’s consolidated financial statements.

On July 30, 2018, Terra Property Trust foreclosed on the real estate property encumbering a senior loan that the borrower defaulted on. As of July 30, 2018, the appraised value of the real estate is greater than the principal amount of the senior loan. Terra Property Trust does not expect to incur any losses related to this senior loan.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information contained in this section should be read in conjunction with our 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, 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 Fund Advisors, LLC (“Terra Fund Advisors”), Terra REIT Advisors, LLC (“Terra REIT Advisors”), Terra Income Advisors, LLC (“Terra Income Advisors”); 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-looking statements for any reason, including the factors set forth in “Part I — Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2017. 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 high yielding commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States. Our investments finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. We focus on smaller, middle market loans in the approximately $3 million to $50 million range which are financing properties in primary and secondary markets because we believe these loans are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. We were formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. We make substantially all of our investments and conduct substantially all of our real estate lending business through Terra Property Trust, which has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. Our objectives are to (i) preserve our members’ capital contributions, (ii) realize income from our investments and (iii) make monthly distributions to our members from cash generated from investments. There can be no assurances that we will be successful in meeting our objectives.

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 all of 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.

As described in greater detail in our current report on Form 8-K filed with the SEC on February 14, 2018, on February 8, 2018, Terra Capital Partners caused (i) a new subsidiary of Terra Capital Partners, Terra REIT Advisors, to become the external manager of Terra Property Trust, (ii) a new subsidiary of Terra Capital Partners, Terra Fund Advisors, to be admitted as the replacement manager of the Company and the equity interests in Terra Fund Advisors to be distributed to the equity owners of Terra Capital Partners on a pro rata basis and (iii) the equity interests in another subsidiary of Terra Capital Partners, Terra Income Advisors, which also serves as the external advisor to Terra Income Fund 6, Inc. (“Terra Fund 6”), to be distributed to the equity owners of Terra Capital Partners on a pro rata basis. After the completion of the above steps, an affiliate of Axar Capital Management L.P. (“Axar”) entered into an investment agreement with Terra Capital Partners and its affiliates (which is referred to collectively as the “Axar Transaction”), pursuant to which an affiliate of Axar acquired from the respective owners thereof: (i) a 49% economic interest in Terra Fund Advisors; (ii) a 65.7% economic and voting interest in Terra Capital Partners (and thereby Terra REIT Advisors); and (iii) an initial 49% economic interest in Terra Income Advisors, with an agreement to acquire an additional 16.7% economic interest, and for the entire 65.7% stake to become a voting interest in Terra Income Advisors, subject to requisite approval by a majority of the outstanding voting securities (as defined by the 1940 Act) of Terra Fund 6 of a new advisory and administrative services agreement between Terra Income Advisors and Terra Fund 6 and upon the satisfaction of certain other conditions. When

used herein the term “Manager” refers to Terra Income Advisors for periods prior to February 8, 2018 and refers to Terra Fund Advisors beginning on such date.

Portfolio Summary

The following tables provide a summary of Terra Property Trust’s net loan portfolio as of June 30, 2018 and December 31, 2017:



	June 30, 2018
	Fixed Rate			Floating Rate ⁽¹⁾			Total Gross Loans			Obligations under Participation Agreements		Total Net Loans
Number of loans	29			7			36			21		36
Principal balance	$	238,627,022		$	143,263,703		$	381,890,725		86,354,064		$	295,536,661
Amortized cost	240,851,963			144,315,202			385,167,165			87,291,408		297,875,757
Fair value	241,102,813			144,309,666			385,412,479			87,227,961		298,184,518
Weighted average coupon rate	12.97		%	11.81		%	12.54		%	12.73	%	12.48		%
Weighted-average remaining term (years)	1.65			1.28			1.51			1.23		1.59



	December 31, 2017
	Fixed Rate			Floating Rate ⁽¹⁾			Total Gross Loans			Obligations under Participation Agreements		Total Net Loans
Number of loans	33			1			34			19		34
Principal balance	$	299,311,201		$	53,749,794		$	353,060,995		75,077,891		$	277,983,104
Amortized cost	302,816,709			54,277,021			357,093,730			76,053,279		281,040,451
Fair value	302,951,869			54,282,803			357,234,672			75,991,436		281,243,236
Weighted average coupon rate	12.79		%	9.97		%	12.36		%	12.67	%	12.23		%
Weighted-average remaining term (years)	1.62			0.19			1.40			1.14		1.47

_______________


(1)	These loans pay a coupon rate of London Interbank Offered Rate (“LIBOR”) plus a fixed spread, six of which are subject to a LIBOR floor. Coupon rate shown was determined using the applicable annual coupon rate as of June 30, 2018 and December 31, 2017.

