Terra Income Fund 6, LLC - Quarter Report: 2023 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number: 000-55429

Terra Income Fund 6, LLC

(Exact name of registrant as specified in its charter)


Delaware						92-0548263
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

205 West 28th Street, 12th Floor

New York, New York 10001

(Address of principal executive offices) (Zip Code)

(212) 753-5100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of exchange on
which registered

7.00% Notes due 2026

TFSA

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

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 o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No o

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 the 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	þ	Smaller reporting company	þ
		Emerging growth company	¨

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. o

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

All of the limited liability company interest in the registrant is held by an affiliate of the registrant. No market value has been computed based upon the fact that no active trading market had been established as of the date of this document.

OMISSION OF CERTAIN INFORMATION

The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Quarterly Report on Form 10-Q with reduced disclosure format.

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets (Successor Basis) as of J une 30 , 2023 (unaudited) and December 31, 2022	2

	Consolidated Statement of Operations (Successor Basis) for the T hree and S ix M onths E nded June 30 , 2023 (unaudited)	3

	Consolidated Statement of Operations (Predecessor Basis) for the T hree and S ix M onths E nded June 30 , 2022 (unaudited)	4

	Consolidated Statement of Changes in Member’s Capital (Successor Basis) for the Three and S ix months ended June 30 , 2023 (unaudited)	5

	Consolidated Statement of Change in Net Assets (Predecessor Basis) for the Three and S ix M onths E nded J u ne 30 , 2022 (unaudited)	6

	Consolidated Statement of Cash Flows (Successor Basis) for the S ix M o nth s E nded June 30 , 2023 (unaudited)	7

	Consolidated Statement of Cash Flows (Predecessor Basis) for the S ix M onths E nded June 30 , 2022 (unaudited)	8

	Notes to Consolidated Financial Statements as of J u ne 30 , 2023 (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	44

PART II	OTHER INFORMATION	44

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults upon Senior Securities	44

Item 4.	Mine Safety Disclosures	44

Item 5.	Other Information	44

Item 6.	Exhibits	45

Signatures		46

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Terra Income Fund 6, LLC

Consolidated Balance Sheets (Successor Basis)


	June 30, 2023		December 31, 2022
	(unaudited)
Assets
Cash and cash equivalents	$	8,761,896	$	6,524,596
Restricted cash	—		215,357
Loans held for investment, net of allowance for credit losses of $566,541 and none	59,362,302		79,082,650
Loans held for investment acquired through participation, net of allowance for credit losses of $3,937,050 and $3,937,050	22,445,906		42,330,376
Equity investment in unconsolidated investment	37,031,942		10,013,691
Marketable securities	531,696		—
Interest receivable	1,253,090		1,441,044
Prepaid expenses and other assets	401,906		177,240
Total assets	$	129,788,738	$	139,784,954
Liabilities and Equity
Liabilities:
Unsecured notes payable, net of purchase discount	34,611,977		34,042,904
Term loan payable, net of deferred financing cost	14,850,000		25,000,000
Interest reserve and other deposits held on investments	—		215,357
Accrued expenses	224,180		582,816
Other liabilities	26,894		252,045
Total liabilities	49,713,051		60,093,122
Commitments and contingencies (See Note 7)
Equity:
Managing member	80,075,687		79,691,832
Total equity	80,075,687		79,691,832
Total liabilities and equity	$	129,788,738	$	139,784,954

See notes to unaudited consolidated financial statements.

Terra Income Fund 6, LLC

Consolidated Statement of Operations (Successor Basis)

(Unaudited)


	Three Months Ended June 30, 2023		Six Months Ended June 30, 2023
Revenues
Interest income	$	2,595,328	$	5,527,232
Dividend and other income	31,900		37,475
	2,627,228		5,564,707
Operating expenses
Asset management and asset servicing fees paid to Terra REIT (1)	428,883		863,433
Operating expense reimbursement to Terra REIT (1)	406,480		712,360
Provision (reversal of provision) for credit losses	47,349		(67,988)
Professional fees	183,532		466,042
Insurance expense	21,072		83,191
General and administrative	14,727		27,387
	1,102,043		2,084,425
Operating income	1,525,185		3,480,282
Other income and expenses
Unrealized gain on investments, net	5,829		5,829
Realized loss on investments, net	(12,512)		(12,512)
(Loss) income from equity investment in unconsolidated investment	(124,106)		190,907
Interest expense on unsecured notes payable	(960,049)		(1,912,198)
Interest expense on term loan	(355,468)		(707,031)
	(1,446,306)		(2,435,005)
Net income	$	78,879	$	1,045,277

______________

(1)The fees were paid, and expenses were reimbursed, to Terra Property Trust, Inc. (“Terra REIT”) pursuant to a cost sharing agreement with Terra REIT (Note 5).

See notes to unaudited consolidated financial statements.

Terra Income Fund 6, LLC

Consolidated Statement of Operations (Predecessor Basis)

(Unaudited)


	Three months ended June 30, 2022			Six Months Ended June 30, 2022

Investment income
Interest income		$	4,078,288	$	8,165,702
Dividend and other income		8,596		56,957
Total investment income		4,086,884		8,222,659
Operating expenses
Base management fees		670,327		1,292,145
Reversal of incentive fees on capital gains (1)		(158,315)		(33,674)
Operating expense reimbursement to Adviser (Note 5)		316,859		617,049
Servicing fees (Note 2, Note 5)		121,133		240,107
Interest expense on unsecured notes payable		766,499		1,531,038
Professional fees		234,104		589,408
Interest expense from obligations under participation agreements (Note 5)		140,315		261,882
Interest expense on term loan		410,777		682,281
Directors’ fees		27,126		57,252
Insurance expense		61,570		128,722
Transaction costs		1,145,880		1,145,880
General and administrative expenses		14,301		22,574
Total operating expenses		3,750,576		6,534,664
Net investment income before income taxes		336,308		1,687,995
Income tax expense		57,005		496,658
Net investment income		279,303		1,191,337
Net change in unrealized depreciation on investments		(828,675)		(251,088)
Net change in unrealized depreciation on obligations under participation agreements		14,579		26,940
Net realized gain on investments		22,523		55,783
Net (decrease) increase in net assets resulting from operations		$	(512,270)	$	1,022,972

Per common share data:
Net investment income per share		$	0.03	$	0.15
Net (decrease) increase in net assets resulting from operations per share		$	(0.06)	$	0.13
Weighted average common shares outstanding		8,110,168		8,098,531

_______________

(1)For the three and six months ended June 30, 2022, the Company reversed previously accrued incentive fees on capital gains of $158,315 and $33,674, respectively. Incentive fees on capital gains were based on 20% of net realized and unrealized capital gains. No incentive fees on capital gains were actually payable by the Company with respect to unrealized gains unless and until those gains were realized.

See notes to unaudited consolidated financial statements.

Terra Income Fund 6, LLC

Consolidated Statement of Changes in Member’s Capital (Successor Basis)

(Unaudited)


	Managing Member		Total
Balance, January 1, 2023	$	79,691,832	$	79,691,832
Cumulative effect of adoption of credit loss accounting standard effective January 1, 2023 (Note 2)	(661,422)		(661,422)
Net income	966,398		966,398
Balance, March 31, 2023	79,996,808		79,996,808
Net income	78,879		78,879
Balance, June 30, 2023	$	80,075,687	$	80,075,687

See notes to unaudited consolidated financial statements.

Terra Income Fund 6, LLC

Consolidated Statement of Changes in Net Assets (Predecessor Basis)

(Unaudited)


	Three Months Ended June 30, 2022		Six months ended June 30, 2022
Operations
Net investment income	$	279,303	$	1,191,337
Net change in unrealized depreciation on investments	(828,675)		(251,088)
Net change in unrealized depreciation on obligations under participation agreements	14,579		26,940
Net realized gain on investments	22,523		55,783
Net (decrease) increase in net assets resulting from operations	(512,270)		1,022,972
Stockholder distributions
Distributions from return of capital	(919,973)		(1,696,398)
Distributions from net investment income	—		(130,807)
Net decrease in net assets resulting from stockholder distributions	(919,973)		(1,827,205)
Capital share transactions
Reinvestment of stockholder distributions	213,424		425,287
Net increase in net assets resulting from capital share transactions	213,424		425,287
Net depreciation in net assets	(1,218,819)		(378,946)
Net assets, at beginning of period	74,426,517		73,586,644
Net assets, at end of period	$	73,207,698	$	73,207,698


Capital share activity
Shares outstanding, at beginning of period	8,102,167		8,078,627
Shares issued from reinvestment of stockholder distributions	23,291		46,831
Shares outstanding, at end of period	8,125,458		8,125,458

See notes to unaudited consolidated financial statements.

Terra Income Fund 6, LLC

Consolidated Statement of Cash Flows (Successor Basis)

(Unaudited)


	Six Months Ended June 30, 2023

Cash flows from operating activities:
Net income	$	1,045,277
Adjustments to reconcile net income from operations to net cash used in operating activities:
Reversal of provision for credit losses	(67,988)
Amortization of premiums and discounts on investments	744,316
Amortization and accretion of investment-related fees, net	(226,859)
Amortization of discount on debt	569,073
Distributions received from equity investment in unconsolidated investments	526,998
Income from equity investment in unconsolidated investments	(190,907)
Realized loss on investments, net	12,512
Unrealized gain on investments, net	(5,829)
Changes in operating assets and liabilities:
Decrease in interest receivable	187,954
Increase in prepaid expenses and other assets	(224,666)
Decrease in interest reserve and other deposits held on investments	(215,357)
Decrease in accrued expenses	(358,636)
Decrease in other liabilities	(252,044)
Net cash provided by operating activities	1,543,844
Cash flows from investing activities:
Repayment of loans	41,777,390
Purchase of equity interest in unconsolidated investment	(27,354,342)
Purchase of held-to-maturity debt securities	(10,012,512)
Proceeds from redemption of held-to-maturity debt securities	10,000,000
Origination and purchase of loans	(3,256,570)
Purchase of marketable securities	(525,867)
Net cash provided by investing activities	10,628,099
Cash flows from financing activities:
Repayments of borrowings under term loan payable	(10,000,000)
Payment of financing costs	(150,000)
Net cash used in financing activities	(10,150,000)
Net increase in cash, cash equivalents and restricted cash	2,021,943
Cash, cash equivalents and restricted cash, at beginning of period	6,739,953
Cash, cash equivalents and restricted cash, at end of period (Note 2)	$	8,761,896

Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,050,156
Income taxes paid	$	225,000

Supplemental non-cash information:
Settlement of a mezzanine loan accounted for as an equity investment in exchange for equity interest in a joint venture that owns real estate (Note 3)	$	10,149,642

See notes to unaudited consolidated financial statements.

Terra Income Fund 6, LLC

Consolidated Statement of Cash Flows (Predecessor Basis)

(Unaudited)


	Six Months Ended June 30, 2022

Cash flows from operating activities:
Net increase in net assets resulting from operations	$	1,022,972
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
Net change in unrealized depreciation on investments	251,088
Net change in unrealized depreciation on obligations under participation agreements	(26,940)
Net realized gain on investments	(55,783)
Amortization and accretion of investment-related fees, net	(526,576)
Amortization of discount on debt issuance	178,352
Amortization of deferred financing costs	120,838
Purchases of investments	(45,506,615)
Repayments and proceeds from sale of investments	35,689,626
Changes in operating assets and liabilities:
Increase in interest receivable	(342,289)
Decrease in prepaid expenses and other assets	251,107
Decrease in interest reserve and other deposits held on investments	(29,711)
Decrease in due to related party	(3,108,922)
Decrease in due to Adviser, net	(185,915)
Increase in accrued expenses	117,582
Increase in interest payable from obligations under participation agreements	43,364
Decrease in other liabilities	(36,900)
Net cash used in operating activities	(12,144,722)
Cash flows from financing activities:
Proceeds from borrowings under term loan payable	20,000,000
Payments of stockholder distributions	(1,401,918)
Proceeds from obligations under participation agreements	959,293
Net cash provided by financing activities	19,557,375
Net decrease in cash, cash equivalents and restricted cash	7,412,653
Cash, cash equivalents and restricted cash, at beginning of period	12,456,874
Cash, cash equivalents and restricted cash, at end of period (Note 2)	$	19,869,527

Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,069,892
Income taxes paid	$	206,413
Supplemental non-cash information:
Reinvestment of stockholder distributions	$	425,287

See notes to unaudited consolidated financial statements.

Terra Income Fund 6, LLC

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Principal Business and Organization

Terra Income Fund 6, LLC (“Terra LLC”) was formed as a Delaware limited liability company on April 29, 2022 as a wholly owned subsidiary of Terra Property Trust, Inc. (“Terra REIT”). On October 1, 2022, pursuant to an Agreement and Plan of Merger, dated as of May 2, 2022 (as amended, the “Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”) merged with and into Terra LLC, with Terra LLC continuing as the surviving entity of the merger (the “Merger”) (Note 5). Subsequent to the Merger, Terra LLC became the successor of Terra BDC and assumed all of Terra BDC’s rights and obligations. As context requires, the “Company” refers to Terra BDC prior to the Merger and its successor, Terra LLC, after the Merger.

Terra BDC was incorporated under the general corporation laws of the State of Maryland on May 15, 2013. Terra BDC elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). On September 29, 2022, Terra BDC withdrew its election to be regulated as a BDC. Terra BDC was an externally managed, non-diversified, closed-end management investment company that elected to be taxed and qualified annually thereafter, as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Subsequent to the Merger, Terra LLC’s sole member is responsible for paying tax, if any, on the Company’s taxable income.

Terra BDC’s investment activities were externally managed by Terra Income Advisors, LLC (“Terra Income Advisors” or the “Adviser”), a private investment firm affiliated with Terra BDC, pursuant to an investment advisory and administrative services agreement (the “Investment Advisory Agreement”), under the oversight of Terra BDC’s board of directors (the “Terra BDC Board”), a majority of whom were independent directors. In connection with the Merger, the Investment Advisory Agreement was terminated, and the former members of the Terra BDC Board were elected to the board of directors of Terra REIT (the “Terra REIT Board”). Terra LLC does not have a board of directors and Terra REIT is the sole and managing member of Terra LLC. Terra REIT’s investments activities are externally managed by Terra REIT Advisors, LLC (“REIT Manager”), an affiliate of the Company.

