Results

Terra Income Fund 6 LLC

11/07/2025 | Press release | Distributed by Public on 11/07/2025 16:16

Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

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, "Terra LLC," "we," "us" and "our" refer to Terra Income Fund 6, LLC.
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;
•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;
•our ability to fund our liquidity needs and upcoming debt maturities through ordinary course loan repayments, asset sales and distributions and debt or equity capital sources or facilities, including exchange offers;
•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 Property Trust, Inc. ("Terra REIT"), our parent company; 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 (the "REIT Manager"); Terra Fund Advisors, LLC, an affiliate of Terra Capital Partners; 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; Mavik Real Estate Special Opportunities VS2, LP; or any of their affiliates;
•our dependence on the REIT Manager 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; and
•the degree and nature of our competition.
In addition, words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth 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;
•tariffs imposed by the current presidential administration and the threat of such tariffs;
•the availability of financing on acceptable terms or at all;
•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 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"). Subsequent to the Merger, Terra LLC became the successor of Terra BDC and assumed all of Terra BDC's rights and obligations, including the obligations under the indenture governing Terra BDC's unsecured notes payable.
We are a wholly owned subsidiary of Terra REIT. Terra REIT's investment activities are externally managed by the REIT Manager, our affiliate. We originate, invest in and manage a diverse portfolio of real estate-related investments that generate a stable income stream. We directly originate, structure and underwrite most, if not all, of our loans, as we believe that doing so will provide us with the best opportunity to invest in loans that satisfy our standards, establish a direct relationship with the borrower and optimize the terms of its investments; however, we may acquire existing loans from the originating lender should its adviser determine such an investment is in its best interest. We may also make strategic non-real estate related investments that align with our investment objectives and criteria. We may hold our investments until their scheduled maturity dates or may sell them if we are able to command favorable terms for their disposition. We may seek to realize growth in the value of its investments by timing their sale to maximize value.
On November 8, 2022, we entered into a cost sharing agreement with Terra REIT effective October 1, 2022, pursuant to which we reimburse 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 (the "Cost Sharing Agreement").
Portfolio Summary
Net Loan Portfolio
The following table provides a summary of our net loan portfolio. Carrying value represents the amortized cost of loan, net of applicable allowance for credit losses.
September 30, 2025
Fixed Rate
Floating
Rate(1)(2)
Total Gross Loans Obligations under Participation Agreements Total Net Loans
Number of loans 2 2 4 1 4
Principal balance $ 3,952,042 $ 45,731,937 $ 49,683,979 $ 18,000,000 $ 31,683,979
Carrying value 3,560,530 28,088,934 31,649,464 18,180,000 13,469,464
Fair value 3,562,042 28,085,556 31,647,598 18,177,137 13,470,461
Weighted-average coupon rate (3)
16.00% 19.31% 19.17% 19.31% 18.57%
Weighted-average remaining
term (years) (3) (4)
0.21 0.00 0.01 0.00 0.05
December 31, 2024
Fixed Rate
Floating
Rate (1)(2)
Total Gross Loans Obligations under Participation Agreements Total Net Loans
Number of loans 1 2 3 1 3
Principal balance $ 2,843,280 $ 43,059,173 $ 45,902,453 $ 18,000,000 $ 27,902,453
Carrying value 2,573,280 27,814,616 30,387,896 18,173,962 12,213,934
Fair value 2,573,280 28,068,902 30,642,182 18,254,853 12,387,329
Weighted-average coupon rate (3)
-% 19.53% 19.53% 19.53% 19.53%
Weighted-average remaining
term (years) (3) (4)
0.00 0.10 0.10 0.10 0.10
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(1)As of September 30, 2025 and December 31, 2024, these loans pay a coupon rate of 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 average SOFR and Term SOFR of 4.31% and 4.13%, respectively, as of September 30, 2025, and 4.53% and 4.33%, respectively, as of December 31, 2024.
(2)As of both September 30, 2025 and December 31, 2024, two loans were subject to SOFR or Term SOFR floor, as applicable.