Portfolio Information

The tables below detail the types of loans in Terra Property Trust’s loan portfolio, as well as the property type and geographic location of the properties securing these loans, on a net loan basis, which represents Terra Property Trust’s proportionate share of the loans, based on its economic ownership of these loans.



	June 30, 2018									December 31, 2017
Loan Structure	Principal Balance		Amortized Cost			Fair Value		% of Total		Principal Balance		Amortized Cost		Fair Value		% of Total
Preferred equity investments	$	98,279,955	$	98,922,022		$	98,880,261	33.2	%	$	67,635,660	$	68,347,128	$	68,263,958	24.3	%
Mezzanine loans	95,959,767		97,019,430			97,003,807		32.5	%	101,115,711		102,386,404		102,670,907		36.5	%
First mortgages	91,871,939		92,790,658			92,782,302		31.1	%	109,231,733		110,306,919		110,308,371		39.2	%
Credit facility ⁽¹⁾	9,425,000		9,519,250			9,518,148		3.2	%	—		—		—		—	%
Allowance for loan losses	—		(375,603		)	—		—	%	—		—		—		—	%
Total	$	295,536,661	$	297,875,757		$	298,184,518	100.0	%	$	277,983,104	$	281,040,451	$	281,243,236	100.0	%

_______________


(1)	Represents unused cash from a credit facility.



	June 30, 2018									December 31, 2017
Property Type	Principal Balance		Amortized Cost			Fair Value		% of Total		Principal Balance		Amortized Cost		Fair Value		% of Total
Office	$	69,317,177	$	69,980,142		$	69,975,091	23.6	%	$	58,145,794	$	58,714,480	$	58,722,267	20.9	%
Infill land	58,491,314		58,870,033			58,866,232		19.7	%	55,481,939		56,029,898		56,025,568		19.9	%
Hotel	55,569,103		56,165,409			56,120,637		18.8	%	59,319,892		60,026,750		59,958,385		21.3	%
Multifamily	42,343,045		42,749,936			42,725,350		14.3	%	37,456,258		37,988,040		37,848,395		13.5	%
Condominium	31,149,170		31,424,931			31,436,392		10.5	%	38,511,274		38,829,923		38,868,479		13.8	%
Student housing	22,241,852		22,541,659			22,542,668		7.6	%	22,067,947		22,451,360		22,820,142		8.1	%
Industrial	7,000,000		7,000,000			7,000,000		2.3	%	7,000,000		7,000,000		7,000,000		2.5	%
Credit facility ⁽¹⁾	9,425,000		9,519,250			9,518,148		3.2	%	—		—		—		—	%
Allowance for loan losses	—		(375,603		)	—		—	%	—		—		—		—	%
Total	$	295,536,661	$	297,875,757		$	298,184,518	100.0	%	$	277,983,104	$	281,040,451	$	281,243,236	100.0	%

_______________


(1)	Represents unused cash from a credit facility.



	June 30, 2018									December 31, 2017
Geographic Location	Principal Balance		Amortized Cost			Fair Value		% of Total		Principal Balance		Amortized Cost		Fair Value		% of Total
United States
California	$	122,287,410	$	123,414,919		$	123,348,617	41.4	%	$	104,362,267	$	105,490,614	$	105,391,192	37.5	%
New York	56,409,550		56,726,192			56,744,480		19.0	%	43,761,274		44,121,538		44,164,421		15.7	%
Florida	22,705,125		22,910,387			22,921,621		7.6	%	39,926,892		40,281,901		40,296,964		14.3	%
Washington	20,570,802		20,692,185			20,753,809		7.0	%	20,354,875		20,469,129		20,527,134		7.3	%
Pennsylvania	15,585,000		15,731,773			15,733,255		5.3	%	15,585,000		15,731,551		15,732,064		5.6	%
Georgia	12,346,939		12,470,408			12,469,169		4.2	%	15,846,939		16,126,857		15,998,575		5.7	%
Massachusetts	7,000,000		7,000,000			7,000,000		2.3	%	7,000,000		7,000,000		7,000,000		2.5	%
Texas	6,093,243		6,188,776			6,113,514		2.1	%	6,093,243		6,188,077		6,157,971		2.2	%
Ohio	4,575,000		4,620,750			4,620,215		1.5	%	4,000,000		4,040,000		4,039,499		1.4	%
Delaware	4,396,000		4,439,960			4,439,464		1.5	%	4,396,000		4,437,459		4,439,464		1.6	%
Alabama	3,700,000		3,768,194			3,736,507		1.3	%	3,700,000		3,772,716		3,736,507		1.3	%
Oregon	3,140,000		3,192,487			3,213,378		1.1	%	3,140,000		3,246,472		3,263,587		1.2	%
Other ⁽¹⁾	16,727,592		17,095,329			17,090,489		5.7	%	9,816,614		10,134,137		10,495,858		3.7	%
Allowance for loan losses	—		(375,603		)	—		—	%	—		—		—		—	%
Total	$	295,536,661	$	297,875,757		$	298,184,518	100.0	%	$	277,983,104	$	281,040,451	$	281,243,236	100.0	%