In February 2021, Terra BDC issued $38.4 million in aggregate principal amount of 7.00% fixed-rate notes due 2026, for net proceeds of $37.2 million, after deducting underwriting commissions of $1.2 million, see “Unsecured Notes Payable” in Note 6 for more information.

The Company is a wholly owned subsidiary of Terra REIT, and its investment objective is to provide attractive risk-adjusted returns to Terra REIT’s stockholders, primarily through Terra REIT’s regular distributions. The Company structures, acquires and maintains a portfolio of investments that generate a stable income stream. The Company directly structures, underwrites and originates most of its investments, as it believes that doing so will provide it with the best opportunity to invest in loans that satisfy its standards, establish a direct relationship with the borrower and optimize the terms of its investments; however, the Company may acquire existing loans from the originating lender should its adviser determine such an investment is in its best interest. The Company may hold its investments until their scheduled maturity dates or may sell them if the Company is able to command favorable terms for their disposition. The Company may also seek to realize growth in the value of its investments by timing their sale to maximize value.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its consolidated subsidiaries. The accompanying interim consolidated 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. Prior to the Merger, Terra BDC operated as and met the criteria of an investment company, as defined under U.S. GAAP, and applied accounting and reporting guidance in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 946, Financial Services — Investment Companies (the “Predecessor Basis”). As a result of the Merger, Terra LLC has not met the requirements to be classified as an investment company since October 1, 2022. As such, Terra LLC is an operating company and reports its investments at historical cost (the “Successor Basis”). The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the results of operations and financial condition as of and for the periods presented. The interim consolidated financial statements for the three and six months ended June 30, 2022, reflect Terra BDC’s financial results as an investment

Notes to Unaudited Consolidated Financial Statements

company. The consolidated financial statements as of June 30, 2023 and December 31, 2022, and for the three and six months ended June 30, 2023, reflect Terra LLC’s financial results as an operating company.

Consolidation

As provided under Regulation S-X and ASC Topic 946, the Terra BDC generally did not consolidate its investment in a company other than an investment company or controlled operating company whose business consists of providing services to Terra BDC. Accordingly, Terra BDC consolidated the accounts of its wholly-owned subsidiaries that meet the aforementioned criteria in its consolidated financial statements as of June 30, 2022.

Terra LLC consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest entity (“VOE”) model. Terra LLC is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If Terra LLC determines the entity is not a VIE, it then applies the VOE model. Under the VOE model, Terra LLC consolidates an entity when it holds a majority voting interest in an entity.

Terra LLC accounts for investments in which it has significant influence but not a controlling financial interest using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.

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 held at financial institutions, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.

Restricted Cash

Restricted cash represents cash held as additional collateral by the Company on behalf of the borrowers related to the investments for the purpose of such borrowers making interest and property-related operating payments. There is a corresponding liability of the same amount on the statements of assets and liabilities called “Interest reserve and other deposits held on investments.”

The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Company’s consolidated balance sheets to the total amount shown in its statements of cash flows:


	June 30, 2023		June 30, 2022
Cash and cash equivalents	$	8,761,896	$	19,674,620
Restricted cash	—		194,907
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows	$	8,761,896	$	19,869,527

Loans Held for Investment

The Company originates, acquires, and structures, or acquires through participations, real estate-related loans generally to be held to maturity (collectively the “loans”). Loans held for investment are carried at the principal amount outstanding, adjusted for the accretion of discounts on investments and exit fees, and the amortization of premiums on investments and origination fees. The Company’s preferred equity investments, which are economically similar to mezzanine loans and subordinate to any loans but senior to common equity, are accounted for as loans held for investment. Loans are carried at amortized cost less allowance for credit losses.

Prior to the Merger and under Predecessor Basis of accounting, the Company’s investments were reported at fair value, with the changes in fair value recorded as changes in unrealized gains or losses on investments in the consolidated statements of operations.

Current Expected Credit Losses Reserve

ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2023. ASC 326 mandates the use of a current expected credit loss (“CECL”) model for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under U.S. GAAP. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model

Notes to Unaudited Consolidated Financial Statements

applies to the Company’s loan portfolio and the held-to-maturity debt securities which are carried at amortized cost, including future funding commitments, for which the Company does not have the unconditional right to cancel. Amortized cost is defined as the principal amount outstanding, adjusted for the accretion of purchase discounts and disposition fees, and amortization of purchase premiums and origination fees, and includes accrued interest receivable related to these loans and securities. As permitted by ASC 326, the Company elected not to measure an allowance for credit losses on accrued interest receivable (which is presented separately on the consolidated balance sheet), but rather write off in a timely manner by reversing interest income that would likely be uncollectible. The Company’s adoption of the CECL model resulted in a $0.7 million increase to total reserve, including reserve on future funding commitments, which was recognized as a cumulative-effect adjustment to member’s capital as of January 1, 2023. Subsequent to the adoption of the CECL model, any increase or decrease to the CECL reserve is recorded in earnings on the consolidated statement of operations.

The Company utilizes information obtained from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for its loan portfolio. The Company does not have a meaningful history of realized credit losses on its loan portfolio so it has subscribed to a third-party database service to provide the Company with industry losses for its loans. The Company utilizes a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by a leading commercial mortgage-based security data analytics provider. It employs logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. The Company provides specific loan-level inputs which include loan-to-value and debt service coverage ratio metrics, as well as principal balances, property type, location, coupon rate, coupon rate type, original or remaining term, expected repayment dates and contractual future funding commitments. The Company selects from a group of independent five-year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. Because the Company’s loan portfolio is comprised of a small number of loans, the Company measures the CECL reserve based on an evaluation of each loan as its own segregated asset. Based on the inputs, the loan loss model determines a loan loss rate through the generation of probability of defaults (PD) and loss given defaults (LGD) for each loan. The CECL reserve is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan. These results require a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance for credit losses. Changes in such estimates can significantly affect the expected credit losses.

The calculation of the estimate of expected credit loss considers historical experience and current conditions for each loan and reasonable and supportable forecasts about the future. The reasonable and supportable forecast period is determined based on the Company’s assessment of the most likely scenario of assumptions and plausible outcomes for the U.S. economy, current portfolio composition, level of historical loss forecast estimates, material changes in growth and credit strategy and other factors that may affect its loss experience. The Company regularly evaluates the reasonable and supportable forecast period to determine if a change is needed.

Beyond the Company’s reasonable and supportable forecast period, the Company generally reverts to historical loss information, pooled by asset type and investment structure, over the remaining loan period, taken from a period that most accurately reflects the expectation of conditions expected to exist during the period of reversion. The Company may adjust historical loss information for differences in risk that may not reflect the characteristics of its current portfolio, including but not limited to, loan-to-value and debt service coverage ratios, among other relevant factors. The method of reversion selected represents the best estimate of the collectability of the investments and is reevaluated each reporting period. The Company generally expects to use an average historical loss for reversion, utilizing an immediate or straight-line method for the remaining life of the loans.

The Company also performs a qualitative assessment beyond model estimates and applies qualitative adjustments as necessary. The Company’s qualitative analysis includes a review of data that may directly impact its estimates including internal and external information about the loan or property including current market conditions, asset specific conditions, property operations or borrower/sponsor details (i.e., refinance, sale, bankruptcy) which allows the Company to determine the amount of the expected loss more accurately and reasonably for these investments. The Company also evaluates the contractual life of its loans to determine if changes are needed for contractual extension options, renewals, modifications, and prepayments.

During the loan review process, if the Company determines that it is not able to collect all amounts due for both principal and interest according to the contractual terms of a loan, the Company considers that loan non-performing. For all non-performing loans, such as those in default, collateral-dependent or modified loans, including historical troubled debt restructurings, the Company removes these loans from the industry loss rate approach described above and analyzes them separately. The credit loss reserve for these loans is calculated as any excess of the amortized cost of the loan over (i) the present value of expected future cash flows discounted at the appropriate discount rate or (ii) the fair value of collateral, if repayment is expected solely from the collateral.

Notes to Unaudited Consolidated Financial Statements

Some of the Company’s loans include commitments to fund incremental proceeds to the borrowers over the life of the loan and these unfunded commitments are also subject to the CECL model because the Company does not have an unconditional right to cancel such commitments. The CECL reserve related to unfunded commitments is recorded as a component of other liabilities on the Company’s consolidated balance sheets. This CECL reserve is estimated using the same method outlined above for the Company’s outstanding loan balances and increases or decreases in the CECL reserve relating to unfunded commitments are also recorded in earnings on the consolidated statements of operations.

As discussed below in Recent Accounting Pronouncements, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2022-02 Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) concurrently with the adoption of CECL on January 1, 2023, prospectively.

Marketable Securities

From time to time, the Company may invest in short term debt and equity securities. These securities are classified as available-for-sale securities and are carried at fair value. Changes in the fair value of equity securities are recognized in earnings. Changes in the fair value of debt securities are reported in other comprehensive income until a gain or loss on the securities is realized.

Held-to-Maturity Debt Securities

The Company classifies debt securities for which it has both the positive intent and ability to hold until maturity of the security as held-to-maturity debt securities. These securities are recorded at amortized cost with changes in amortized cost recognized in earnings until realized. Held-to-maturity debt securities are subject to the CECL reserve described above.

Revenue Recognition

Revenue is recognized 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 those goods or services.

Interest Income: Interest income is accrued based upon the outstanding principal amount and contractual terms of the loans and preferred equity investments that the Company expects to collect, and it is accrued and recorded on a daily basis. Discounts and premiums on investments purchased are accreted or amortized over the expected life of the respective loan using the effective yield method, and are included in interest income in the consolidated statements of operations. Loan origination fees and exit fees, net of portions attributable to obligations under participation agreements, are capitalized and amortized or accreted to interest income over the life of the investment using the effective yield method. Outstanding interest receivable is assessed for recoverability. The Company generally reverses the accrued and unpaid interest against interest income and no longer accrues for the interest when, in the opinion of the Manager, recovery of income and principal becomes doubtful. Interest is then recorded on the basis of cash received until accrual is resumed when the loan becomes contractually current and performance is demonstrated. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability.

The Company holds loans in its portfolio that contain paid-in-kind (“PIK”) interest provisions. The PIK interest, which represents contractually deferred interest that is added to the principal balance that is due at maturity, is recorded on the accrual basis.

Other Revenues: Prepayment fee income is recognized as prepayments occur. All other income is recognized when earned.

Deferred Debt Issuance Costs

The Company records issue discounts and other financing costs related to its debt obligation as deferred debt issuance costs, which are presented as a direct deduction from the carrying value of the related debt liability. These expenses are deferred and amortized using the effective interest method over the stated maturity of the debt obligation.

Stockholder Dividends and Distributions

Dividends and distributions to stockholders, which were determined in accordance with federal income tax regulations, were recorded on the declaration date. The amount to be paid out as a dividend or distribution was approved by the Terra BDC Board. Net realized capital gains, if any, were generally distributed or deemed distributed at least annually. Terra BDC adopted an “opt in” DRIP pursuant to which stockholders may elect to have the full amount of stockholders cash distributions reinvested in additional shares of common stock. Participants in the DRIP were free to elect to participate or terminate participation in the plan within a reasonable time as specified in the plan. For stockholders who have opted into the DRIP, they had their cash distributions reinvested in additional shares of common stock, rather than receiving the cash distributions. Pursuant to the

Notes to Unaudited Consolidated Financial Statements

DRIP, shares were issued at a price equal to Terra BDC’s most recently disclosed net asset value (“NAV”) per share of its common stock immediately prior to the applicable distribution payment date. In connection with the Merger, the DRIP was terminated and Terra REIT will make monthly distributions to stockholders. On January 20, 2023, the Terra REIT Board adopted a distribution reinvestment plan (the “Plan”), pursuant to which Terra REIT’s stockholders may elect to reinvest cash distributions payable by Terra REIT in additional shares of Class A Common Stock and Class B Common Stock, at the price per share determined pursuant to the Plan.

Incentive Fee on Capital Gains

Pursuant to the terms of the Investment Advisory Agreement, the incentive fee on capital gains was determined and payable in arrears as of the end of each fiscal year (or upon termination of the Investment Advisory Agreement). This fee equaled 20.0% of Terra BDC’s incentive fee on capital gains, which equaled the realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, Terra BDC accrued (but did not pay) for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period. While the Investment Advisory Agreement neither included nor contemplated the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants Technical Practice Aid for investment companies, Terra BDC accrued for this incentive fee to include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflected the incentive fees that would be payable to Terra Income Advisors if Terra BDC’s entire portfolio was liquidated at its fair value as of the balance sheet date even though Terra Income Advisors was not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

In connection with the Merger, the Investment Advisory Agreement was terminated and the Company no longer pays any fees to the Adviser. Such fees are now payable by Terra REIT pursuant to its management agreement with the REIT Manager. Terra LLC and Terra REIT have entered into a cost sharing and reimbursement agreement (the “Cost Sharing Agreement”) pursuant to which Terra LLC will be responsible for its allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to the REIT Manager.

Servicing Fee

Terra BDC paid selected dealers a servicing fee at an annual rate of 0.75% of the most recently published NAV per share, excluding shares sold through the DRIP, in exchange for providing certain administrative support services (Note 5) to stockholders such as establishing and maintaining stockholder accounts, customer service support and assisting stockholders in changing account options, account designations and account addresses. The servicing fee was recorded as expense on the consolidated statements of operations in the period in which it was incurred. In connection with the Merger, the servicing plan was terminated and the servicing fee is no longer payable.