(3)Excludes non-performing loans for which recovery of interest income was not probable.
(4)Excludes loans that are in maturity default and represents current effective maturity as of September 30, 2025 and December 31, 2024, exclusive of any extension options available.
Promissory Note Receivable
On January 24, 2024, we entered into a revolving promissory note receivable with Terra REIT. The promissory note receivable bears interest at the Prime Rate, as such Prime Rate is published in the Wall Street Journal, computed on the basis of the actual number of days elapsed and a year of 365 days. The promissory note does not contain current interest payment obligations in cash and instead adds such interest amount to the principal balance of the promissory note on the last day of each calendar quarter. The promissory note matures on March 31, 2027. As of September 30, 2025 and December 31, 2024, the amount outstanding under the promissory note receivable was $38.1 million and $45.1 million, respectively.
Equity Interest in Unconsolidated Investments
In addition to our loan portfolio, we owned equity interests in two joint ventures that own real estate properties. We account for our equity interest in the joint ventures as equity method investments because we do not have a controlling financial interest in the entities. As of September 30, 2025 and December 31, 2024, these equity investments had total carrying value of $26.7 million and $36.3 million, respectively.
Portfolio Investment Activity
For the three months ended September 30, 2025 and 2024, we invested $13.8 million and $5.9 million in new and add-on investments, and had $21.0 million and $5.0 million of repayments, resulting in net repayment and net investment of $7.2 million and $0.9 million, respectively. For the three months ended September 30, 2025 and 2024, new and add-on investments included $9.2 million and $5.8 million of funding and $18.3 million and $5.0 million of repayment under the promissory note receivable, respectively.
For the nine months ended September 30, 2025 and 2024, we invested $25.5 million and $41.1 million in new and add-on investments, and had $28.8 million and $44.9 million of repayments, resulting in net repayments of $3.3 million and $3.9 million, respectively. For the nine months ended September 30, 2025 and 2024, new and add-on investments included $19.1 million and $40.1 million of funding and $26.1 million and $5.0 million of repayment under the promissory note receivable, respectively.
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, and on February 26, 2021, the underwriters exercised the option to purchase an additional $3.6 million of the notes (collectively the "7.00% Senior Notes Due 2026"). The 7.00% Senior Notes Due 2026 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, at a redemption price equal to 100% of the outstanding principal
amount thereof, plus accrued and unpaid interest. In connection with the Merger, Terra LLC assumed all of Terra BDC's rights and obligations under the indenture governing the 7.00% Senior Notes Due 2026.
Term Loan
In April 2021, Terra BDC 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"). On September 27, 2022, the Credit Agreement was amended to, among other things, 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 rights and obligations of Terra BDC under the Credit Agreement. On June 30, 2023, we amended the Credit Agreement to, among other things, (i) decrease the principal amount to $15.0 million, (ii) extend the scheduled maturity date to March 31, 2024, and (iii) increase the rate on which the loans thereunder bear 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%, and repaid $10.0 million of the principal amount of the Term Loan. The Credit Agreement was secured by a lien on substantially all of Terra BDC's, and, following the Merger, Terra LLC's owned and thereafter acquired property. In March 2024, the Term Loan was repaid in full.
Factors Impacting Operating Results
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. As of September 30, 2025, we held four loan investments secured by office, mixed use, multifamily and retail properties. Our largest loan investment represented approximately 77.3% of the principal balance of our total net loan investments.