_______________

(1)

Other includes $9.4 million of unused cash from a credit facility, $2.4 million of properties in North Carolina, $1.9 million of properties in South Carolina, $1.9 million of properties in Tennessee and $1.1 million of properties in Utah at June 30, 2018. Other includes $2.7 million of properties in Indiana, $2.2 million of properties in North Carolina, $1.9 million of properties in South Carolina, $1.9 million of properties in Tennessee and $1.1 million of properties in Utah at December 31, 2017.

Factors Impacting Operating Results

Our operating results are affected by a number of factors and primarily depend on, among other things, the level of the interest income from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first and second mortgage loans, subordinated mortgage loans, bridge loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business. Interest income and borrowing costs may vary as a result of changes in interest rates, which could impact the net

interest we receive on our assets. Our operating results may also be impacted by conditions in the financial markets and unanticipated credit events experienced by borrowers under our loan assets.

Market Risk

Terra Property Trust’s loans are highly illiquid and there is no assurance that it will achieve its investment objectives, including targeted returns. Due to the illiquidity of the loans, valuation of Terra Property Trust’s loans may be difficult, as there generally will be no established markets for these loans.

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. 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 loans, through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value ratio, debt service coverage ratio, 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.

We and Terra Property Trust maintain all of our 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 loans. Thus, its loan portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such loans could materially reduce Terra Property Trust’s capital.

Liquidity Risk

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

Interest Rate Risk

Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in the fair value of our interest-bearing financial instruments. With respect to Terra Property Trust’s business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to slow, and (v) to the extent we enter into interest rate swap agreements as part of Terra Property Trust’s hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to increase, and (v) to the extent Terra Property Trust enters into interest rate swap agreements as part of its hedging strategy, the value of these agreements to decrease.

Prepayment Risk

Prepayments can either positively or adversely affect the yields on Terra Property Trust’s loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If Terra Property Trust does not collect a prepayment fee in connection with a prepayment or are unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, 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 loans.

Use of Leverage

Terra Property Trust may deploy moderate amounts of leverage as part of our operating strategy, which may consist of borrowings under first mortgage financings, warehouse facilities, repurchase agreements and other credit facilities. While borrowing and leverage present opportunities for increasing total return, they may have the effect of potentially creating or increasing losses.

Results of Operations

The following table presents the comparative results of our operations for the three and six months ended June 30, 2018 and 2017:



	Three Months Ended June 30,									Six Months Ended June 30,
	2018			2017			Change			2018			2017		Change
Investment income
Dividend income	$	6,808,108		$	5,123,787		$	1,684,321		$	12,341,913		$	11,254,379	$	1,087,534
Other operating income	460			273			187			1,003			953		50
Total investment income	6,808,568			5,124,060			1,684,508			12,342,916			11,255,332		1,087,584
Operating expenses
Professional fees	99,290			232,022			(132,732		)	207,836			327,365		(119,529		)
Other	4,022			3,778			244			7,941			32,313		(24,372		)
Total operating expenses	103,312			235,800			(132,488		)	215,777			359,678		(143,901		)
Net investment income	6,705,256			4,888,260			1,816,996			12,127,139			10,895,654		1,231,485
Net change in unrealized (depreciation) appreciation on investment	(63,131		)	(50,870		)	(12,261		)	(175,754		)	491,994		(667,748		)
Net increase in members’ capital resulting from operations	$	6,642,125		$	4,837,390		$	1,804,735		$	11,951,385		$	11,387,648	$	563,737

Dividend Income

Dividend income associated with our ownership of Terra Property Trust represents Terra Property Trust’s net income for the period. Any excess of distributions received from Terra Property Trust over its net income is recorded as return of capital.

