Consolidated Financial Statements Three Months Ended ......Terra Secured Income Fund 5, LLC...

Terra Secured Income Fund 5, LLC

Consolidated Financial Statements Three Months Ended March 31, 2016


Contents

Consolidated Financial Statements:

Consolidated Statement of Assets, Liabilities and Members’ Capital 3

Consolidated Statement of Operations 4

Consolidated Statement of Changes in Members’ Capital 5

Consolidated Statement of Cash Flows 6-7

Notes to Consolidated Financial Statements 8-14

Supplemental Non-GAAP Financial Schedules 15-19

Consolidated Financial Statements of Terra Property Trust, Inc. 20-44


Consolidated Statement of Assets, Liabilities and Members’ Capital

3

See notes to consolidated financial statements.

March 31, 2016

Assets

300,420,562$

Cash and cash equivalents 3,394,674

Other assets 153,366

Total assets 303,968,602$

Liabilities and Members' Capital

Liabilities

Accounts payable and accrued expenses 533,219$

Taxes payable 233,177

Due to Terra Property Trust, Inc. 3,158,658

Payable for unsettled subscriptions 1,563,682

Distributions payable 97,782

Syndication costs payable 97,645

Total liabilities 5,684,163

Commitments and contingencies (See Note 7)

Members' Capital

Managing member -

Non-managing members 298,284,439

Total Members' Capital 298,284,439

Total Liabilities and Members' Capital 303,968,602$

Investment in Terra Property Trust, Inc. (cost of $298,259,804)


Consolidated Statement of Operations

4


Three Months Ended March 31, 2016

Investment income

Dividend income $ 3,423,961

Other income 7,320

Total investment income 3,431,281

Operating expenses

Merger transaction fees 312,192

Professional fees 112,494

Other expenses 18,572

Total operating expenses 443,258

Net investment income 2,988,023

Net increase in unrealized appreciation on investment 2,160,762

Net increase in Members' capital resulting from operations $ 5,148,785


Consolidated Statement of Changes in Members’ Capital

5


Managing Member

Balance, January 1, 2016 ‐$ 122,667,661$ 122,667,661$

Capital contributions from Merger Transactions - 155,643,000 155,643,000

Capital contributions from Rights Offering, net of syndication fees of $1,196,922) - 23,907,817 23,907,817

Offering expenses - - -

Capital distributions - (7,485,042) (7,485,042)

Capital redemptions - (1,597,782) (1,597,782)

Increase in Members' capital resulting from operations:

Net investment income - 2,988,023 2,988,023

Net increase in unrealized appreciation on investments - 2,160,762 2,160,762

Net increase in Members' capital resulting from operations - 5,148,785 5,148,785

Balance, March 31, 2016 -$ 298,284,439$ 298,284,439$

TotalNon-Managing

Members



Consolidated Statement of Cash Flows

6


Cash flows from operating activities:

Net increase in members' capital resulting from operations $ 5,148,785

Adjustments to reconcile net increase in members' capital resulting from operations to net cash used in operating activities:

Purchases of investment in Terra Property Trust, Inc. (10,000,000)

Net increase in unrealized appreciating on investments (2,160,762)

Changes in operating assets and liabilities:

Interest receivable 351,883

Other assets (153,366)

Accounts payable and accrued expenses (5,235,660)

Due to Terra Property Trust, Inc. 3,158,658

Redemption liability (3,514,785)

Payable for unsettled subscriptions 1,563,682

Taxes payable (388,000)

Due to Manager (705,389)

Net cash used in operating activities (11,934,954)

Cash flows from investing activities:

Cash acquired in the Merger Transactions 3,480,981

Cash transferred to Terra Property Trust, Inc. (5,034,571)

Net cash used in investing activities (1,553,590)

Cash flows from financing activities:

Proceeds from capital contributions, net of syndication fees paid 24,005,462

Payments for capital distributions (7,485,042)

Payments for capital redemption (1,500,000)

Net cash provided by financing activities 15,020,420

Net increase in cash and cash equivalent 1,531,876

Cash and cash equivalent at beginning of period 1,862,798

Cash and cash equivalent at end of period $ 3,394,674


Consolidated Statement of Cash Flows (Cont.)