Income Taxes

Terra BDC elected to be taxed as a REIT under the Code commencing with its short taxable year beginning October 1, 2018 and ending December 31, 2018. In order to qualify as a REIT, Terra BDC was required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders annually and meet certain tests regarding the nature of its income and assets. As a REIT, Terra BDC was not subject to U.S. federal income taxes on income and gains distributed to the stockholders as long as certain requirements were satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. For the nine months ended September 30, 2022, Terra BDC satisfied all the requirements for a REIT. Subsequent to the Merger, Terra REIT, the sole member of Terra LLC, will be responsible for paying tax, if any, on the Company’s taxable income.

Terra BDC held certain portfolio company investments through consolidated taxable REIT subsidiaries (“TRSs”). Such subsidiaries may be subject to U.S. federal and state corporate-level income taxes. These consolidated subsidiaries recognized deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between the tax basis of certain assets and liabilities and the reported amounts included in the accompanying consolidated statements of assets and liabilities using the applicable statutory tax rates in effect for the year in which any such temporary differences are expected to reverse. In connection with the Merger on October 1, 2022, Terra BDC’s TRS became a qualified REIT subsidiary of Terra LLC.

Terra BDC did not have any uncertain tax positions that met the recognition or measurement criteria under accounting for income taxes, nor did Terra BDC have any unrecognized tax benefits as of the periods presented herein. Terra BDC recognized interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its statements of operations. For the

Notes to Unaudited Consolidated Financial Statements

nine months ended September 30, 2022, Terra BDC did not incur any interest or penalties. Terra BDC’s 2019-2022 federal tax years remain subject to examination by the Internal Revenue Service and the state department of revenue.

Use of Estimates

The preparation of the 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 disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of income, expenses and gains and losses during the reporting period. Actual results may ultimately differ from those estimates, and those differences could be material.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. In April 2019, the FASB issued additional amendments to clarify the scope of ASU 2016-13 and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. In May 2019, the FASB issued ASU 2019-05 — Targeted Transition Relief, which provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. In October 2019, the FASB decided that for smaller reporting companies, ASU 2016-13 and related amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company meets the definition of a smaller reporting company under the regulation of the Securities and Exchange Commission. The Company adopted this ASU and related amendments on January 1, 2023. The adoption of ASU 2016-13 resulted in an incremental reserve of approximately $0.7 million, which included reserve on future loan funding commitments. The Company recorded the cumulative effect of initially applying this guidance as an adjustment to member’s equity using the modified retrospective method of adoption.

London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. In July 2017, the U.K. Financial Conduct Authority, which regulates the LIBOR administrator, ICE Benchmark Administration Limited (“IBA”), announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, which has subsequently been delayed to June 30, 2023. In March 2020, the FASB issued ASU. 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition (“ASU 2021-01”). In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) — Deferral the Sunset Date of Topic 848 (“ASU 2022-06”). ASU 2022-06 deferred the sunset date of ASU 2020-04 to December 31, 2024. In the event LIBOR is unavailable, the Company’s investment documents provide for a substitute index, on a basis generally consistent with market practice, intended to put the Company in substantially the same economic position as LIBOR. As a result, the Company has not adopted the new ASUs and does not expect the reference rate reform and the adoption of ASU 2020-04 and ASU 2021-01 to have a material impact on its consolidated financial statements and disclosures.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates troubled debt restructuring guidance for organizations that adopted the amendments in ASU 2016-13 while providing for additional disclosures for loan modifications. ASU 2022-02 also amends the vintage disclosure guidance for public business entities. The Company adopted the provisions of ASU 2022-02 concurrently with the adoption of ASU 2016-13. The adoption of ASU 2022-02 did not have any material impact on the Company’s financial condition and results of operations.

Note 3. Loans Held for Investment

The Company elected the practical expedient under ASC 326 to exclude accrued interest from amortized cost. As of June 30, 2023 and December 31, 2022, accrued interest receivable of $1.3 million and $1.4 million, respectively, is included in interest receivable on the consolidated balance sheets, and is excluded from the amortized cost of loans held for investment.

Notes to Unaudited Consolidated Financial Statements

Portfolio Summary

The following table provides a summary of the Company’s loan portfolio:


	June 30, 2023						December 31, 2022
	Fixed Rate		Floating Rate (1)(2)		Total		Fixed Rate		Floating Rate (1)(2)		Total
Number of loans	4		2		6		6		3		9
Principal balance	$	43,267,842	$	42,271,673	$	85,539,515	$	61,913,795	$	61,826,028	$	123,739,823
Carrying value	$	43,487,381	$	38,320,827	$	81,808,208	$	62,781,893	$	58,631,133	$	121,413,026
Fair value	$	43,273,776	$	39,113,475	$	82,387,251	$	62,035,611	$	58,244,737	$	120,280,348
Weighted-average coupon rate	13.7%		16.4%		15.0%		14.1%		14.4%		14.2%
Weighted-average remaining term (years)	0.70		0.78		0.71		0.86		0.77		0.80

_______________

(1)These loans pay a coupon rate of LIBOR , Secured Overnight Financing Rate (“SOFR”), or forward-looking term rate based on SOFR (“Term SOFR”), as applicable, plus a fixed spread. Coupon rates shown were determined using LIBOR of 5.2% and average SOFR and Term SOFR of 5.1% as of June 30, 2023, and LIBOR of 4.4% and average SOFR of 4.1% as of December 31, 2022.

(2)As of June 30, 2023 and December 31, 2022, two and three loans, respectively, were subject to a LIBOR, SOFR or Term SOFR floor, as applicable.

Lending Activities

The following table presents the activities of the Company’s loan portfolio for the six months ended June 30, 2023:


	Loans Held for Investment		Loans Held for Investment through Participation Interests		Total
Balance, January 1, 2023	$	79,082,650	$	42,330,376	$	121,413,026
Cumulative effect of adoption of credit loss accounting standard effective January 1, 2023 (Note 2)	(593,040)		—		(593,040)
New loans made	3,023,096		233,474		3,256,570
Principal repayments received	(21,655,810)		(20,121,580)		(41,777,390)
Net amortization of discounts on loans	(662,905)		(81,411)		(744,316)
Accrual, payment and accretion of investment-related fees and other, net	141,812		85,047		226,859
Reversal of provision for credit losses	26,499		—		26,499
Balance, June 30, 2023	$	59,362,302	$	22,445,906	$	81,808,208

Notes to Unaudited Consolidated Financial Statements

Portfolio Information

The tables below detail the types of loans in the Company’s loan portfolio, as well as the property type and geographic location of the properties securing these loans:


	June 30, 2023						December 31, 2022
Loan Structure	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
Preferred equity investments	$	61,289,515	$	61,863,420	75.6	%	$	58,823,211	$	59,521,319	49.0	%
First mortgages	21,250,000		21,522,542		26.3	%	41,970,028		42,800,010		35.3	%
Mezzanine loans	3,000,000		2,925,837		3.6	%	6,282,208		6,231,399		5.1	%
Credit facility	—		—		—	%	16,664,376		16,797,348		13.8	%
Allowance for credit losses	—		(4,503,591)		(5.5)	%	—		(3,937,050)		(3.2)	%
Total	$	85,539,515	$	81,808,208	100.0	%	$	123,739,823	$	121,413,026	100.0	%


	June 30, 2023						December 31, 2022
Property Type	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
Office	$	23,704,377	$	23,704,380	28.9	%	$	23,655,377	$	23,655,377	19.5	%
Infrastructure	21,250,000		21,522,542		26.3	%	21,250,000		21,705,029		17.9	%
Multifamily	19,017,842		19,297,442		23.6	%	17,717,211		18,048,117		14.9	%
Mixed use	18,567,296		18,861,598		23.1	%	41,452,859		42,227,836		34.7	%
Student housing	3,000,000		2,925,837		3.6	%	3,000,000		2,916,369		2.4	%
Industrial	—		—		—	%	16,664,376		16,797,348		13.8	%
Allowance for credit losses	—		(4,503,591)		(5.5)	%	—		(3,937,050)		(3.2)	%
Total	$	85,539,515	$	81,808,208	100.0	%	$	123,739,823	$	121,413,026	100.0	%


	June 30, 2023						December 31, 2022
Geographic Location	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
United States
New York	$	26,382,953	$	26,382,956	32.3	%	$	29,437,256	$	29,470,078	24.3	%
California	21,567,296		21,787,435		26.6	%	37,114,999		37,531,542		30.8	%
Utah	21,250,000		21,522,542		26.3	%	21,250,000		21,705,029		17.9	%
Georgia	16,339,266		16,618,866		20.3	%	15,217,540		15,548,446		12.8	%
North Carolina	—		—		—	%	20,720,028		21,094,981		17.4	%
Allowance for credit losses	—		(4,503,591)		(5.5)	%	—		(3,937,050)		(3.2)	%
Total	$	85,539,515	$	81,808,208	100.0	%	$	123,739,823	$	121,413,026	100.0	%

Current Expected Credit Losses Reserve

As described in Note 2, on January 1, 2023, the Company adopted the provisions of ASU 2016-13, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses. The adoption of ASU 2016-13 resulted in a $0.7 million increase to total reserve, including reserve on future funding commitments, which was recognized as a cumulative-effect adjustment to member’s capital as of January 1, 2023.

Notes to Unaudited Consolidated Financial Statements

The following table presents the activity in allowance for credit losses for funded loans:


	Six Months Ended June 30,
	2023		2022
	Successor Basis		Predecessor Basis
Allowance for credit losses, beginning of period	$	3,937,050	$	—
Cumulative effect of adoption of ASU 2016-13 effective January 1, 2023 (Note 2)	593,040		—
Reversal of provision for credit losses	(26,499)		—
Charge-offs	—		—
Recoveries	—		—
Allowance for credit losses, end of period	$	4,503,591	$	—

Certain of the Company’s loans contain provisions for future fundings, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. These unfunded commitments amounted to approximately $1.8 million and $5.9 million as of June 30, 2023 and December 31, 2022, respectively.

The following table presents the activity in the liability for credit losses on unfunded commitments:


	Six Months Ended June 30, 2023

Liability for credit losses on unfunded commitments, beginning of period	$	—
Cumulative effect of credit loss accounting standard effective January 1, 2023 (Note 2)	68,382
Reversal of provision for credit losses	(41,489)
Liability for credit losses on unfunded commitments, end of period	$	26,893

The allowance for credit losses for unfunded commitments is included in other liabilities on the consolidated balance sheets.

Accrued Interest Receivable

The Company elected not to measure a CECL reserve on accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely matter. If the Company determines it has uncollectible accrued interest receivable, it generally would reverse the accrued and unpaid interest against interest income and no longer accrue interest. For the three and six months ended June 30, 2023 and 2022, the Company did not reverse any interest income accrual because all accrued interest income were deemed collectible. As of both June 30, 2023 and December 31, 2022, the Company had two loans that were in default, and suspended interest income accrual of $1.0 million and $2.0 million for the three and six months ended June 30, 2023, respectively, because recovery of such income was doubtful. As of June 30, 2023 and December 31, 2022, there was no outstanding interest receivable on these loans.

Non-Performing Loans

As discussed in Note 2, for loans that are considered non-performing, the Company removes them from the industry loss rate approach and analyzes them separately. As of both June 30, 2023 and December 31, 2022, the Company had two non-performing loans with total carrying value of $26.4 million and $26.2 million, respectively. The allowance for credit losses for these non-performing loans were $3.9 million as of both June 30, 2023 and December 31, 2022.

Loan Risk Rating

The Company assesses the risk factors of each loan and assigns each loan a risk rating between 1 and 5, which is an average of the numerical ratings in the following categories: (i) sponsor capability and financial condition; (ii) loan and collateral performance relative to underwriting; (iii) quality and stability of collateral cash flows and/or reserve balances; and (iv) loan to value. Based on a 5-point scale, the Company’s loans are rated “1” through “5”, from less risk to greater risk as follows:

Notes to Unaudited Consolidated Financial Statements


Risk Rating						Description
1						Very low risk
2						Low risk
3						Moderate/average risk
4						Higher risk
5						Highest risk

The following table presents the amortized cost of the Company's loan portfolio by year of origination and loan risk rating as of June 30, 2023:


	June 30, 2023
Loan Risk Rating	Number of Loans	Amortized Cost		% of Total		Amortized Cost by Year Originated
						2023		2022		2021		2020		2019		Prior
1	—	$	—	—	%	$	—	$	—	$	—	$	—	$	—	$	—
2	—	—		—	%	—		—		—		—		—		—
3	3	41,067,246		47.5	%	—		—		38,141,409		—		—		2,925,837
4	1	18,861,598		21.9	%	—		18,861,598		—		—		—		—
5	—	—		—	%	—		—		—		—		—		—
Non-performing	2	26,382,955		30.6	%	—		—		—		—		—		26,382,955
	6	86,311,799		100.0	%	$	—	$	18,861,598	$	38,141,409	$	—	$	—	$	29,308,792
Allowance for credit losses		(4,503,591)
Total, net of allowance for credit losses		$	81,808,208

The following table presents the principal balance and the amortized cost of the Company’s loans based on the loan risk rating as of December 31, 2022:


	December 31, 2022
Loan Risk Rating	Number of Loans	Principal Balance		Amortized Cost		% of Total
1	—	$	—	$	—	—	%
2	—	—		—		—	%
3	7	97,584,775		99,195,028		79.1	%
4	—	—		—		—	%
5	—	—		—		—	%
Non-performing (1)	2	26,155,048		26,155,048		20.9	%
	9	$	123,739,823	125,350,076		100.0	%
Allowance for credit losses				(3,937,050)
Total, net of allowance for credit losses				$	121,413,026

(1)Because these loans have an event of default, they were removed from the pool of loans on which a general allowance was calculated and were evaluated for collectability individually. As of December 31, 2022, the specific allowance for credit losses on these loans were $3.9 million, as a result of a decline in the fair value of the respective collateral.