For the three months ended June 30, 2018 and 2017, we received distributions of $9.1 million and $7.8 million, respectively, or $0.61 and $0.52 per share, respectively, from Terra Property Trust, of which $6.8 million and $5.1 million was recorded as dividend income, respectively, representing Terra Property Trust’s net income for the periods presented, and $2.3 million and $2.7 million was recorded as return of capital, respectively. The $1.7 million increase in Terra Property Trust’s net income was primarily due to an increase in net interest income of $1.5 million and an increase in prepayment fee income of $1.7 million as a result of a $1.6 million prepayment fee received on an investment that the borrower repaid four years early in the current year period, partially offset by an increase in total operating expense of $1.6 million due to a $0.4 million provision for loan losses recorded in the current year period compared to a reversal of provision for loan losses of $1.0 million recorded in the same period in 2017, as well as an increase in professional fees.

Net interest income increased by $1.5 million as a result of our suspension during the prior three months ended June 30, 2017 of interest income accrual on a senior loan and a subordinated loan and write 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. These loans were repaid in full in July 2017. Additional factors contributing to the decrease in net interest income were a decrease in amortization of net purchase premium of $0.4 million as a result of the majority of the net purchase premium recognized in connection with the Merger in 2016 as well as a senior loan purchased in 2017 having already been amortized prior to the current period as well as the payment during the prior three months ended June 30, 2017 of an origination fee expense of $0.4 million to the Manager on a senior loan for which we did not receive an origination fee income. The increases in net interest income was partially offset by the suspension of interest income accrual of approximately $0.6 million during the three months ended June 30, 2018 on a senior loan that the borrower defaulted on. On July 30, 2018, Terra Property Trust foreclosed on the real estate property encumbering the senior loan. Contractual net interest income remained substantially

the same as the increase in the weighted average interest rate on investments was substantially offset by the decrease in weighted average principal balance of investments.

For the six months ended June 30, 2018 and 2017, we received distributions of $16.8 million and $16.6 million, respectively, or $1.13 and $1.11 per share, respectively, from Terra Property Trust, of which $12.3 million and $11.3 million was recorded as dividend income, respectively, representing Terra Property Trust’s net income for the periods presented, and $4.5 million and $5.3 million was recorded as return of capital, respectively. The $1.1 million increase in Terra Property Trust’s net income was primarily due to an increase in net interest income of $1.0 million and an increase in prepayment fee income of $1.5 million as described above, partially offset by (i) an increase in total operating expense of $0.9 million due to a $0.4 million provision for loan losses recorded in the six months ended June 30, 2018 compared to a reversal of provision for loan losses of $0.2 million recorded in the same period in 2017 as well as an increase in professional fees in the current period; and (ii) our recognition during the prior six months ended June 30, 2017 of a realized gain of investments of $0.5 million. There was no such gain recognized during the same period in 2018.

Net interest income increased by $1.0 million as a result of (i) the $1.4 million suspension of interest income accrual and write-off of the related past due interest receivable and exit fee accrual on a senior loan and a subordinated loan during the six months ended June 30, 2017 as described above; (ii) a decrease in amortization of net purchase premium of $0.8 million as a result of the majority of the net purchase premium recognized in connection with the Merger in 2016 as well as a senior loan purchased in 2017 having already been amortized prior to the current period and (iii) our payment during the six months ended June 30, 2017 of $0.4 million to the Manager on a senior loan for which we did not receive an origination fee income. The increases in net interest income was partially offset by the suspension of interest income accrual of approximately $0.6 million during the six months ended June 30, 2018 on a senior loan that the borrower defaulted on as described above and a decrease in contractual net interest income as a result of a lower weighted average principal balance of investments partially offset by an increase in weighted average interest rate on investments.