7

Supplemental non-cash investing and financing activities:

In December 2015, the unitholders approved the merger of Terra Secured Income Fund, LLC (“Terra Fund 1”), Terra Secured Income Fund 2, LLC (“Terra Fund 2”), Terra Secured Income Fund 3, LLC (“Terra Fund 3”) and Terra Secured Income Fund 4, LLC (“Terra Fund 4”) with and into subsidiaries of the Company (individually, the “Terra Fund”) through a series of separate mergers effective January 1, 2016 (the “Merger Transactions”, see Note 3). The following table summarizes the fair values of the assets acquired and liabilities assumed in the Merger Transactions:

Immediately after the Merger Transactions, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust, Inc. (“Terra Property Trust”) in exchange for the common shares of Terra Property Trust (see Note 3). The following table presents a summary of the net assets contributed to Terra Property Trust:


Total Consideration:

Fair value of units issued 155,643,000$

155,643,000

Assets Acquired at Fair Value:

Investments, at fair value 157,622,767

Cash, restricted 7,119,078

Interest receivable 2,157,509

Other assets 35,695

Liabilities Assumed at Fair Value:

Interest reserve and other deposits held on loans (7,119,078)

Accounts payable and accrued expenses (3,245,926)

Redemption liability (3,514,785)

Due to Manager (394,275)

Taxes payable (232,040)

Unearned income (192,339)

Underwriting deposits (74,587)

Net assets acquired excluding cash 152,162,019

Cash acquired in the Merger Transactions 3,480,981$

Fair Value of Common Stock Received 288,259,803$

Net Assets Contributed


Investment through participation interests, at fair value 13,687,053



Other assets 35,695

Obligations under participation agreements, at fair value (23,961,197)



Other liabilities (248,082)

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


Notes to Consolidated Financial Statements

8

Note 1. Business

Terra Secured Income Fund 5, LLC (and, together with its consolidated subsidiaries, the “Company”), a Delaware limited liability company, commenced operations on August 8, 2013. The Company was formed to originate, acquire and structure real estate-related loans, including mezzanine loans, first and second mortgage loans, subordinated mortgage loans, bridge loans, preferred equity investments and other loans related to high quality commercial real estate. The Company completed its original offering on January 31, 2015 and raised approximately $142 million in gross proceeds.

In December 2015, the unitholders approved the merger of Terra Fund 1, Terra Fund 2, Terra Fund 3 and Terra Fund 4 with and into subsidiaries of the Company through a series of separate mergers effective January 1, 2016 (see Note 3). Following the Merger Transactions, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust, a newly-formed and wholly-owned subsidiary of the Company that intends to qualify to be taxed as a real estate investment trust (“REIT”) for taxable year ended 2016, in exchange for the common shares of Terra Property Trust. Upon completion of the Merger Transactions, the Company become the parent company of Terra Funds 1 through 4 and the direct and indirect sole common stockholder of, and conducts substantially all of its real estate lending business through Terra Property Trust.

Terra Capital Advisors, LLC (the “Manager”), a Delaware limited liability company, currently serves as the managing member of the Company.

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

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company is an investment company, as defined under U.S. GAAP, and applies industry specific guidance in accordance with Accounting Standards Codification (“ASC”) 946, Financial Services – Investment Companies. The Company's financial statements should be read in conjunction with the financial statements of Terra Property Trust.

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

Cash and Cash Equivalents: The Company considers all highly liquid investments, with maturities of ninety days or less when purchased, as cash equivalents. The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.