Equity Investment in Unconsolidated Investment

On December 28, 2022, the Company originated a $10.0 million mezzanine loan to a borrower to finance the acquisition of a real estate portfolio. Additionally, the Company entered into a residual profit-sharing agreement with the borrower in which the borrower would pay the Company an additional amount of 35.0% of remaining net cash flow from the sale of the real estate portfolio. The Company accounted for the entire arrangement as equity investment in unconsolidated investment. In May 2023, the Company made a cash payment of $27.4 million and settled the $10.0 million mezzanine loan in exchange for an 80.0% equity interest in a joint venture that owns the real estate portfolio. The Company accounts for its equity interest in the joint venture as an equity method investment because the Company does not have a controlling financial interest in the entity. As of

Notes to Unaudited Consolidated Financial Statements

June 30, 2023 and December 31, 2022, equity investment in unconsolidated investment had a carrying value of $37.0 million and $10.0 million, respectively. For the three and six months ended June 30, 2023, the Company recorded the interest income accrued on the mezzanine loan as income from equity investment in unconsolidated investment of $0.2 million and $0.5 million, respectively, and the payments received on interest income as distributions from equity investment in unconsolidated investment of $0.3 million and $0.5 million, respectively. Additionally, for both the three and six months ended June 30, 2023, the Company recorded equity loss from its investment on the joint venture of $0.3 million.

Held-to-Maturity Debt Securities

In the first quarter of 2023, the Company purchased $10.0 million of corporate bonds with a coupon rate of 6.125% that matured on May 15, 2023. The Company classified these bonds as held-to-maturity debt securities, as it had the intent and ability to hold these securities until maturity. These securities were recorded at amortized cost and were fully redeemed at par on May 15, 2023.

Note 4. Fair Value Measurements

The Company follows 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 is 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 the Company considers factors specific to the investment.

As of June 30, 2023 and December 31, 2022, the Company had not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, term loan payable and unsecured notes payable. Such financial instruments are carried at cost, less impairment or less net deferred costs, where applicable. Held-to-maturity debt securities are financial instruments that are reported at amortized cost.

Financial Instruments Carried at Fair Value on a Recurring Basis

From time to time, the Company may invest in short-term debt and equity securities which are classified as available-for-sale securities, and are presented at fair value on the consolidated balance sheet. Changes in the fair value of equity securities are recognized in earnings. Changes in the fair value of debt securities are reported in other comprehensive income until the securities are realized. Additionally, the Company may invest in short-term money market funds. These funds are included in cash and cash equivalents on the consolidated balance sheet due to their short-term nature and can be easily converted to cash.

Notes to Unaudited Consolidated Financial Statements

As of December 31, 2022, the Company did not own financial instruments that were carried at fair value. The following table presents fair value measurements of financial instruments that were carried at fair value, by major class, as of June 30, 2023, according to the fair value hierarchy:


	June 30, 2023
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Money market fund (1)	$	2,525,843	$	—	$	—	$	2,525,843
Marketable securities - debt securities	531,696		—		—		531,696
Total	$	3,057,539	$	—	$	—	$	3,057,539

_______________

(1) Included in cash and cash equivalents on the consolidated balance sheets.

The following table presents the activities of the marketable securities for the periods presented.


	Six Months Ended June 30,
	2023		2022
Beginning balance	$	—	$	—
Purchases	525,867		—
Unrealized gain on marketable securities	5,829		—
Ending balance	$	531,696	$	—

Financial Instruments Not Carried at Fair Value

The following table presents the carrying value and estimated fair value of the Company’s financial instruments that are not carried at fair value on the consolidated balance sheets as of:


		June 30, 2023						December 31, 2022
		(Successor Basis)
	Level	Principal Balance		Carrying Value		Fair Value		Principal Balance		Carrying Value		Fair Value
Investments:
Loans held for investment	3	$	59,156,562	$	59,928,843	$	59,949,503	$	77,638,191	$	79,082,650	$	78,011,106
Loans held for investment acquired through participation	3	26,382,953		26,382,956		22,437,748		46,101,632		46,267,426		42,269,242
Allowance for credit losses		—		(4,503,591)		—		—		(3,937,050)		—
Total loans		85,539,515		81,808,208		82,387,251		123,739,823		121,413,026		120,280,348
Liabilities:
Unsecured notes payable (1)(2)	1	$	38,375,000	$	34,611,977	$	36,533,000	$	38,375,000	$	34,042,904	$	35,381,748
Term loan payable (3)(4)	3	15,000,000		14,850,000		15,000,000		25,000,000		25,000,000		25,000,000
		$	53,375,000	$	49,461,977	$	51,533,000	$	63,375,000	$	59,042,904	$	60,381,748

_______________

(1)Carrying value is net of unamortized purchase discount of $3.8 million and $4.3 million as of June 30, 2023 and December 31, 2022, respectively.

(2)Valuation falls under Level 1 of the fair value hierarchy, which is based on the trading price of $23.80 and $23.05 as of the close of business day on June 30, 2023 and December 31, 2022, respectively.

(3)Carrying value is net of unamortized discount of $150,000 as of June 30, 2023.

(4)Valuation falls under Level 3 of the fair value hierarchy, which is based on a discounted cash flow model with a discount rate of 12.48% and 5.625%, as of June 30, 2023 and December 31, 2022, respectively

Valuation Methodology

The fair value of the Company’s investment in corporate bonds, preferred stock and common stock within the marketable securities portfolio, if any, is determined based on quoted prices in an active market and is classified as Level 1 of the fair value

Notes to Unaudited Consolidated Financial Statements

hierarchy. Additionally, the fair value of the Company’s unsecured notes payable is determined based on quoted price in an active market and is also classified as Level 1.

Market quotations are not readily available for the Company’s real estate-related loan investments, all of which are included in Level 3 of the fair value hierarchy, as 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, net operating income and debt service coverage ratio; construction progress reports and construction budget analysis; the nature, quality and realizable value of any collateral (and loan-to-value ratio); 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 and replacement costs; and the anticipated duration of each real estate-related loan investment.

These valuation techniques are applied in a consistent and verifiable manner to all investments that are categorized within Level 3 of the fair value hierarchy and Terra REIT Advisors provides the Terra REIT Board, (which is made up exclusively of independent directors) with the investment valuations that are based on this discounted cash flow methodology. Valuations are prepared quarterly, or more frequently as needed, with each asset in the portfolio subject to a valuation prepared by a third-party valuation service at a minimum of once during every 12-month period. Terra REIT Advisors reviews the preliminary valuation with the Terra REIT Board and, together with an independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the Terra REIT Board. Terra REIT Advisors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on various metrics and other factors, including the input and recommendation provided by the Terra REIT Boards and any third-party valuation firm, if applicable.

Significant Unobservable Inputs

The following tables summarize the significant unobservable inputs used by the Company to value the Level 3 investments as of June 30, 2023 and December 31, 2022. The following tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.

June 30, 2023

Primary
Valuation
Technique

Unobservable Input

Range

Weighted

Asset Category

Fair Value

Minimum

Maximum

Average

Assets:

Loans

59,949,503

Discounted cash flow

Discount rate

12.45

16.31

15.23

Loans through participation interest (1)

22,437,748

Discounted cash flow

Discount rate

N/A

Total Level 3 Assets

82,387,251

_______________

(1)Valuation for these loans is based on recovery analysis.


December 31, 2022
			Primary Valuation Technique	Unobservable Input	Range				Weighted
Asset Category	Fair Value				Minimum		Maximum		Average
Assets:
Loans	$	78,011,106	Discounted cash flow	Discount rate	10.51	%	19.36	%	14.49	%
Loans through participation interest	42,269,242		Discounted cash flow	Discount rate	15.25	%	16.61	%	16.38	%
Total Level 3 Assets	$	120,280,348

If the weighted average discount rate used to value the Company’s investments were to increase, the fair value of the Company’s investments would decrease. Conversely, if the weighted average discount rate used to value the Company’s investments were to decrease, the fair value of Company’s investments would increase.

Notes to Unaudited Consolidated Financial Statements

Changes in the Company’s Level 3 investments for the six months ended June 30, 2022 were as follows:


	Six Months Ended June 30, 2022 (Predecessor Basis)
	Loans		Loans Through Participation		Total Loan Investments		Obligations under Participation Agreements
Balance as of January 1, 2022	$	61,281,259	$	48,349,374	$	109,630,633	$	4,883,877
Purchases of investments	27,800,788		17,705,827		45,506,615		—
Repayments of investments	(15,000,000)		(19,844,508)		(34,844,508)		—
Net change in unrealized (depreciation) appreciation on investments	(257,777)		96,626		(161,151)		—
Amortization and accretion of investment-related fees, net	422,449		135505		557,954		31,378
Proceeds from obligations under participation agreements	—		—		—		959,293
Net change in unrealized depreciation on obligations under participation agreements	—		—		—		(26,940)
Balance as of June 30, 2022	$	74,246,719	$	46,442,824	$	120,689,543	$	5,847,608
Net change in unrealized appreciation or depreciation for the period relating to those Level 3 assets that were still held by the Company at the end of the period:
Net change in unrealized depreciation or appreciation on loan investments and obligations under participation agreements	$	(54,826)	$	96,625	$	41,799	$	(26,940)

Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the six months ended June 30, 2022, there were no transfers.

Note 5. Related Party Transactions

Terra BDC entered into various agreements with Terra Income Advisors whereby Terra BDC paid and reimbursed Terra Income Advisors for certain fees and expenses. Additionally, Terra BDC paid Terra Capital Markets certain fees for providing certain administrative support services. In connection with the Merger, the Investment Advisory Agreement was terminated and the Company no longer pays or reimburses the following fees. Such fees are now payable by Terra REIT pursuant to its management agreement with its manager. Terra LLC and Terra REIT have entered into the Cost Sharing Agreement pursuant to which Terra LLC is responsible for its allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to its manager.

The following table presents a summary of such fees and reimbursements in accordance with the terms of the related agreements:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023 (1)		2022		2023 (1)		2022
	(Successor Basis)		(Predecessor Basis)		(Successor Basis)		(Predecessor Basis)
Amounts Included in the Statements of Operations
Base management fees	$	428,883	$	670,327	$	863,433	$	1,292,145
Incentive fees on capital gains (2)	N/A		(158,315)		N/A		(33,674)
Operating expense reimbursement to Adviser (3)	406,480		316,859		712,360		617,049
Origination, extension and disposition fees	126,754		N/A		317,752		N/A

_______________

(1)These fees were incurred pursuant to the Cost Sharing Agreement between Terra LLC and Terra REIT.

(2)For the three and six months ended June 30, 2022, the Company reversed previously accrued incentive fees on capital gains of $158,315 and $33,674, respectively. Incentive fees on capital gains were based on 20.0% of net realized and unrealized capital gains. No incentive fees on capital gains were actually payable by the Company with respect to unrealized gains unless and until those gains were realized.

(3)Amounts were primarily compensation for time spent supporting the Company’s day-to-day operations.

Notes to Unaudited Consolidated Financial Statements

Merger

On October 1, 2022, pursuant to the terms of the Merger Agreement, Terra BDC merged with and into Terra LLC, with Terra LLC continuing as the surviving entity of the Merger. Immediately following the Merger, Terra LLC remained a wholly owned subsidiary of Terra REIT. The Certificate of Merger and Articles of Merger with respect to the Merger were filed with the Secretary of State of the State of Delaware and State Department of Assessments and Taxation of Maryland, respectively, with an effective time and date of 12:02 a.m., Eastern Time, on October 1, 2022 (the “Effective Time”). Effective immediately following the Merger, Terra LLC changed its name to “Terra Income Fund 6, LLC.”

At the Effective Time, except for any shares of common stock, par value $0.001 per share, of Terra BDC (“Terra BDC Common Stock”) held by Terra REIT or any wholly owned subsidiary of Terra REIT or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of the newly designated Class B Common Stock, par value $0.01 per share, of Terra REIT (“Class B Common Stock”) and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38.

Pursuant to the terms of the transactions described in the Merger Agreement, 4,847,910 shares of Class B Common Stock were issued to former Terra BDC stockholders in connection with the Merger. Following the consummation of the Merger, former Terra BDC stockholders own approximately 19.9% of the common equity of Terra REIT as the combined company. In connection with the Merger, the Company incurred transaction costs totaling $1.5 million for the year ended December 31, 2022.

In connection with the Merger, Terra LLC assumed the obligations of Terra BDC under the indenture and supplemental indentures between Terra BDC and the Trustee as well as the Credit Agreement with Eagle Point (Note 6). Additionally, the Investment Advisory Agreement between Terra BDC and the Adviser and the Servicing Plan (as defined below) were terminated and fees pursuant to such agreements are no longer payable. These advisory/management fees are now payable by the Company’s parent, Terra REIT, to its manager pursuant to the management agreement with its manager.

Management and Incentive Fee Compensation to Adviser

Pursuant to the Investment Advisory Agreement, Terra Income Advisors was responsible for Terra BDC’s day-to-day operations. Pursuant to the Investment Advisory Agreement, Terra Income Advisors was paid for its services in two components — a base management fee and an incentive fee. The base management fee was calculated at an annual rate of 2.0% of Terra BDC’s average gross assets. The base management fee was payable quarterly in arrears and calculated based on the average value of Terra BDC’s gross assets at the end of the two most recently completed calendar quarters.

The incentive fee consisted of two parts. The first part, which was referred to as the subordinated incentive fee on income, was calculated and payable quarterly in arrears based upon Terra BDC’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated incentive fee on income was subject to a quarterly hurdle rate, expressed as a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized), subject to a “catch-up” feature. For this purpose, “pre-incentive fee net investment income” meant interest income, dividend income and any other income (including any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees that Terra BDC received from portfolio companies) accrued during the calendar quarter, minus Terra BDC’s operating expenses for the quarter (including the base management fee, expenses reimbursed to Terra Income Advisors under the Investment Advisory Agreement and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero-coupon securities), accrued income that the Company has not yet received in cash. Pre-incentive fee net investment income did not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. The calculation of the subordinated incentive fee on income for each quarter was as follows:

•No incentive fee was payable to Terra Income Advisors in any calendar quarter in which Terra BDC’s pre-incentive fee net investment income does not exceed the hurdle rate of 2.0% (8.0% annualized);

•100% of Terra BDC’s pre-incentive fee net investment income, if any, that exceeded the hurdle rate but was less than or equal to 2.5% in any calendar quarter (10.0% annualized) was payable to Terra Income Advisors, all or any portion of which may be waived or deferred in Terra Income Advisors' discretion. This portion of the pre-incentive fee net investment income (which exceeds the hurdle rate but is less than or equal to 2.5%) was referred to as the “catch-up.”