Net Loan Portfolio

In assessing the performance of Terra Property Trust’s loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements and mortgage loan payable. The following tables present a reconciliation of Terra Property Trust’s loan portfolio from a gross basis to a net basis for the three and six months ended June 30, 2018 and 2017:



	Three Months Ended June 30, 2018				Three Months Ended June 30, 2017
	Weighted Average Principal Amount			Weighted Average Coupon Rate	Weighted Average Principal Amount			Weighted Average Coupon Rate
Total portfolio
Gross loans	$	364,309,430		12.5%	$	361,037,933		11.8%
Obligations under participation agreements	(79,440,292		)	12.7%	(61,937,157		)	12.3%
Mortgage loan payable	(33,938,122		)	7.2%	(42,786,865		)	5.7%
Net loans ⁽¹⁾	$	250,931,016		13.2%	$	256,313,911		12.7%
Senior loans
Gross loans	$	113,825,000		11.2%	$	178,046,914		10.1%
Obligations under participation agreements	(21,953,061		)	12.0%	(19,365,201		)	10.4%
Mortgage loan payable	(33,938,122		)	7.2%	(42,786,865		)	5.7%
Net loans ⁽¹⁾	$	57,933,817		13.4%	$	115,894,848		11.7%
Subordinated loans ⁽²⁾
Gross loans	$	250,484,430		13.1%	$	182,991,019		13.4%
Obligations under participation agreements	(57,487,231		)	13.0%	(42,571,956		)	13.1%
Net loans ⁽¹⁾	$	192,997,199		13.1%	$	140,419,063		13.4%



	Six Months Ended June 30, 2018				Six Months Ended June 30, 2017
	Weighted Average Principal Amount			Weighted Average Coupon Rate	Weighted Average Principal Amount			Weighted Average Coupon Rate
Total portfolio
Gross loans	$	349,589,995		12.5%	$	351,072,132		11.9%
Obligations under participation agreements	(75,106,907		)	12.7%	(52,385,371		)	12.4%
Mortgage loan payable	(33,968,890		)	7.0%	(38,417,706		)	5.7%
Net loans ⁽¹⁾	$	240,514,198		13.2%	$	260,269,055		12.7%
Senior loans
Gross loans	$	118,273,234		11.3%	$	162,589,780		10.2%
Obligations under participation agreements	(22,740,355		)	12.0%	(15,473,112		)	10.8%
Mortgage loan payable	(33,968,890		)	7.0%	(38,417,706		)	5.7%
Net loans ⁽¹⁾	$	61,563,989		13.3%	$	108,698,962		11.7%
Subordinated loans ⁽²⁾
Gross loans	$	231,316,761		13.1%	$	188,482,352		13.3%
Obligations under participation agreements	(52,366,552		)	13.0%	(36,912,259		)	13.1%
Net loans ⁽¹⁾	$	178,950,209		13.1%	$	151,570,093		13.4%

_______________


(1)	The weighted average coupon rate represents net interest income over the period calculated using the weighted average coupon rate and weighted average principal amount shown on the table (interest income on the loans less interest expense) divided by the weighted average principal amount of the net loans during the period.


(2)	Subordinated loans include mezzanine loans, preferred equity investments and a credit facility.

For the three and six months ended June 30, 2018 as compared to the same periods in 2017, the increase in weighted average coupon rate was due to a decrease in investments in senior loans, which are typically larger principal-balance loans paying lower levels of interest reflecting the lower perceived risk due to their senior position in the borrower’s capital structure as compared to investments in subordinated loans, as well as the senior loans that matured in the prior year period having coupon rates that were lower than the current senior loans.

Professional Fees

For each of the three and six months ended in June 30, 2018 as compared to the same periods in 2017, professional fees decreased by $0.1 million primarily due to additional fees incurred in connection with the filing of our registration statement on Form 10 in 2017.

Net Change in Unrealized (Depreciation) Appreciation on Investment

Net change in unrealized appreciation or depreciation on investment reflects the change in Terra Property Trust’s net loan portfolio value during the reporting period, including any reversal of previously recorded unrealized gains or losses, when gains or losses are realized. There may be fluctuations in unrealized gains and losses of the portfolio as loans within the portfolio approach their respective maturity dates and fair value premiums are amortized or discounts are accreted to each loan’s respective collectible value. In addition, the unrealized gains or losses in the portfolio may fluctuate over time due to changes in the market yields or carrying value adjustments such as the amortization or accretion of premiums, discounts, origination fees, and exit fees.

For the three months ended June 30, 2018 as compared to the same period in 2017, net change in unrealized depreciation on investment was substantially the same.

For the six months ended June 30, 2018, we recorded a net change in unrealized depreciation on investment of $0.2 million, compared to a net change in unrealized appreciation on investment of $0.5 million recorded in the same period in 2017, primarily due to the extension fee associated with a matured mortgage loan payable that we extended in 2018 as well as the amortization of a substantial portion of the net purchase premiums recognized in connection with the Merger in 2016, which reduced the carrying value of the loans in 2017.