Results of Operations
Operating results for the three and nine months ended September 30, 2025 and 2024 were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2025 2024 Change 2025 2024 Change
Revenues
Interest income $ 1,865,338 $ 1,851,745 $ 13,593 $ 5,598,551 $ 5,782,363 $ (183,812)
Dividend and other income 36,458 10,497 25,961 57,452 37,323 20,129
1,901,796 1,862,242 39,554 5,656,003 5,819,686 (163,683)
Operating expenses
Asset management and asset servicing
fees paid/payable to Terra REIT (1)
206,526 238,710 (32,184) 614,445 906,389 (291,944)
Operating expense reimbursement to
Terra REIT (1)
126,812 177,824 (51,012) 432,906 880,332 (447,426)
Provision for credit losses 924,129 524,486 399,643 2,537,813 1,575,113 962,700
Professional fees 170,836 163,157 7,679 463,476 491,484 (28,008)
Insurance expense 21,072 21,072 - 63,216 63,216 -
General and administrative expenses 3,675 10,463 (6,788) 36,478 58,004 (21,526)
1,453,050 1,135,712 317,338 4,148,334 3,974,538 173,796
Operating income 448,746 726,530 (277,784) 1,507,669 1,845,148 (337,479)
Other income and expenses
Loss from equity interest in
unconsolidated investments 		(1,870,622) (792,622) (1,078,000) (3,439,070) (2,943,172) (495,898)
Interest expense on unsecured notes
payable 		(1,041,941) (1,003,009) (38,932) (3,095,674) (2,982,049) (113,625)
Interest expense on term loan - - - - (517,528) 517,528
Interest expense from obligation under
participation agreement 		(934,768) (792,352) (142,416) (2,876,517) (2,301,347) (575,170)
(3,847,331) (2,587,983) (1,259,348) (9,411,261) (8,744,096) (667,165)
Net loss $ (3,398,585) $ (1,861,453) $ (1,537,132) $ (7,903,592) $ (6,898,948) $ (1,004,644)
_____________
(1)Fees were paid and payable, and expenses were reimbursed, to Terra REIT pursuant to the Cost Sharing Agreement with Terra REIT.
Interest Income
For the three months ended September 30, 2025 as compared to the three months ended September 30, 2024, interest income remained substantially the same.
For the nine months ended September 30, 2025 as compared to the nine months ended September 30, 2024, interest income decreased by $0.2 million, primarily due to a decrease in the weighted average principal balance of gross loans, partially offset by an increase in the weighted average principal balance of the promissory note receivable.
Asset Management and Asset Servicing Fees
On November 8, 2022, we entered into the Cost Sharing Agreement with Terra REIT effective October 1, 2022, pursuant to which we reimburse Terra REIT for our allocable portion of management and transaction fees and operating expenses incurred by Terra REIT, including fees paid by Terra REIT to the REIT Manager.
For the three months ended September 30, 2025 as compared to the three months ended September 30, 2024, management fees consisting of asset management and asset servicing fees paid/payable to Terra REIT pursuant to the Cost Sharing Agreement decreased by $0.03 million, primarily due to a decrease in total funds under management.
For the nine months ended September 30, 2025 as compared to the nine months ended September 30, 2024, management fees consisting of asset management and asset servicing fees paid/payable to Terra REIT pursuant to the Cost Sharing Agreement decreased by $0.3 million, primarily due to a decrease in total funds under management.
Operating Expense Reimbursement
For the three months ended September 30, 2025 as compared to the three months ended September 30, 2024, operating expense incurred on our behalf pursuant to the Cost Sharing Agreement decreased by $0.1 million, primarily due to a decrease in the allocation ratio as a result of a decrease in total funds under management.
For the nine months ended September 30, 2025 as compared to the nine months ended September 30, 2024, operating expense incurred on our behalf pursuant to the Cost Sharing Agreement decreased by $0.4 million, primarily due to a decrease in the allocation ratio as a result of a decrease in total funds under management.
Provision for Credit Losses
We follow the provisions of Accounting Standards Codification ("ASC") 326, Financial Instruments - Credit Losses, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses.
For the three and nine months ended September 30, 2025, we recorded a provision for credit losses of $0.9 million and $2.5 million, respectively, primarily as a result of a decline in our estimated recoverable amount on a non-performing subordinated loan due to an increase in funding on the senior loan.
For the three and nine months ended September 30, 2024, we recorded a provision for credit losses of $0.5 million and $1.6 million, respectively, primarily as a result of a decline in our estimated recoverable amount on a non-performing subordinated loan due to an increase in funding on the senior loan.