Notes to Unaudited Consolidated Financial Statements

The catch-up provision was intended to provide Terra Income Advisors with an incentive fee of 20.0% on all of Terra BDC’s pre-incentive fee net investment income when Terra BDC’s pre-incentive fee net investment income reaches 2.5% in any calendar quarter; and

•20.0% of the amount of Terra BDC’s pre-incentive fee net investment income, if any, that exceeded 2.5% in any calendar quarter (10.0% annualized) was payable to Terra Income Advisors once the hurdle rate was reached and the catch-up was achieved.

The second part of the incentive fee, which was referred to as the incentive fee on capital gains, was an incentive fee on capital gains earned on liquidated investments from the portfolio and was determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). This fee equaled 20.0% of Terra BDC’s incentive fee on capital gains, which equaled the realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, Terra BDC accrued (but did not pay) for the unrealized capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

In connection with the Merger, the Investment Advisory Agreement was terminated and the Company no longer pays management and incentive fees to the Adviser. Such fees are now payable by Terra REIT pursuant to its management agreement with the REIT Manager. Terra REIT charges the Company for its allocable share of the management fees through the Cost Sharing Agreement.

Operating Expenses

Terra BDC reimbursed Terra Income Advisors for operating expenses incurred in connection with administrative services provided to Terra BDC, including compensation to administrative personnel. Terra BDC did not reimburse Terra Income Advisors for personnel costs in connection with services for which Terra Income Advisors receives a separate fee. In addition, Terra BDC did not reimburse Terra Income Advisors for (i) rent or depreciation, capital equipment or other costs of Terra Income Advisors' own administrative items, or (ii) salaries, fringe benefits, travel expenses and other administrative items incurred or allocated to any controlling person of Terra Income Advisors. In connection with the Merger, the Company no longer reimburses Terra Income Advisors for operating expenses incurred in connection with administrative services provided to the Company. Such expenses are now reimbursable by Terra REIT to the REIT Manager pursuant to its management agreement with the REIT manager. Terra REIT charges the Company for its allocable share of the operating expense reimbursement through the Cost Sharing Agreement.

Servicing Plan

Terra BDC Board adopted the servicing plan (the “Servicing Plan”) pursuant to which Terra BDC paid selected dealers a servicing fee to up 0.75% of the most recently published NAV per share in exchange for providing certain administrative support services. With respect to each share sold, excluding shares sold through the DRIP, the servicing fee was payable annually on the anniversary of the applicable month of purchase. In connection with the Merger, the Servicing Plan was terminated.

Cost Sharing Agreement

On November 8, 2022, the Company entered into the Cost Sharing Agreement with Terra REIT effective October 1, 2022, pursuant to which the Company reimburses Terra REIT for its allocable portion of management and transaction fees and operating expenses incurred by Terra REIT, including fees paid by Terra REIT to the REIT Manager.

Terra REIT’s Management Agreement with Terra REIT Advisors

Terra REIT is the Company’s parent and sole managing member. The Company has entered into a cost sharing arrangement with Terra REIT pursuant to which the Company is responsible for its allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to its manager, Terra REIT Advisors. Terra REIT currently pays the following fees to Terra REIT Advisors pursuant to the Management Agreement:

Origination and Extension Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund or structure real estate-related investments, including any third-party expenses related to such loan. 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

Notes to Unaudited Consolidated Financial Statements

the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension.

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 REIT.

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 REIT (inclusive of closing costs and expenses).

Disposition Fee. A disposition fee in the amount of 1.0% of the gross sale price received by Terra REIT 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 REIT takes ownership of a property as a result of a workout or foreclosure of a loan, Terra REIT 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 REIT receive 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 REIT reimburses Terra REIT Advisors for operating expenses incurred in connection with services provided to the operations of Terra REIT, including its allocable share of Terra REIT Advisors’ overhead, such as rent, employee costs, utilities, and technology costs.

Participation Agreements

The Company may enter into participation agreements with related and unrelated parties, primarily other affiliated funds of Terra REIT Advisors. The participation agreements provide the Company with the opportunity to invest along the same terms, conditions, price and rights in the specified investment. The purpose of the participation agreements is to allow the Company and an affiliate to originate a specified investment when, individually, the Company does not have the liquidity to do so or to achieve a certain level of portfolio diversification. The Company may transfer portions of its investments to other participants or it may be a participant to an investment held by another entity.

ASC Topic 860, Transfers and Servicing (“ASC 860”), establishes accounting and reporting standards for transfers of financial assets. ASC 860-10 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company has determined that the participation agreements it enters into are accounted for as secured borrowings under ASC Topic 860.

Participation interest purchased by the Company: The below tables list the investment interests purchased by the Company via participation agreements (each, a “PA”) as of June 30, 2023 and December 31, 2022. In accordance with the terms of each PA, each participant’s rights and obligations, including interest income and other income (e.g., exit fee and prepayment income) and related fees/expenses are based upon its respective pro-rata participation interest in such investments, as specified in the respective PA. The Company’s share of the investment is repayable only from the proceeds received from the related borrower/issuer of the investment, and therefore the Company is also subject to the credit risk (i.e., risk of default by the underlying borrower/issuer).

Pursuant to each PA, the affiliated fund receives and allocates the interest income and other related investment incomes in respect of the investment to the Company. The Company paid related expenses (i.e., the base management fee) directly to Terra Income Advisors prior to the Merger and to Terra REIT after the Merger.

Notes to Unaudited Consolidated Financial Statements


	June 30, 2023						December 31, 2022
	(Successor Basis)
	Participating Interests		Principal Balance		Carrying Value		Participating Interests		Principal Balance		Carrying Value
370 Lex Part Deux, LLC (1)	35.0	%	$	23,704,377	$	23,704,380	35.0	%	$	23,655,377	$	23,655,377
RS JZ Driggs, LLC (1)	50.0	%	2,678,576		2,678,576		50.0	%	2,499,671		2,499,671
William A. Shopoff & Cindy I. Shopoff (2)	—	%	—		—		66.7	%	16,664,376		16,797,348
Havemeyer TSM LLC (2)(3)	—	%	—		—		23.0	%	3,282,208		3,315,030
Allowance for credit losses			—		(3,937,050)				—		(3,937,050)
Total			$	26,382,953	$	22,445,906			$	46,101,632	$	42,330,376

_______________

(1)The loan is held in the name of Terra REIT, the Company’s parent entity.

(2)This loan was repaid in the first quarter of 2023.

(3)The loan was held in the name of Mavik Real Estate Special Opportunities Fund REIT, LLC.

Co-investment

As a BDC, Terra BDC was subject to certain regulatory restrictions in making its investments. For example, Terra BDC may have been prohibited under the 1940 Act from knowingly participating in certain transactions with its affiliates without the prior approval of its Board who are not interested persons and, in some cases, prior approval by the SEC. The SEC granted Terra BDC exemptive relief permitting it, subject to satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with certain affiliates of Terra Income Advisors, including Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC, Terra Secured Income Fund 5, LLC, Terra Secured Income Fund 5 International, Terra Income Fund International and Terra Secured Income Fund 7, LLC, Terra REIT and any future BDC or closed-end management investment company that is registered under the 1940 Act and is advised by Terra Income Advisors or its affiliated investment advisers (the “Co-Investment Affiliates”). However, Terra BDC was prohibited from engaging in certain transactions with its affiliates even under the terms of this exemptive order. Terra LLC is not subject to any such regulatory restrictions in making its investments.

Note 6. Debt

Senior Unsecured Notes

On February 10, 2021, Terra BDC issued $34.8 million in aggregate principal amount of 7.00% fixed-rate notes due 2026, pursuant to an indenture between Terra BDC and U.S. Bank National Association, for net proceeds of $33.7 million after deducting underwriting commissions of $1.1 million. On February 26, 2021, the underwriters exercised the option to purchase an additional $3.6 million of the notes for net proceeds of $3.5 million, after deducting underwriting commissions of $0.1 million. Interest on the notes is paid quarterly in arrears every March 30, June 30, September 30 and December 30, at a rate of 7.00% per year, beginning June 30, 2021. The notes mature on March 31, 2026. The notes may be redeemed in whole or in part at any time or from time to time at Terra BDC’s option on or after February 10, 2023. In connection with the issuance of the notes, Terra BDC incurred deferred financing costs totaling $1.0 million, to be amortized to interest expense over the term of the notes.

On October 1, 2022 in connection with the Merger, Terra BDC, Terra LLC and U.S. Bank National Association entered into a second supplemental indenture pursuant to which Terra LLC assumed the payment of the notes and the performance of every covenant of the indenture, to be performed or observed by Terra BDC.

The indenture between Terra LLC (as successor to Terra BDC) and the trustee contains certain debt limitations and asset coverage covenants. As of June 30, 2023 and December 31, 2022, the Company was in compliance with the asset coverage ratio requirements under the indenture.

Notes to Unaudited Consolidated Financial Statements

For the three and six months ended June 30, 2023 and 2022, the components of interest expense were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(Successor Basis)			(Predecessor Basis)			(Successor Basis)			(Predecessor Basis)
Stated interest expense	$	671,563		$	671,562		$	1,343,125		$	1,343,124
Amortization of issue discount	—			51,921			—			102,771
Amortization of financing costs	—			43,016			—			85,143
Amortization of purchase discount (1)	288,486			—			569,073			—
Total interest expense	$	960,049		$	766,499		$	1,912,198		$	1,531,038
Weighted average debt outstanding	$	38,375,000		$	38,375,000		$	38,375,000		$	38,375,000
Cash paid for interest expense	$	671,563		$	671,562		$	1,343,125		$	1,343,124
Stated interest rate	7.00		%	7.00		%	7.00		%	7.00		%
Effective interest rate (2)	7.00		%	7.63		%	7.00		%	7.63		%

_______________

(1)The purchase discount was recorded in connection with the Merger (Note 5)

(2)The effective interest rate of the debt component is equal to the stated interest rate plus the amortization of issue discount, if any.

Term Loan

On April 9, 2021, Terra BDC, as borrower, entered into a credit agreement (the “Credit Agreement”) with Eagle Point Credit Management LLC, as the administrative agent and collateral agent (“Eagle Point”), and certain funds and accounts managed by Eagle Point, as lenders (in such capacity, collectively, the “Lenders”). The Credit Agreement provides for (i) a delayed draw term loan to Terra BDC of $25.0 million (the “Term Loan”) and (ii) additional incremental loans in a minimum amount of $1.0 million and multiples of $0.5 million in excess thereof, which may be approved by a Lender in its sole discretion (“Incremental Loans,” and together with the Term Loan, the “Loans”).

The scheduled maturity date of the Loans was April 9, 2025. The Loans bore interest on the outstanding principal amount thereof at a rate equal to 5.625% per annum; provided that if at any time Terra BDC was rated below investment grade, the interest rate would increase to 6.625% until the rating is no longer below investment grade. In connection with the entry into the Credit Agreement, Terra BDC also agreed to pay Eagle Point an upfront fee in an amount equal to 2.50% of the loan commitment amount on the initial borrowing date as described in the Credit Agreement. Terra BDC also paid, with respect to any unused portion of the Term Loan, a commitment fee of 0.75% per annum.

In connection with entering into the Credit Agreement, Terra BDC incurred deferred financing costs totaling $0.3 million, to be amortized to interest expense over the term of the Term Loan. On August 31, 2021, Terra BDC made an initial draw on the Term Loan of $5.0 million and incurred an upfront fee of $0.6 million, which was deducted from proceeds from borrowings under the Term Loan. The discount is amortized to interest expense over the term of the Term Loan. During 2022, Terra BDC drew down an additional $20.0 million on the Term loan.

Terra BDC could prepay any Loan, in whole or in part, together with all accrued but unpaid interest thereon, upon at least 30 but not more than 60 days’ prior notice to the Agent. If Terra BDC elected to make such prepayments prior to October 9, 2023, Terra BDC would also be required to pay a make whole premium, being the present value at such date of (1) the principal amount being prepaid of such Loan, plus (2) all remaining required interest payments due on the principal amount being prepaid of such Loan through the maturity date (excluding accrued but unpaid interest to the date on which the make whole premium becomes owed), computed using a discount rate equal to the applicable U.S. Treasury rate (as set forth in the Credit Agreement) plus 50 basis points, over (B) the principal amount being prepaid of such Loan; provided that the make whole premium may in no event be less than zero.

In connection with its entry into the Credit Agreement, Terra BDC also entered into a security agreement (the “Security Agreement”), by and among Terra BDC, as grantor, and Eagle Point, as administrative agent, for the benefit of the Lenders, their affiliates and Eagle Point as the secured parties thereunder. Pursuant to the Security Agreement, Terra BDC pledged substantially all of its now owned and hereafter acquired property as security for the obligations of Terra BDC under the Credit Agreement, subject to certain limitations and restrictions set forth in the Security Agreements.

Notes to Unaudited Consolidated Financial Statements

The Credit Agreement contains customary representations, warranties, reporting requirements, borrowing conditions and affirmative, negative and financial covenants, including REIT status requirements and minimum asset coverage ratio requirements. As of June 30, 2023 and December 31, 2022, the Company was in compliance with these covenants. The Credit Agreement also includes usual and customary events of default and remedies for credit agreements of this nature. Events of default under the Credit Agreement include, but are not limited to: (i) the failure by Terra BDC to make any payments when due under the Credit Agreement; (ii) the failure of Terra BDC to perform or observe any term, covenant or agreement under the Credit Agreement or any other loan document, subject to applicable cure periods; (iii) an event of default on other material indebtedness of Terra BDC; (iv) the bankruptcy or insolvency of Terra BDC; and (v) judgments and attachments, with customary limits and grace periods, against Terra BDC or its property. In addition, the Loans are subject to mandatory prepayment, at the option of each Lender, upon a change in control of Terra BDC (as defined by the Credit Agreement).