Valuation of Investment: The Company invests substantially all of its equity capital in the purchase of common shares of Terra Capital Trust and its primary investment position is the common shares of Terra Capital Trust. The Company determines the fair value of its investment in the common shares of Terra Capital Trust as the net asset value per common share of Terra Capital Trust (as determined by Terra Capita Trust) multiplied by the number of common shares of Terra Capital Trust owned by the Company.



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Fair Value of Financial Instruments: The fair values of the Company’s assets and liabilities, which qualify as financial instruments, approximate the carrying amount presented on the consolidated statement of assets, liabilities and members’ capital.

Payable for unsettled subscriptions: Subscriptions received in advance of the effective admittance date are recorded as payable for unsettled subscriptions on the consolidated statement of assets, liabilities and members’ capital.

Dividend Income: Dividend income associated with the Company's ownership of Terra Capital Trust is recognized on the record date as declared periodically by Terra Capital Trust.

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

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. If this threshold is met, management measures the tax benefit as the largest amount of benefit that is more likely than not of being realized upon ultimate settlement. The Company is subject to potential examination by taxing authorities in various jurisdictions. The Company recognizes interest and penalties, if any, as income tax expense in the consolidated statement of operations. The open tax years under potential examination vary by jurisdiction. As of March 31, 2016, there was no impact to the consolidated financial statements related to accounting for uncertain income tax positions.

Note 3. Merger Transactions

In December 2015, the unitholders approved the merger of Terra Fund 1, Terra Fund 2, Terra Fund 3, and Terra Fund 4 with and into subsidiaries of the Company through a series of separate mergers effective January 1, 2016.

In the Merger Transactions, unitholders of Terra Funds 1 through 4 (other than unitholders the Manager was unable to establish to continue to qualify as “accredited investors” under the Securities Act and unitholders holding their interests through a qualified ERISA plan) exchanged their units in their respective fund for Continuing Income Units (regular units in the Company) or Termination Units (membership interest in the Company offered to unitholders of Terra Funds 1 through 4 who wish to enter the liquidation phase of their investments). The number of Continuing Income Units and Termination Units was allocated to each of the merging Terra Funds by dividing the exchange value for such fund by the exchange value per unit of the Company, which was $43,410 on December 31, 2015. The exchange value for each of the Terra Funds was determined based on a valuation of each of the Terra Funds’ assets and liabilities as of December 31, 2015. This exchange resulted in a taxable gain for the Terra Funds’ existing unitholders to the extent that the value of each asset exceeds its respective tax basis, of which the full amount would generally be treated as ordinary income.



10

The following table presents the exchange ratio and the merger consideration for Terra Funds 1 through 4 as of December 31, 2015:

Terra Capital Markets, LLC, an affiliate of the Manager, served as the dealer manager for the consent

solicitation on the merger, and was paid a voting advisory fee of $750.0 per initial unit sold to unitholders in the Terra Funds and a dealer manager fee of 0.5% of the aggregate offering price of the units originally issued by the Terra Funds. Most of these fees were re-allowed to participating dealers. The Terra Funds also reimbursed the Manager for actual costs incurred for legal, accounting, and other professional services in connection with the consent solicitation. Total of these fees amounted to approximately $6.1 million, of which approximately $5.8 million was recorded and allocated among the Terra Funds based on the exchange value as of December 31, 2015. The remaining $0.3 million was recorded by the Company during the three months ended March 31, 2016.