Net Increase in Members’ Capital Resulting from Operations

For the three and six months ended June 30, 2018 as compared to the same periods in 2017, the resulting net increase in members’ capital results from operations increased by $1.8 million and $0.6 million, respectively.

Financial Condition, Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including funding and maintaining our assets and operations, making distributions to our members and other general business needs. Our primary cash requirements for the next twelve months are making the discretionary recurring distributions to our members and, to a lesser extent, redeeming Terra Fund 4 Termination Units for approximately $0.5 million. We expect to use cash distributions received from Terra Property Trust to meet such cash requirements. Terra Property Trust’s expected loan and liability maturities during the next twelve months include the sole mortgage loan payable with a principal amount of $33.9 million which matures in September 2018, assuming no additional extension, and obligations under participation agreements totaling $50.4 million. As of June 30, 2018, the principal balance of the first mortgage encumbering the mortgage loans was past due. Terra Property Trust is in the process of taking over the real estate property encumbering the first mortgage. Terra Property Trust expects to fully recover the principal balance of the first mortgage because the fair value of the underlying real estate property exceeds the principal balance of the first mortgage. Terra Property Trust expects to refinance the mortgage loan payable and use the proceeds from the repayment of the corresponding investments to repay the participation obligations. Additionally, Terra Property Trust expects to fund approximately $42.0 million of the unfunded commitments to borrowers during the next twelve months. Terra Property Trust expects to maintain sufficient cash on hand to fund such commitment through matching these commitments with principal repayments on outstanding loans.

Cash Flows Provided by Operating Activities

2018 — For the six months ended June 30, 2018, cash flows provided by operating activities were $16.6 million, primarily due to $16.8 million of dividends received from Terra Property Trust, of which $4.5 million was recorded as a return of capital.

2017 — For the six months ended June 30, 2017, cash flows provided by operating activities were $15.6 million, primarily due to $16.6 million of dividends received from Terra Property Trust, of which $5.3 million was recorded as a return of capital.

Cash Flows used in Financing Activities

2018 — For the six months ended June 30, 2018, cash flows used in financing activities were $16.7 million, consisting of distributions paid to members of $15.0 million, and $1.7 million used to redeem 37.9 Termination Units and 3.6 continuing income units.

2017 — For the six months ended June 30, 2017, cash flows used in financing activities was $15.5 million for distributions paid to members.

Critical Accounting Policies and Use of Estimates

Our consolidated financial statements are prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our expected operating plans, we will describe additional critical accounting policies in the notes to our future consolidated financial statements in addition to those discussed below.

Allowance for Loan Losses

Terra Property Trust’s loans are typically collateralized by either the sponsors’ equity interest in real estate properties or real estate properties. As a result, Terra Property Trust regularly evaluates the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the

borrower/sponsor on a loan by loan basis. Terra Property Trust’s manager employs an asset management approach and monitors the portfolio of loans, through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value, debt-service coverage ratio and the debt yield, supplemented by occasional site visits to evaluate the assets. Terra Property Trust’s manager 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. The information gathered by way of the asset management process is sufficient in assessing collectability.

Using the information gathered by way of the asset management process, Terra Property Trust’s manager performs a quarterly, or more frequently as needed, review of Terra Property Trust’s portfolio of loans. In conjunction with this review, Terra Property Trust’s manager assesses the risk factors of each loan and assigns each loan a risk rating. Based on a 5-point scale, Terra Property Trust’s loans are rated “1” through “5”, from less risk to greater risk. For loans with a risk rating of “4” and “5”, Terra Property Trust’s manager assesses each loan on which a net realized amount analysis is able to perform for collectability. This analysis includes the ability to realize the full amount of principal and interest in the event that Terra Property Trust needs to exercise its rights under the terms of the agreement and/or any other contemplated workout or modification. To the extent the net realizable amount analysis indicates the principal amount of the recorded loan as of the reporting date is in jeopardy, an appropriate allowance for loan losses will be recorded. Additionally, Terra Property Trust records a general allowance for loan losses equal to 1.5% of the aggregate principal amount of loans rated as a “4” and 5% of the aggregate principal amount of loans rated as a “5”, and in both cases, excluding loans on which a specific allowance assessment has been performed.

Fair Value Measurements

The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Our financial assets and liabilities were recorded at fair value on our consolidated statements of assets and liabilities and were categorized based on the inputs valuation techniques as follows:


•	Level 1. Quoted prices for identical assets or liabilities in an active market.


•	Level 2. Financial assets and liabilities whose values are based on the following:

◦Quoted prices for similar assets or liabilities in active markets.