On September 27, 2022, Terra BDC, Terra LLC and Eagle Point and the Lenders entered into a Consent Letter and Amendment (the “Credit Facility Amendment”) effective October 1, 2022. Pursuant to the Credit Facility Amendment, (i) Eagle Point and the Lenders consented to the consummation of the Merger and the assumption by Terra LLC of all of the obligations of Terra BDC under the Credit Agreement, (ii) and the Credit Agreement was amended to, among other things, change the scheduled maturity date to July 1, 2023, and remove the make whole premium on voluntary prepayments of the loans.

On June 30, 2023, the Company, Eagle Point and the Lenders entered into an amendment to the Credit Agreement, pursuant to which the Credit Agreement was amended to, among other things, (i) extend the scheduled maturity date to March 31, 2024, and (ii) increase the rate on which the Term Loan bears interest from a fixed rate of 5.625% per annum to a floating rate based on SOFR plus 7.375% with a SOFR floor of 5.0%. In connection with the amendment, the Company paid Eagle Point an amendment fee of $150,000, to be amortized to interest expense over the remaining term of the Term Loan. Additionally, the Company made a repayment of $10.0 million on the Term Loan. As of June 30, 2023 and December 31, 2022, the principal amount outstanding under the Term Loan was $15.0 million and $25.0 million, respectively.

For the three and six months ended June 30, 2023 and 2022, the components of interest expense were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(Successor Basis)			(Predecessor Basis)			(Successor Basis)			(Predecessor Basis)
Stated interest expense	$	355,468		$	353,750		$	707,031		$	550,078
Amortization of issue discount	—			38,829			—			75,581
Amortization of financing costs	—			17,969			—			35,695
Unused fee	—			229			—			20,927
Total interest expense	$	355,468		$	410,777		$	707,031		$	682,281
Weighted average debt outstanding	$	24,890,110		$	24,879,121		$	24,944,751		$	19,555,249
Cash paid for interest expense	$	355,468		$	353,979		$	707,031		$	571,005
Stated interest rate	5.625		%	5.625		%	5.625		%	5.625		%
Effective interest rate (1)	5.625		%	6.25		%	5.625		%	6.25		%

_______________

(1)The effective interest rate of the debt component is equal to the stated interest rate plus the amortization of issue discount and fees paid to the lender, if any.

Notes to Unaudited Consolidated Financial Statements

Scheduled Debt Principal Payments

Scheduled debt principal payments for each of the five calendar years following June 30, 2023 are as follows:


Years Ending December 31,	Total
2023 (July 1 through December 31)	$	—
2024	15,000,000
2025	—
2026	38,375,000
2027	—
Thereafter	—
	53,375,000
Unamortized discount, net	(3,913,023)
Total	$	49,461,977

Note 7. Commitments and Contingencies

Funding Commitments

In the ordinary course of business, the Company may enter into future funding commitments, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. As of June 30, 2023 and December 31, 2022, the Company had $1.8 million and $5.9 million of unfunded commitments, respectively. The Company maintained sufficient cash on hand to fund such unfunded commitments, including matching these commitments with principal repayments on outstanding loans.

Other

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. Management of Terra Income Advisors 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.

See Note 5. “Related Party Transactions”, for a discussion of the Company’s commitments to Terra Income Advisors.

Note 8. Income Taxes

Terra BDC elected to be taxed as a REIT under the Code commencing with its short taxable year beginning October 1, 2018 and ending December 31, 2018. In order to qualify as a REIT, Terra BDC was required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders annually and meet certain tests regarding the nature of its income and assets. Because federal income tax regulations differ from U.S. GAAP, distributions in accordance with tax regulations may differ from net investment for financial reporting purposes. Differences may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

Taxable income generally differs from net increase in net assets resulting from operations for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses and generally excludes unrealized appreciation (depreciation) on investments as investment gains and losses are not included in taxable income until they are realized.

Notes to Unaudited Consolidated Financial Statements

The following table reconciles net increase in net assets resulting from operations to taxable income:


	Six Months Ended June 30, 2022
	(Predecessor Basis)
Net increase in net assets resulting from operations	$	1,022,972
Net change in unrealized appreciation on investments	251,088
Net change in unrealized depreciation on obligations under participation agreements	(26,940)
Income tax expense	496,658
Reversal of incentive fees on capital gains	(33,674)
Other temporary differences (1)	(260,361)
Total taxable income (2)	$	1,449,743

_______________

(1)Other temporary differences primarily related to capitalization and amortization of transaction-related fees.

(2)Amount included $1.3 million of taxable income attributable to the TRS described below.

Taxable REIT Subsidiary

Terra BDC held certain portfolio company investments through consolidated taxable REIT subsidiaries, of which it was the parent. Such subsidiaries may be subject to U.S. federal and state corporate-level income taxes. These consolidated subsidiaries recognize deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between the tax basis of certain assets and liabilities and the reported amounts included in the accompanying consolidated statements of assets and liabilities using the applicable statutory tax rates in effect for the year in which any such temporary differences are expected to reverse. Terra BDC had one TRS prior to the Merger. In connection with the Merger on October 1, 2022, the TRS became a qualified REIT subsidiary of Terra LLC.

For the three and six months ended June 30, 2022, pre-tax income attributable to the TRS was $0.2 million and $1.6 million. Based on the effective income tax rate of 29.4% and 30.3%, the provision for income tax for the TRS was $0.1 million and $0.5 million, respectively. Additionally, for the three and six months ended June 30, 2022, the Company had temporary differences between the tax basis and book basis of certain assets and liabilities totaling $0.5 million and $0.1 million, resulting in a deferred tax asset, net of a deferred tax liability, and corresponding deferred income tax benefit of $0.1 million and $0.02 million, respectively. The Company has not provided a valuation allowance for the deferred tax asset because the Company expects the deferred tax asset to be realized in future periods.

Source of Distribution

The following table reflects, for tax purposes, the estimated sources of the cash distributions that Terra BDC has paid on its common stock:


	Six Months Ended June 30, 2022
	(Predecessor Basis)
Source of Distribution	Distribution Amount (1)		%
Return of capital	$	1,696,398	92.8	%
Net investment income (2)	130,807		7.2	%
Distributions on a tax basis:	$	1,827,205	100.0	%

_______________

(1)The Distribution Amount and Percentage reflected are estimated figures. The actual source of distributions was calculated in connection with the filing of Terra BDC’s tax return.

(2)The TRS’s taxable income was not available for distribution to Terra BDC’s stockholders until the income was distributed to the parent company. For the six months ended June 30, 2022, the TRS made a distribution of $0.4 million to the parent company.

As of June 30, 2022, Terra BDC did not have differences between amortized cost basis and tax basis cost of investments.

Notes to Unaudited Consolidated Financial Statements

Note 9. Directors’ Fees

Terra BDC’s directors who did not serve in an executive officer capacity for Terra BDC or Terra Income Advisors were entitled to receive annual cash retainer fees, fees for attending board and committee meetings and annual fees for serving as a committee chairperson. These directors received an annual fee of $20,000, plus $2,500 for each board meeting attended in person, $1,000 for each board meeting attended via teleconference and $1,000 for each committee meeting attended. In addition, the chairman of the audit committee received an annual fee of $7,500 and the chairman of each of the nominating and corporate governance and the valuation committees, and any other committee, received an annual fee of $2,500 for their additional services. In connection with the Merger on October 1, 2022, Terra BDC’s directors were elected to the Terra REIT Board to fill the vacancies created by the Merger and Terra REIT will pay the fees to directors directly. For the three and six months ended June 30, 2022, Terra BDC recorded $27,126 and $57,252 of directors’ fees expense.

Terra BDC also reimbursed each of the above directors for all reasonable and authorized business expenses in accordance with Terra BDC policies as in effect from time to time, including reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and each committee meeting not held concurrently with a board meeting.

Terra BDC did not pay compensation to the directors who also served in an executive officer capacity for Terra BDC or Terra Income Advisors.

Note 10. Capital

As of June 30, 2023 and December 31, 2022, all of the limited liability company interest in Terra LLC was held by Terra REIT.

Share Repurchase Program

Terra BDC implemented a share repurchase program whereby every quarter Terra BDC offered to repurchase up to 2.5% of the weighed-average number of shares outstanding in the prior calendar year at a price per share equal to the most recently disclosed NAV per share of its common stock immediately prior to the date of repurchase. The purpose of the share repurchase program was to provide stockholders with liquidity, because there was otherwise no public market for Terra BDC’s common stock. The Terra BDC Board was permitted to amend, suspend or terminate the share repurchase program upon 30 days’ notice. On March 30, 2022, the Terra BDC Board unanimously approved the suspension of the operation of the share repurchase program, effective as of April 30, 2022.

There were no shares repurchased for the six months ended June 30, 2022.

Note 11. Net Increase in Net Assets

Income per share is computed by dividing income available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

The following information sets forth the computation of the weighted average net increase in net assets per share from operations:


	Three Months Ended June 30, 2022		Six Months Ended June 30, 2022
Basic	(Predecessor Basis)
Net (decrease) increase in net assets resulting from operations	$	(512,270)	$	1,022,972
Weighted average common shares outstanding	8,110,168		8,098,531
Net (decrease) increase in net assets per share resulting from operations	$	(0.06)	$	0.13

Note 12. Distributions

Distributions from net investment income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which differ from U.S. GAAP.

Notes to Unaudited Consolidated Financial Statements

Subsequent to the Merger on October 1, 2022, Terra LLC has not made a distribution to Terra REIT. The following table reflects Terra BDC’s distributions for the six months ended June 30, 2022:


Record Date	Payment Date	Per Share Per Day		Distributions Paid in Cash		Distributions Paid through the DRIP		Total Distributions Paid/Accrued
January 26, 2022	January 31, 2022	$	0.001247	$	238,677	$	73,512	$	312,189
February 23, 2022	February 28, 2022	0.001247		216,361		65,899		282,260
March 28, 2022	March 31, 2022	0.001247		240,331		72,452		312,783
April 27, 2022	April 30, 2022	0.001247		233,306		69,693		302,999
May 26, 2022	May 29, 2022	0.001247		240,446		72,948		313,394
June 25, 2022	June 30, 2022	0.001247		232,797		70,783		303,580



				$	1,401,918	$	425,287	$	1,827,205

Note 13. Financial Highlights

The following is a schedule of financial highlights for Terra BDC:


		Six Months Ended June 30, 2022
	(Predecessor Basis)
Per share data:
Net asset value at beginning of period		$	9.11
Results of operations (1):
Net investment income		0.15
Net change in unrealized depreciation on investments		(0.03)
Net change in unrealized depreciation on obligations under participation agreements (2)		—
Net realized gain on investments		0.01
Net increase in net assets resulting from operations		0.13
Stockholder distributions (3):
Distributions from return of capital		(0.21)
Distributions from net investment income		(0.02)
Net decrease in net assets resulting from stockholder distributions		(0.23)
Net asset value, end of period		$	9.01
Shares outstanding at end of period		8,125,458
Total return (4)		1.38		%


Ratio/Supplemental data:
Net assets, end of period	$	73,207,698
Ratio of net investment income to average net assets (5)	4.79		%
Ratio of operating expenses to average net assets (5) (6) (7)	17.70		%
Portfolio turnover	29.08		%

_______________

(1)The per share data was derived by using the weighted average shares outstanding during the applicable period.

(2)The impact on net asset value was approximately $0.003.

(3)The per share data for distributions reflects the actual amount of distributions declared per share during the applicable period.

(4)Total return is calculated assuming a purchase of shares of common stock at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the DRIP. The total return does not consider the effect of any selling commissions or charges that may have been incurred in connection with the sale of shares of our common stock.

(5)These ratios are calculated using annualized net investment income and operating expenses.

Notes to Consolidated Financial Statements

(6)Excluding accrued incentive fees on capital gains, the ratio of operating expenses to average net assets was 16.19%,

(7)Excluding accrued incentive fees on capital gains, transaction costs and interest expense on debt, the ratio of operating expenses to average net assets was 9.42%.

Note 13. Subsequent Events

The management of the Company has evaluated events and transactions through the date the consolidated financial statements were issued and has determined that there are no material events that would require adjustment to or disclosure in the Company’s consolidated financial statements.

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 Income Fund 6, Inc. prior to the Merger (as defined below) and its successor, Terra Income Fund 6, LLC, after the Merger.

FORWARD-LOOKING STATEMENTS

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. 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 and operating results;

•our ability to achieve the expected synergies, cost savings and other benefits from the Merger;

•risks associated with achieving expected synergies, cost savings and other benefits from the Merger;

•the availability of attractive risk-adjusted investment opportunities in our target asset class and other real estate-related investments that satisfy our objectives and strategies;

•the origination or acquisition of our targeted assets, including the timing of originations or 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 loans;

•our use of financial leverage;

•actual and potential conflicts of interest with any of the following affiliated entities: Terra Income Fund 6, Inc. (“Terra BDC”); Terra Income Fund 6 LLC (“Terra LLC”), a wholly owned subsidiary of Terra Property Trust, Inc. (“Terra REIT”) and the successor of Terra BDC; Terra Income Advisors, LLC (“Terra Income Advisors”), the investment adviser to Terra BDC prior to the Merger; Terra Capital Partners, LLC (“Terra Capital Partners”), our sponsor; Terra REIT Advisors, LLC, a subsidiary of Terra Capital Partners, and the external manager to our sole member Terra REIT (“Terra REIT Advisors”); Terra Fund Advisors, LLC, an affiliate of Terra Capital Partners; Terra JV, LLC, Terra Secured Income Fund 5, LLC, Terra Secured Income Fund 5 International, Terra Income Fund International and Terra Secured Income Fund 7, LLC, (collectively, the “Terra Income Funds”); Terra Offshore Funds REIT, LLC; Mavik Real Estate Special Opportunities Fund, LP; or any of their affiliates;

•our dependence on Terra REIT Advisors or its affiliates and the availability of its senior management team and other personnel;

•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;

•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 as “Risk Factors” in our Annual Report on Form 10-K. 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. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders 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. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by 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”).