The following table presents a summary of the fair value of assets acquired and liabilities assumed in the Merger Transactions:

Fund

Exchange

Ratio

Original Units

Exchanged

Continuing

Income Units

Termination

Units

Terra Fund 1 0.732 606.9 289.1 155.5

Terra Fund 2 0.950 680.2 520.4 126.1

Terra Fund 3 1.041 768.0 678.7 120.5

Terra Fund 4 1.011 1,758.2 1,728.6 49.4

Total 6,692.2 6,095.7 451.5

Total ConsiderationFair value of units issued 155,643,000$

155,643,000$

Assets AcquiredInvestments at fair value 157,622,767 Cash and cash equivalent 3,480,981 Cash, restricted 7,119,078 Interest receivable 2,157,509 Other assets 35,695

Liabilities Assumed Interest reserve and other deposits held on loans (7,119,078) Accounts payable and accrued expenses (3,245,926) Redemption liability (3,514,785) Due to Manager (394,275) Taxes payable (232,040) Unearned income (192,339) Underwriting deposits (74,587)

155,643,000$



11

Immediately after the Merger Transactions, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust, a wholly-owned subsidiary of the Company that intends to qualify to be taxed as a REIT, in exchange for 14,412,990 shares of common stock of Terra Property Trust. The following table presents a summary of the net assets contributed to Terra Property Trust:

In connection with the Merger Transactions, the Company offered existing unitholders of the Terra Funds the opportunity to invest in the Company through purchase of additional Continuing Income Units at a price of $47,000 per unit (the “Rights Offering”), which reflects the reduced front-end load relative to the existing unitholders' initial investment of $50,000 per unit. Since commencing the Rights Offering and through March 31, 2016, the Company has sold 535.6 Continuing Income Units for gross proceeds of approximately $25.1 million. Note 4. Investment At March 31, 2016, the Company owned the following investment:

The Company invests substantially all of its equity capital in the purchase of common shares of Terra Capital Trust and its primary investment position is the common shares of Terra Capital Trust. Subsequent to the Merger Transactions and during the three months ended March 31, 2016, the Company purchased 500,000 common shares of Terra Capital Trust for a total cost of $10.0 million.

During the three months ended March 31, 2016, the Company recorded approximately $3.4 million of dividend income from Terra Property Trust. Note 5. Related Party Transactions Rights Offering

In connection with the Merger Transactions (Note 3), the Company offered existing unitholders of the Terra Funds the opportunity to invest in the Company through purchase of additional Continuing Income Units. Terra Capital Markets, LLC serves as the dealer manager for the sale of the Company’s Continuing Income Units and receives compensation of 3% in selling commission, 1% in dealer manager fees and a 1% broker dealer fee. Most of these fees are re-allowed to independent broker dealers and financial advisors. These fees amounted to $1.2 million

Net Assets ContributedInvestments, at fair value 291,990,652$ Investment through participation interests, at fair value 13,687,053 Cash and cash equivalent 5,034,571 Cash, restricted 21,421,501 Interest receivable 2,382,545 Other assets 35,695 Obligations under participation agreements, at fair value (23,961,197) Interest reserve and other deposits held on loans (21,421,501) Unearned income (661,434) Other liabilities (248,082)

Net assets contributed 288,259,803$

Fair value of common stock of Terra Property Trust received 288,259,803$

Investment No. of Shares Cost Fair Value % of Net Assets

Terra Property Trust, Inc. 14,912,990 298,259,804$ 300,420,562$ 100.7%

Total investment 14,912,990 298,259,804$ 300,420,562$ 100.7%



12

for the three months ended March 31, 2016 and have been deducted from capital contributions received as syndication fees.

Consent Solicitation

As discussed in Note 3, Terra Capital Markets, LLC served as the dealer manager for the consent solicitation on the merger, and was paid a voting advisory fee of $750.0 per initial unit sold to unitholders in the Terra Funds and a dealer manager fee of 0.5% of the aggregate offering price of the units originally issued by the Terra Funds. Most of these fees were re-allowed to participating dealers. The Terra Funds also reimbursed the Manager for actual costs incurred for legal, accounting, and other professional services in connection with the consent solicitation. Total of these fees amounted to approximately $6.1 million, of which approximately $5.8 million was recorded and allocated among the Terra Funds based on the exchange value as of December 31, 2015. The remaining $0.3 million was recorded by the Company during the three months ended March 31, 2016.

Due to Terra Property Trust, Inc.