Loss From Equity Interest In Unconsolidated Investments
For the three and nine months ended September 30, 2025, we recognized a loss from equity interest in unconsolidated investment of $1.9 million and $3.4 million, respectively, related to our portion of the net loss incurred by the two joint ventures that own real estate properties primarily due to a loss on sale of one industrial real estate property as well as depreciation expense and interest expense on floating rate loans.
For the three and nine months ended September 30, 2024, we recognized loss from equity interest in unconsolidated investment of $0.8 million and $2.9 million, respectively, related to our portion of the net loss incurred by the two joint ventures that own real estate properties primarily as a result of depreciation and interest expense on floating rate loans.
Interest Expense on Unsecured Notes Payable
As discussed in the section entitled "Senior Unsecured Notes"above, we assumed the $38.4 million 7.00% Senior Notes Due 2026 in connection with the Merger.
For the three and nine months ended September 30, 2025 as compared to the three and nine months ended September 30, 2024, interest expense on unsecured notes payable remained substantially the same.
Interest Expense on Term Loan
As discussed in the section entitled "Term Loan"above, we assumed the $25.0 million Term Loan in connection with the Merger. In June 30, 2023, we made a $10.0 million partial repayment on the Term Loan. In March 2024, the Term Loan was repaid in full.
For the nine months ended September 30, 2024, interest expense on the Term Loan was $0.5 million. There was no such interest expense for the three and nine months ended September 30, 2025, and the three months ended September 30, 2024 because the Term Loan was repaid in March 2024.
Interest Expense From Obligation Under Participation Agreement
For the three and nine months ended September 30, 2025 as compared to the three and nine months ended September 30, 2024, interest expense from obligation under participation agreement increased by $0.1 million and $0.6 million, respectively, primarily due to an increase in the weighted average outstanding balance.
Net loss
For the three and nine months ended September 30, 2025 as compared to the three and nine months ended September 30, 2024, the resulting net loss increased by $1.5 million and $1.0 million, respectively.
Terra REIT's Management Agreement with the REIT Manager
Terra REIT is our parent and sole member. We have entered into a cost sharing arrangement with Terra REIT pursuant to which we will be responsible for our allocable share of Terra REIT's expenses, including fees paid by Terra REIT to its manager, the REIT Manager. Terra REIT currently pays the following fees to the REIT Manager pursuant to a management agreement (as amended, 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 investments, including any third-party expenses related to such investments. In the event that the term of any loan is extended, the REIT Manager also receives an origination fee equal to the lesser of (i) 1.0% of the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension.
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 investment 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 investment 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 an investment, 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 investment or disposition transaction, the REIT Manager 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 the REIT Manager with respect to its evaluation and pursuit of such transactions.
In addition to the fees described above, Terra REIT reimburses the REIT Manager for operating expenses incurred in connection with services provided to the operations of Terra REIT, including its allocable share of the REIT Manager's overhead, such as rent, employee costs, utilities, and technology costs.
Financial Condition, Liquidity and Capital Resources
We currently generate cash primarily from cash flows from interest, dividends and fees earned from our investments, principal repayments, and proceeds from sales of our investments. Our primary use of cash is for our targeted assets 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 the 7.00% Senior 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 7.00% Senior Notes Due 2026 and the performance of every covenant of the indenture, to be performed or observed by Terra BDC. The 7.00% Senior Notes Due 2026 are scheduled to mature on March 31, 2026. We intend to repay the 7.00% Senior Notes Due 2026 through ordinary course loan repayments, including collecting on the outstanding balance of the promissory note receivable, asset sales and distributions, and may also use debt or equity capital sources or facilities, including exchange offers. However, no assurance can be given that we will be able to obtain additional liquidity when needed or under acceptable terms, if at all. As previously disclosed, Terra REIT may repurchase certain of its 6.00% senior notes due 2026 and we may repurchase certain of the 7.00% Senior Notes Due 2026. The repurchases may be made directly by us or made indirectly through an affiliated purchaser entity managed by the REIT Manager and co-owned by Terra REIT and other vehicles managed by the REIT Manager or its affiliates. Such affiliate purchaser entity may also purchase third-party marketable securities. The timing and amount of any transactions will be determined by the REIT Manager based on its evaluation of market conditions, prices, legal requirements and other factors, and may be made from time to time on the open market, in privately negotiated transactions or otherwise, in each case subject to compliance with all SEC rules and other legal requirements.