Overview

Terra LLC was formed as a Delaware limited liability company on April 29, 2022 as a wholly owned subsidiary of Terra REIT. On October 1, 2022, pursuant to an Agreement and Plan of Merger, dated as of May 2, 2022 (as amended, the “Merger Agreement”), Terra BDC merged with and into Terra LLC, with Terra LLC continuing as the surviving entity of the merger (the “Merger”). Subsequent to the Merger, Terra LLC became the successor of Terra BDC and assumed all of Terra BDC’s rights and obligations. The former members of the Terra BDC’s board of directors (the “Terra BDC Board”) joined the board of directors of Terra REIT. Terra LLC does not have a board of directors and Terra REIT is the sole and managing member of Terra LLC.

Prior to the Merger, Terra BDC was an investment company, as defined under United States generally accepted accounting principles (“U.S. GAAP”), and applied accounting and reporting guidance in accordance with the Financial Accounting Standards Board Accounting Standard Codification (“ASC”) Topic 946, Financial Services — Investment Companies (the “Predecessor Basis”). Terra LLC does not meet the requirements to be classified as an investment company, and as such, it is an operating company and reports its investments at historical cost (the “Successor Basis”).

Terra BDC was incorporated under the general corporation laws of the State of Maryland on May 15, 2013 and commenced operations on June 24, 2015. Terra BDC was an externally managed, non-diversified, closed-end management investment company that elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). Terra BDC elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”) during the period beginning October 1, 2018 through its short taxable year ended October 1, 2022 (the “REIT Period”) and believed it operated so as to qualify to be taxed as a REIT under Subchapter M of the Code during the REIT Period.

Our investment activities were externally managed by Terra Income Advisors and supervised by the Terra BDC Board, a majority of whom were independent. Under an investment advisory and administrative services agreement between Terra BDC and Terra Income Advisors (the “Investment Advisory Agreement”), we paid Terra Income Advisors an annual base management fee based on our average quarterly gross assets, as well as incentive fees based on our performance. In connection with the Merger, the Investment Advisory Agreement was terminated and we no longer pay any fees to Terra Income Advisors. We were also responsible for future payments of the servicing fee to selected dealers (the “Servicing Plan”). In connection with the Merger, the Servicing Plan was terminated.

Pursuant to the terms of the Merger Agreement, on October 1, 2022, except for any shares of common stock, par value $0.001 per share, of Terra BDC (“Terra BDC Common Stock”) held by Terra REIT or any wholly owned subsidiary of Terra REIT or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of the newly designated Class B Common Stock, par value $0.01 per share, of Terra REIT (“Class B Common Stock”) and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38.

In connection with the Merger, Terra LLC assumed the obligations of Terra BDC under the indenture of the unsecured notes payable as well as the credit agreement to provide for a delayed draw term loan of up to $25.0 million. Additionally, the Investment Advisory Agreement between Terra BDC and Terra Income Advisors and the Servicing Plan were terminated on October 1, 2022 and fees pursuant to such agreements are no longer payable. These advisory fees are now payable by our parent and sole managing member, Terra REIT, to its external manager, Terra REIT Advisors, pursuant to a management agreement, dated as of February 8, 2018, by and between Terra REIT and Terra REIT Advisors. We have entered into a cost sharing agreement with Terra REIT (the “Cost Sharing Agreement”) pursuant to which we are responsible for our allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to its manager. Terra REIT’s investment objective is to provide attractive risk-adjusted returns to its stockholders, primarily through regular distributions. There can be no assurances that Terra REIT will be successful in meeting its investment objective.

Portfolio Summary

The following table provides a summary of our net loan portfolio as of:


	June 30, 2023						December 31, 2022
	Fixed Rate		Floating Rate (1)(2)		Total		Fixed Rate		Floating Rate (1)(2)		Total
Number of loans	4		2		6		6		3		9
Principal balance	$	43,267,842	$	42,271,673	$	85,539,515	$	61,913,795	$	61,826,028	$	123,739,823
Carrying value	$	43,487,381	$	38,320,827	$	81,808,208	$	62,781,893	$	58,631,133	$	121,413,026
Fair value	$	43,273,776	$	39,113,475	$	82,387,251	$	62,035,611	$	58,244,737	$	120,280,348
Weighted-average coupon rate	13.7%		16.4%		15.0%		14.1%		14.4%		14.2%
Weighted-average remaining term (years)	0.70		0.78		0.71		0.86		0.77		0.80

_______________

(1)These loans pay a coupon rate of London Interbank Offered Rate (“LIBOR”), Secured Overnight Financing Rate (“SOFR”), or forward-looking term rate based on SOFR (“Term SOFR”), as applicable, plus a fixed spread. Coupon rates shown were determined using LIBOR of 5.2% and average SOFR and Term SOFR of 5.1% as of June 30, 2023, and LIBOR of 4.4% and average SOFR of 4.1% as of December 31, 2022.

(2)As of both June 30, 2023 and December 31, 2022, two and three loans, respectively, were subject to a LIBOR, SOFR or Term SOFR floor, as applicable.

In addition to our loan portfolio, we owned a $10.0 million mezzanine loan and also participated in residual profit from the sale of the underlying real estate portfolio with the borrower. We accounted for the entire arrangement as equity investment in unconsolidated investment. In May 2023, we made a cash payment of $27.4 million and settled the $10.0 million mezzanine loan in exchange for an 80.0% equity interest in a joint venture that owns the real estate portfolio. We account for our equity interest in the joint venture as an equity method investment because we do not have a controlling financial interest in the entity. As of June 30, 2023 and December 31, 2022, equity investment in unconsolidated investment had a carrying value of $37.0 million and $10.0 million, respectively.

In the first quarter of 2023, we purchased $10.0 million of corporate bonds with a coupon rate of 6.125% that matured on May 15, 2023. We classified these bonds as held-to-maturity debt securities, as we had the intent and ability to hold these securities until maturity. These securities were fully redeemed at par on May 15, 2023.

Our portfolio is concentrated in a limited number of industries and borrowers, and, as a result, a downturn in any particular industry or borrower in which we are heavily invested may significantly impact the aggregate returns we realize. If an industry in which we are heavily invested suffers from adverse business or economic conditions, a material portion of our investment could be affected adversely, which, in turn, could adversely affect our financial position and results of operations. For example, as of June 30, 2023, our investments secured by office and infrastructure properties represented approximately 29.0% and 26.3%, respectively, of the carrying value of our total loan investments. In addition, as of June 30, 2023, we held only six loan investments and our largest loan investment represented approximately 29.0% of the carrying value of our total loan investments and our largest three loan investments represented approximately 78.4% of the carrying value of our total loan investments.

Net Loan Portfolio

In assessing the performance of our loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements. The following table presents a reconciliation of our loan portfolio on a weighted average basis from gross to net:


	Three Months Ended June 30,
	2023			2022
	Successor Basis			Predecessor Basis
	Weighted Average Principal Amount		Weighted Average Coupon Rate	Weighted Average Principal Amount		Weighted Average Coupon Rate
Gross loan investments	$	98,043,104	14.7%	$	126,930,780	12.7%
Obligations under participation agreements	—		—%	(5,598,217)		8.3%
Net loan investments	$	98,043,104	14.7%	$	121,332,563	12.9%


	Six Months Ended June 30,
	2023			2022
	Successor Basis			Predecessor Basis
	Weighted Average Principal Amount		Weighted Average Coupon Rate	Weighted Average Principal Amount		Weighted Average Coupon Rate
Gross loan investments	$	104,956,278	14.7%	$	80,550,941	12.8%
Obligations under participation agreements	—		—%	(5,377,179)		8.3%
Net loan investments	$	104,956,278	14.7%	$	75,173,762	13.1%

Portfolio Investment Activity

For the three months ended June 30, 2023 and 2022, we invested $29.0 million and $4.5 million in new and add-on investments, and had $31.6 million and $20.3 million of repayments, resulting in net repayments of $2.6 million and $15.8 million, respectively.

For the six months ended June 30, 2023 and 2022, we invested $41.1 million and $45.5 million in new and add-on investments, and had $51.8 million and $35.7 million of repayments, resulting in net repayments of $10.7 million and net investments of $9.8 million, respectively.

Senior Unsecured Notes

In February 2021, Terra BDC issued $38.4 million in aggregate principal amount of 7.00% fixed-rate notes due 2026, for net proceeds of $37.2 million after deducting underwriting commissions of $1.2 million. Interest on the notes is paid quarterly in arrears every March 30, June 30, September 30 and December 30, at a rate of 7.00% per year, beginning June 30, 2021. The notes mature on March 31, 2026. The notes may be redeemed in whole or in part at any time or from time to time at our option on or after February 10, 2023. On October 1, 2022 in connection with the Merger, Terra BDC, Terra LLC and U.S. Bank National Association entered into a second supplemental indenture pursuant to which Terra LLC assumed the payment of the notes and the performance of every covenant of the indenture, to be previously performed or observed by Terra BDC.

Term Loan

In April 2021, we entered into a credit agreement (the “Credit Agreement”) with a lender to provide for a delayed draw term loan of $25.0 million (the “Term Loan”). The Term Loan bore interest at a rate equal to 5.625% and was scheduled to mature on April 9, 2025. On September 27, 2022, the Credit Agreement was amended to change the scheduled maturity date to July 1, 2023 and remove the make whole premium on voluntary prepayment of the loans as well as to provide consent to the consummation of the Merger and the assumption by Terra LLC of all of the obligations of Terra BDC under the Credit Agreement. On June 30, 2023, we amended the Credit Agreement to extend the scheduled maturity date to March 31, 2024 and increase the rate on which the Term Loan bears interest from a fixed rate of 5.625% per annum to a floating rate based on

SOFR plus 7.375% with a SOFR floor of 5.0%. In connection with the amendment, we made a $10.0 million repayment on the Term Loan. As of June 30, 2023, the Term Loan had an outstanding balance of $15.0 million.

Results of Operations

Operating results for the three and six months ended June 30, 2023 (Successor Basis) and three and six months ended June 30, 2022 (Predecessor Basis) were as follows:


	Three Months Ended June 30, 2023		Six Months Ended June 30, 2023

Revenues
Interest income	$	2,595,328	$	5,527,232
Dividend and other income	31,900		37,475
	2,627,228		5,564,707
Operating expenses
Asset management and asset servicing fees paid to Terra REIT (1)	428,883		863,433
Operating expense reimbursement to Terra REIT (1)	406,480		712,360
Provision (reversal of provision) for credit losses	47,349		(67,988)
Professional fees	183,532		466,042
Insurance expense	21,072		83,191
General and administrative expenses	14,727		27,387
	1,102,043		2,084,425
Operating income	1,525,185		3,480,282
Other income and expenses
Unrealized gain on investments, net	5,829		5,829
Realized loss on investments, net	(12,512)		(12,512)
(Loss) income from equity investment in unconsolidated investment	(124,106)		190,907
Interest expense on unsecured notes payable	(960,049)		(1,912,198)
Interest expense on term loan	(355,468)		(707,031)
	(1,446,306)		(2,435,005)
Net income	$	78,879	$	1,045,277

_____________

(1)The fees were paid and expenses were reimbursed to Terra REIT pursuant to the Cost Sharing Agreement with Terra REIT.


	Three Months Ended June 30, 2022		Six Months Ended June 30, 2022

Investment income
Interest income	$	4,078,288	$	8,165,702
Dividend and other income	8,596		56,957
Total investment income	4,086,884		8,222,659
Operating expenses
Base management fees	670,327		1,292,145
Reversal of incentive fees on capital gains	(158,315)		(33,674)
Operating expense reimbursement to Adviser	316,859		617,049
Servicing fees	121,133		240,107
Interest expense on unsecured notes payable	766,499		1,531,038
Professional fees	234,104		589,408
Interest expense from obligations under participation agreements	140,315		261,882
Interest expense on term loan	410,777		682,281
Directors’ fees	27,126		57,252
Insurance expense	61,570		128,722
Transaction costs	1,145,880		1,145,880
General and administrative expenses	14,301		22,574
Total operating expenses	3,750,576		6,534,664
Net investment income before income taxes	336,308		1,687,995
Income tax expense	57,005		496,658
Net investment income	279,303		1,191,337
Net change in unrealized depreciation on investments	(828,675)		(251,088)
Net change in unrealized depreciation obligations under participation agreements	14,579		26,940
Net realized gain on investments	22,523		55,783
Net (decrease) increase in net assets resulting from operations	$	(512,270)	$	1,022,972

Interest Income

For the three and six months ended June 30, 2023, interest income was $2.6 million and $5.5 million, respectively, primarily consisting of contractual interest income of $2.8 million and $5.9 million and interest income on cash and held-to-maturity securities of $0.2 million and $0.4 million, respectively, partially offset by amortization of net purchase discount recognized in connection of the Merger of $0.4 million and $0.7 million, respectively. For the three and six months ended June 30, 2022, interest income was $4.1 million and $8.2 million, respectively, primarily consisting of contractual interest income of $3.8 million and $7.6 million and amortization of transaction fee income of $0.2 million and $0.6 million, respectively.

Dividend and Other Income

For the three and six months ended June 30, 2023, dividend and other income was $0.03 million and $0.04 million, respectively, primarily related to dividend income earned on our marketable securities. For the three and six months ended June 30, 2022, dividend and other income was $0.01 million and $0.06 million, respectively, primarily related administrative fees earned in connection with servicing our loans.

Base Management Fees

Under the Investment Advisory Agreement, Terra BDC paid Terra Income Advisors a base management fee, which was calculated at an annual rate of 2.0% of our average gross assets. In connection with the Merger, the Investment Advisory Agreement was terminated and we entered into the Cost Sharing Agreement with Terra REIT.