◦Quoted prices for identical or similar assets or liabilities in non-active markets.

◦Pricing models whose inputs are observable for substantially the full term of the asset or liability.

◦Pricing models whose inputs are derived principally from or corroborated by observable market data for

substantially full term of the asset or liability.


•	Level 3. Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

Unobservable inputs reflect our assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available.

Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, we will continue to refine our valuation methodologies. The methods used may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods will be appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.

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 our taxable income. We, however, may be liable for New York City Unincorporated Business Tax (the “NYC UBT”) and similar taxes of various other municipalities. New York City imposes the NYC UBT at a statutory rate of 4% on net income generated from ordinary business activities carried on in New York City. For the three and six months ended June 30, 2018 and 2017, none of our income was subject to the NYC UBT.

We did not have any uncertain tax positions that met the recognition or measurement criteria of Accounting Standards Codification 740-10-25, Income Taxes, nor did we have any unrecognized tax benefits as of the periods presented herein. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. For the three and six months ended June 30, 2018 and 2017, we did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. Our inception-to-date federal tax years remain subject to examination by the Internal Revenue Service.

Contractual Obligations

As part of the Axar Transaction, Terra Income Advisors assigned all of its rights, title and interest in and to its current external management agreement with Terra Property Trust to Terra REIT Advisors and immediately thereafter, Terra REIT Advisors and Terra Property Trust amended and restated such management agreement. Such amended and restated management agreement has the same economic terms and is in all material respects otherwise on the same terms as the management agreement between Terra Income Advisors and Terra Property Trust in effect immediately prior to the Axar Transaction, except for the identity of our manager.

Terra Property Trust currently pays the following fees to Terra REIT Advisors pursuant to a management agreement:

Origination Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund, acquire or structure real estate-related loans, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, Terra REIT Advisors also receives an origination fee equal to the lesser of (i) 1.0% of the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension. The origination fee is offset by the amount of any origination fee received by Terra Property Trust from borrowers.

Asset Management Fee. A monthly asset management fee at an annual rate equal to 1.0% of the aggregate funds under management, which includes the loan origination amount or aggregate gross acquisition cost, as applicable, for each real estate-related loan and cash held by Terra Property Trust.

Asset Servicing Fee. A monthly asset servicing fee at an annual rate equal to 0.25% of the aggregate gross origination price or aggregate gross acquisition price for each real estate related loan then held by Terra Property Trust (inclusive of closing costs and expenses).

Disposition Fee. A disposition fee in the amount of 1.0% of the gross sale price received by us from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and (ii) the amount of the fee paid by the borrower in connection with such transaction. If Terra Property Trust takes ownership of a property as a result of a workout or foreclosure of a loan, Terra Property Trust will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price.

Transaction Breakup Fee. In the event that Terra Property Trust receives any “breakup fees,” “busted-deal fees,” termination fees, or similar fees or liquidated damages from a third-party in connection with the termination or non-consummation of any loan or disposition transaction, Terra REIT Advisors will be entitled to receive one-half of such amounts, in addition to the reimbursement of all out-of-pocket fees and expenses incurred by Terra REIT Advisors with respect to its evaluation and pursuit of such transactions.

In addition to the fees described above, Terra Property Trust reimburses Terra REIT Advisors for operating expenses incurred in connection with services provided to the operations of Terra Property Trust, including Terra Property Trust’s allocable share of Terra REIT Advisors’ overhead, such as rent, employee costs, utilities, and technology costs.

The following table presents a summary of fees paid and costs reimbursed to the predecessor to Terra REIT Advisors as well as Terra REIT Advisors in connection with providing services to Terra Property Trust:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Origination fee expense ⁽¹⁾	$	557,721	$	1,413,207	$	946,580	$	1,757,307
Asset management fee	758,641		810,419		1,523,140		1,611,847
Asset servicing fee	178,492		189,160		344,748		377,488
Operating expenses reimbursed to Manager	845,623		797,216		1,647,522		1,700,502
Disposition fee ⁽²⁾	10,670		373,340		520,313		600,719
Total	$	2,351,147	$	3,583,342	$	4,982,303	$	6,047,863

_______________


(1)	Origination fee expense is generally offset with origination fee income. Any excess is deferred and amortized to interest income over the term of the investment.


(2)	Disposition fee is generally offset with exit fee income on the consolidated statements of operations.