Our $18.0 million obligation under participation agreement will mature in the next twelve months. We expect to use the proceeds from the repayment of the corresponding investment to repay the participation obligation.
Cash Flows Used in Operating Activities
For the nine months ended September 30, 2025 as compared to the nine months ended September 30, 2024, cash used in operating activities increased by $0.2 million. The decrease in operating cash was primarily due to a decrease in contractual interest income.
Cash Flows Provided by Investing Activities
For the nine months ended September 30, 2025, cash provided by investing activities was $9.4 million, primarily related to proceeds from repayment of promissory note receivable of $26.1 million, distributions from equity interest in unconsolidated investments of $6.1 million, and repayment of loans of $2.7 million, partially offset by funding for promissory note receivable of $19.1 million and origination, funding and purchase of loans of $6.5 million.
For the nine months ended September 30, 2024, cash provided by investing activities was $4.1 million, primarily related to proceeds from repayment of loans of $39.9 million and proceeds from repayment of promissory note receivable of $5.0 million, partially offset by funding for promissory note receivable of $40.1 million and origination, funding and purchase of loans of $1.0 million.
Cash Flows Used in Financing Activities
For the nine months ended September 30, 2025, cash used in financing activities was zero. Proceeds from obligation under participation agreement of $2.6 million were offset by repayments of obligation under participation agreement of $2.6 million.
For the nine months ended September 30, 2024, cash used in financing activities was $0.1 million, primarily due to repayment of the Term Loan of $15.0 million as well as a decrease in interest reserve and other deposits held on investment of $0.1 million, partially offset by proceeds from obligation under participation agreement of $15.0 million.
Critical Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in conformity with United States generally accepted accounting principles ("U.S. GAAP"), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
reporting 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.
Allowance for Credit Losses
We follow the provisions of ASC 326, 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 estimating credit losses upon the occurrence of an actual loss event under the previous "incurred loss" methodology.
We use a model-based approach for estimating the allowance for credit losses on performing loans on a collective basis, including future funding commitments for which we do not have the unconditional right to cancel, as these loans share similar risk characteristics. We utilize information obtained from internal and external sources relating to past events, current economic conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for our loan portfolio. We utilize a commercial mortgage-based, third-party loan loss model and because we do not have a meaningful history of realized credit losses on our loan portfolio, we subscribe to a database service to provide historical proxy loan loss information. We employ 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 have chosen to incorporate a weighted average macroeconomic forecast that encompasses baseline, upside and downside scenarios, into our allowance for credit losses on performing loans estimate during the reasonable and supportable forecast period which is currently eight quarters. We select certain economics variables from a group of independent variables such as Commercial Real Estate Price Index, unemployment and interest rate which are included in the model as part of macroeconomic forecast and updated regularly based on current economic trends. The specific loan level information input into the model includes 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. Based on the inputs, the loan loss model determines a loan loss rate through the generation of a probability of default (PD) and loss given default (LGD) for each loan. The allowance for credit losses on performing loans is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan. A significant amount of judgment is applied in selecting inputs and analyzing results produced by the models to determine the allowance for credit losses. Changes in such estimates can significantly affect the expected credit losses.
During the loan review process, all non-performing loans are evaluated for collectability, which includes both loans in default and loans where we do not expect to collect all amounts due for both principal and interest according to the contractual terms of the loan. We remove these loans from the industry loss rate approach described above and analyze 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.
Terra Income Fund 6 LLC published this content on November 07, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on November 07, 2025 at 22:16 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]