For the three and six months ended June 30, 2023, we paid asset management and asset servicing fees of $0.4 million and $0.9 million, respectively, to Terra REIT pursuant to the Cost Sharing Agreement. For the three and six months ended June 30, 2022, we paid base management fees of $0.7 million and$1.3 million, respectively, to Terra Income Advisors pursuant to the Investment Advisory Agreement.

Reversal of Incentive Fees on Capital Gains

Under the Investment Advisory Agreement, Terra BDC paid Terra Income Advisors an incentive fee on capital gains equaled to 20.0% of our net realized and unrealized capital gains. No incentive fees on capital gains were actually payable by Terra BDC with respect to unrealized gains` until those gains were realized. The Investment Advisory Agreement was terminated in connection with the Merger.

For the three and six months ended June 30, 2023, there were no incentive fees on capital gains because the Investment Advisory Agreement was terminated on October 1, 2022. For the three and six months ended June 30, 2022, we reversed previously recorded incentive fees on capital gains of $0.2 million and $0.03 million, respectively, as a result of a decline in the value of our investments.

Operating Expense Reimbursement

Under the Investment Advisory Agreement, Terra BDC reimbursed Terra Income Advisors for operating expenses incurred in connection with administrative services provided to us, including compensation to administrative personnel. In connection with the Merger, the Investment Advisory Agreement was terminated and we entered into the Cost Sharing Agreement with Terra REIT.

For the three and six months ended June 30, 2023, we reimbursed Terra REIT $0.4 million and $0.7 million, respectively, for operating expense incurred on our behalf pursuant to the Cost Sharing Agreement. For the three and six months ended June 30, 2022, we reimbursed Terra Income Advisors $0.3 million and $0.6 million, respectively, for operating expenses incurred on our behalf, pursuant to the Investment Advisory Agreement.

Servicing Fees

Terra BDC maintained a servicing plan whereby it paid selected dealers a servicing fee at an annual rate of 0.75% of the most recently published NAV per share of its common stock, in exchange for providing stockholder-related administrative support services. With respect to each share sold, excluding shares sold through the distribution reinvestment plan, the servicing fee was payable annually on the anniversary of the applicable month of purchase. In connection with the Merger, the servicing plan was terminated.

For the three and six months ended June 30, 2023, there were no servicing fees. For the three and six months ended June 30, 2022, serving fees were $0.1 million and $0.2 million, respectively.

Reversal of Provision for Credit Losses

On January 1, 2023, we adopted the provisions of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments— Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses. Prior to the adoption of ASU 2016-13 and the Merger on October 2022, we followed investment company accounting and did not provide for allowance for credit losses.

For the three months ended June 30, 2023, we recorded a provision for credit losses of $0.05 million, primarily due to the maturity of a loan being extended, and an overall weakening in macroeconomic forecasts during the period. For the six months ended June 30, 2023, we reversed previously accrued provision for credit losses of $0.1 million due to an improvement in macroeconomic forecasts during the period. For the three and six months ended June 30, 2022, there was no provision for credit losses as we followed investment company accounting during that period.

Interest Expense on Unsecured Notes Payable

In February 2021, Terra BDC issued $38.4 million in aggregate principal amount of 7.00% fixed-rate notes due 2026. On October 1, 2022 in connection with the Merger, Terra BDC, Terra LLC and U.S. Bank National Association entered into a

second supplemental indenture pursuant to which Terra LLC assumed the payment of the notes and the performance of every covenant of the indenture, to be performed or observed by Terra BDC.

For the three months ended June 30, 2023 and 2022, interest expense on unsecured notes payable was $1.0 million and $0.8 million, respectively. For the six months ended June 30, 2023 and 2022, interest expense on unsecured notes payable was $1.9 million and $1.5 million, respectively. The increase in interest expense on unsecured notes payable for the three and six months ended June 30, 2023 as compared to the same periods in 2022 was due to amortization of purchase discount recognized in connection with the Merger.

Professional Fees

For the three and six months ended June 30, 2023, professional fees were $0.2 million and $0.5 million, respectively, and for the three and six months ended June 30, 2022, professional fees were $0.2 million and $0.6 million, respectively, all of which were related to accounting and legal fees incurred in the normal course of business.

Interest Expense on Term Loan

In April 2021, Terra BDC entered into the Credit Agreement with a lender to provide for a delayed draw term loan of $25.0 million. The Term Loan carried interest at a rate equal to 5.625% and was scheduled to mature on April 9, 2025. We also pay, with respect to any unused portion of the Term Loan, a commitment fee of 0.75% per annum. On September 27, 2022, the Credit Agreement was amended to change the scheduled maturity date to July 1, 2023 and remove the make whole premium on voluntary prepayment of the loans as well as to provide consent to the consummation of the Merger and the assumption by Terra LLC of all of the obligations of Terra BDC under the Credit Agreement effective October 1, 2022. On June 30, 2023, we amended the Credit Agreement to extend the scheduled maturity date to March 31, 2024 and increase the rate on which the Term Loan bears interest from a fixed rate of 5.625% per annum to a floating rate based on SOFR plus 7.375% with a SOFR floor of 5.0%. In connection with the amendment, we made a $10.0 million repayment on the Term Loan. As of June 30, 2023, the amount outstanding under the Term Loan was $15.0 million.

For the three and six months ended June 30, 2023, interest expense on the Term Loan was $0.4 million and $0.7 million, respectively, and for the three and six months ended June 30, 2022, interest expense on the Term Loan was $0.4 million and $0.7 million, respectively, and remained substantially the same for each comparable period.

Interest Expense From Obligations Under Participation Agreements

For the three and six months ended June 30, 2023, there was no interest expense from obligations under participation agreements as the related obligation under participation agreements was extinguished in connection with the Merger. For the three and six months ended June 30, 2022, interest expense from obligations under participation agreements was $0.1 million and $0.3 million, respectively.

Directors’ Fees

For the three and six months ended June 30, 2023, there were no directors' fees as we do not have a board of directors. Our sole and managing member, Terra REIT, has been responsible for paying directors' fees to its directors. Prior to the Merger and for the three and six months ended June 30, 2022, directors' fees were $0.03 million and $0.06 million, respectively.

Transaction Costs

For the three and six months ended June 30, 2023, there were no transaction costs incurred. For both the three and six months ended June 30, 2022, transaction costs were $1.1 million, related to transaction costs incurred in connection with the Merger.

Income Tax Expense

During the third quarter of 2021, Terra BDC formed a taxable REIT subsidiary (“TRS”) to hold two credit facilities. Subsequent to the Merger on October 1, 2022, the TRS became a qualified REIT subsidiary of Terra LLC.

For the three and six months ended June 30, 2023, there was no provision for income tax as a TRS is not utilized subsequent to the Merger. For the three and six months ended June 30, 2022, pre-tax income attributable to the TRS was $0.2 million and $1.6 million, respectively. Based on the effective income tax rate of 29.4% and 30.3%, the provision for income tax for the TRS was $0.1 million and $0.5 million, respectively.

Net Change in Unrealized Appreciation or Depreciation on Investments and Obligations under Participation Agreements

Net change in unrealized appreciation or depreciation on investments and obligations under participation agreements reflects the change in our portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses, when gains or losses are realized. Valuation of our portfolio investments and obligations under participation agreements fluctuates over time, reflecting changes in the market yields for loans and debt investments, and any associated premium or discount and origination or exit fee are amortized down or accreted up to par value as each investment approaches maturity.

For the three and six months ended June 30, 2023, we did not record any unrealized appreciation or depreciation on investments because investments were reported at carrying value subsequent to the Merger (Successor Basis).

For the three and six months ended June 30, 2022, we recorded depreciation on investments of $0.8 million and $0.3 million, respectively, in connection with the early repayment of two loans, at which time we reversed the previously recorded unrealized gain on investments.

Realized Gain (Loss) on Investments

For both the three and six months ended June 30, 2023, we recognized realized loss on investments of $0.01 million, related to the redemption of the held-to-maturity debt securities.

For the three and six months ended June 30, 2022, we sold marketable securities and recognized a net gain on investments of $0.02 million and $0.06 million, respectively.

Net Income

For the three and six months ended June 30, 2023, the resulting net income was $0.1 million and $1.0 million, respectively.

Net (Decrease) Increase in Net Assets Resulting from Operations

For the three and six months ended June 30, 2022, we recorded a net (decrease) increase in net assets resulting from operations of $(0.5) million and $1.0 million, respectively. Based on the weighted average shares of common stock outstanding, our per share net (decrease) increase in net assets resulting from operations was $(0.06) and $0.13, respectively.

Financial Condition, Liquidity and Capital Resources

We currently generate cash primarily from cash flows from interest, dividends and fees earned from our investments and principal repayments and proceeds from sales of our investments. Our primary use of cash is for our targeted investments and payments of our expenses.

We may borrow funds to make investments to the extent we determine that leveraging our portfolio would be appropriate. In February 2021, Terra BDC issued $38.4 million in aggregate principal amount of 7.00% fixed-rate notes due 2026, for net proceeds of $37.2 million after deducting underwriting commissions of $1.2 million. On October 1, 2022 in connection with the Merger, Terra BDC, Terra LLC and U.S. Bank National Association entered into a second supplemental indenture pursuant to which Terra LLC assumed the payment of the notes and the performance of every covenant of the indenture, to be performed or observed by Terra BDC. In April 2021, Terra BDC entered into a Credit Agreement with a lender to provide for a delayed draw term loan of $25.0 million. The Term Loan bore interest at a rate equal to 5.625% and was scheduled to mature on April 9, 2025. On September 27, 2022, the Credit Agreement was amended to change the scheduled maturity date to July 1, 2023 and remove the make whole premium on voluntary prepayment of the loans as well as to provide consent to the consummation of the Merger and the assumption by Terra LLC of all of the obligations of Terra BDC under the Credit Agreement. On June 30, 2023, we amended the Credit Agreement to extend the scheduled maturity date to March 31, 2024 and increase the rate on which the Term Loan bears interest from a fixed rate of 5.625% per annum to a floating rate based on SOFR plus 7.375% with a SOFR floor of 5.0%. In connection with the amendment, we made a $10.0 million repayment on the Term Loan. As of June 30, 2023, the amount outstanding under the Term Loan was $15.0 million.

Certain of our loans provide for commitments to fund the borrower at a future date. As of June 30, 2023, we had two loans with total funding commitments of $36.8 million, of which we funded $34.9 million. We expect to fund $1.8 million of the unfunded commitments to borrowers during the next twelve months.

Cash Flows for the Six Months Ended June 30, 2023 (Successor Basis)

Operating Activities — For the six months ended June 30, 2023, cash provided by operating activities was $1.5 million.

Investing Activities — For the six months ended June 30, 2023, cash provided by investing activities was $10.6 million, primarily related to proceeds from repayment of loans of $41.8 million and proceeds from sale of held-to-maturity debt securities of $10.0 million, partially offset by purchase of equity interest in unconsolidated investment of $27.4 million, purchase of held-to-maturity debt securities of $10.0 million and payments for origination and purchase of loans of $3.3 million.

Financing Activities — For the six months ended June 30, 2023, cash used in financing activities was $10.2 million, primarily due to the repayments of borrowings under term loan payable of $10.0 million and payment for financing cost of $0.2 million.

Cash Flows for the Six Months Ended June 30, 2022 (Predecessor Basis)

Operating Activities — For the six months ended June 30, 2022, net cash used in operating activities was $12.1 million. The level of cash flows used in or provided by operating activities is affected by the timing of purchases, repayments and sales of portfolio investments, among other factors. Cash flows used in operating activities for the six months ended June 30, 2022 were primarily related to purchases of investments of $45.5 million, partially offset by repayments and proceeds from sale of investments of $35.7 million and cash generated from operations of $2.3 million.

Financing Activities — For the six months ended June 30, 2022, net cash provided by financing activities was $19.6 million, primarily related to proceeds from borrowings under the Term Loan of $20.0 million and proceeds from obligations under participation agreements of $1.0 million, partially offset by distributions paid to stockholders of $1.4 million.

Critical Accounting Policies and Use of Estimates

Our consolidated financial statements are prepared in conformity with 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 period. 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.

Current Expected Credit Losses Reserve

On January 1, 2023, we adopted the provisions of ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses (“CECL”). The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology.

We utilize information obtained from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for its loan portfolio. We utilize a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by a leading commercial mortgage-based security data analytics provider. It employs logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. We provide specific loan-level inputs which include loan-to-value and debt service coverage ratio metrics, as well as principal balances, property type, location, coupon rate, coupon rate type, original or remaining term, expected repayment dates and contractual future funding commitments. We select from a group of independent five-year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. Based on the inputs, the loan loss model determines a loan loss rate through the generation of probability of defaults (PD) and loss given defaults (LGD) for each loan. The CECL reserve is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan. These results require a significant

amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance for credit losses. Changes in such estimates can significantly affect the expected credit losses.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

This section has been omitted pursuant to General Instruction H(2)(c) of 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 our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2023. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.

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 nor Terra REIT nor Terra REIT Advisors is currently subject to any material legal proceedings, nor, to our knowledge, are material legal proceedings threatened against us, Terra REIT, or Terra REIT Advisors. From time to time, we and individuals employed by Terra REIT may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. 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.

For a discussion of the potential risks and uncertainties associated with our business, please see Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. You should be aware that those risk factors may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

This section has been omitted pursuant to General Instruction H(2)(b) of Form 10-Q.

Item 3. Defaults Upon Senior Securities.

This section has been omitted pursuant to General Instruction H(2)(b) of Form 10-Q.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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











10.1*						Waiver and Amendment No. 2 to Credit Agreement, dated June 30, 2023, among Terra Income Fund 6, LLC, Eagle Point Credit Management, LLC, and the Lenders party thereto.
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.
32.1**						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						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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
104						Cover Page Interactive Data File Included as Exhibit 101 (embedded within the Inline XBRL document)

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 11, 2023



									TERRA INCOME FUND 6, LLC
									By: Terra Property Trust, Inc., its sole member

						By:			/s/ Vikram S. Uppal
									Vikram S. Uppal
									Chairman of the Board, Chief Executive Officer and President
									(Principal Executive Officer)

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