Off-Balance Sheet Arrangements

Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off-balance sheet financings or liabilities.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“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. We adopted this standard on January 1, 2018 using the cumulative effect transition method. The adoption of ASU 2014-09 did not have a material impact on our consolidated financial statements and disclosures.

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 our consolidated financial statements and disclosures as we do 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. We adopted this standard on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements and disclosures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We may be subject to financial market risks, including changes in interest rates. To the extent that we borrow money to make investments, our net investment income will be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds would increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

As of June 30, 2018, Terra Property Trust had seven investments with an aggregate principal balance of $143.3 million that provide for interest income at an annual rate of LIBOR plus a spread, six of which are subject to a LIBOR floor. Additionally, Terra Property Trust had $33.9 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBOR plus 5.25%. A decrease of 1,000 basis points in LIBOR would decrease our annual net interest income by approximately $0.5 million and an increase of 1,000 basis points in LIBOR would increase our annual net interest income by approximately $10.5 million.

We may hedge against interest rate and currency exchange rate fluctuations by using standard hedging instruments, such as futures, options and forward contracts, subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. For the three and six months ended June 30, 2018 and 2017, we did not engage in interest rate hedging activities.

In addition, we may have risks regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Fair Value Measurements” in this quarterly report on Form 10-Q.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer of our Manager (performing functions equivalent to those a principal executive officer and principal financial officer of our company would perform if we had any officers), of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2018. Based on that evaluation, the chief executive officer and chief financial officer of our Manager concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports.

Changes in Internal Control Over Financial Reporting

During the most recent fiscal quarter, there was no change in our internal controls over financial reporting, as defined under

Rule 13a-15(f) under the Exchange Act, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II

Item 1. Legal Proceedings.

Neither we, Terra Property Trust nor our Manager is currently subject to any material legal proceedings, nor, to our knowledge, are material legal proceedings threatened against us, Terra Property Trust or our Manager. From time to time, we, Terra Property Trust and individuals employed by our Manager or its affiliates may be a party to certain legal proceedings in the ordinary course of business. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits.

The following exhibits are filed with this report. Documents other than those designated as being filed herewith are incorporated herein by reference.



Exhibit No.		Description and Method of Filing
2.1		Agreement and Plan of Merger by and among the registrant, Terra Capital Advisors, LLC, Terra Secured Income Fund Merger Sub, LLC, and Terra Secured Income Fund, dated January 1, 2016 (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).

2.2		Agreement and Plan of Merger by and among the registrant, Terra Capital Advisors, LLC, Terra Secured Income Fund Merger Sub 2, LLC, and Terra Secured Income Fund 2, LLC, dated January 1, 2016 (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).

2.3		Agreement and Plan of Merger by and among the registrant, Terra Capital Advisors, LLC, Terra Secured Income Fund Merger Sub 3, LLC, and Terra Secured Income Fund 3, LLC, dated January 1, 2016 (incorporated by reference to Exhibit 2.3 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).

2.4		Agreement and Plan of Merger by and among the registrant, Terra Capital Advisors, Terra Capital Advisors 2, Terra Secured Income Fund 4, LLC, and Terra Secured Income Fund 4, LLC, dated January 1, 2016 (incorporated by reference to Exhibit 2.4 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).



Exhibit No.		Description and Method of Filing

2.5		Contribution Agreement by and among Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC, the registrant, and Terra Property Trust, Inc., dated January 1, 2016 (incorporated by reference to Exhibit 2.5 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).

2.6		Amendment No. 1 to the Contribution Agreement by and among Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC, the registrant, and Terra Property Trust, Inc., dated December 31, 2016 (incorporated by reference to Exhibit 2.6 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).

3.1		Amended and Restated Limited Liability Company Agreement of the registrant, dated January 1, 2016 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32**		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

_______________

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Quarterly Report on Form10-Q to be signed on its behalf by the undersigned in the capacities indicated* thereunto duly authorized.

Date: August 8, 2018



	TERRA SECURED INCOME FUND 5, LLC

	By:	/s/ Bruce D. Batkin
		Bruce D. Batkin
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Gregory M. Pinkus
		Gregory M. Pinkus
		Chief Financial Officer and Chief Operating Officer,
		(Principal Financial and Accounting Officer)

___________

* The registrant is a limited liability company managed by Terra Fund Advisors, LLC, its sole and managing member and the persons are signing in their respective capacities as officers of Terra Fund Advisors, LLC.

Terra Secured Income Fund 5, LLC - FORM 10-Q - August 8, 2018

Attached files

Terra Secured Income Fund 5, LLC Reports