As of March 31, 2016, amount due to Terra Property Trust was approximately $3.1 million, as reflected on the consolidated statement of assets, liabilities and members’ capital, primarily related to interest income received on certain loans.

Note 6. Members’ Capital

Capital Contributions

In the Merger Transactions, original membership units of Terra Funds 1 through 4 were exchanged for Continuing Income Units and Termination Units of the Company (Note 3). The Company also offered existing unitholders of the Terra Funds the opportunity to invest in the Company through purchase of additional Continuing Income Units (Note 3).

Capital Distributions

At the discretion of the Manager, the Company may make distributions from net cash flow from operations, net disposition proceeds, or other cash available for distribution. Distributions are made to holders of Continuing Income Units at 9.0% per annum until they receive a return of their initial Deemed Capital Contribution, as defined in the operating agreement, plus a preferred return ranging from 8.5% to 9.0% depending on the historical preferred return applicable to their Terra Fund units, after which time distributions are made 15% to the Manager (“carried interest”) and 85% to the holders of Continuing Income Units. The preferred return applicable to the Continuing Income Units sold in the Rights Offering is 8.5%. For the three months ended March 31, 2016 there was no carried interest.

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

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



13

Capital Redemptions

In the Merger Transactions, unitholders of Terra Funds 1 through 4 who wish to enter the liquidation phase of their investments chose to receive Termination Units as merger consideration. These Termination Units will be redeemed on the original expected liquidation dates of the funds. The following table presents a summary of the Termination Units:

Allocation of Income (Loss)

Profits and losses are allocated to the members in proportion to the distributions made to them in a given calendar year.

Member Units

Each membership interest through the original offering was offered for a price of $50,000 per unit. As discussed in Note 3, membership interests in Terra Funds 1 through 4 were exchanged for units of the Company at a price of $43,410 per unit, which was the exchange value per unit of the Company on December 31, 2015, and the units in the Rights Offering was offered at a price of $47,000 per unit. The following table provides a roll forward of the units outstanding of the Company for the three months ended March 31, 2016:

Note 7. Commitments and Contingencies

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

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

Fund

Number of

Units

Scheduled

Redemption Date

Terra Fund 1 122.14 May 2016

Terra Fund 2 126.13 December 2016

Terra Fund 3 120.52 September 2017

Terra Fund 4 49.42 July 2018

Managing

Member

Non-Managing

Members Total

Units outstanding, January 1, 2016 - 2,878.9 2,878.9

Units exchanged in the Merger Transactions - 3,668.3 3,668.3

Units admitted through the Rights Offering - 535.6 535.6

Units redeemed - (33.3) (33.3)

Units outstanding, March 31, 2016 - 7,049.5 7,049.5



14

Note 8. Subsequent Events

Management has evaluated subsequent events through May 20, 2016, the date the consolidated financial statements were available to be issued. Management has determined that there are no material events that would require adjustment to, or disclosure in, the Company’s consolidated financial statements.

15

Terra Secured Income Fund 5, LLC Supplemental Non-GAAP Financial Schedules


The accompanying supplemental non-GAAP financial schedules are parpared on a combined basis. All intercompany transactions are eliminated. The Company believes these supplenenatal non-GAAP financial schedules are useful to investors because they may assist them to better understand and measure the performance of the Company’s business. These schedles should be read in conjuction with the consolidated financial statements of Terra Secured Income Fund 5, LLC and Terra Property Trust, Inc.

16

Terra Secured Income Fund 5, LLC Combined Consolidated Statement of Assets, Liabilities and Members’ Capital

March 31, 2016

TPT TSIF5 Elimination Combined

Assets

330,385,917$ -$ -$ 330,385,917$

14,371,855 - - 14,371,855

- 300,420,562 (300,420,562) -

Cash and cash equivalents 1,192,063 3,394,674 - 4,586,737

Cash, restricted 26,533,437 - - 26,533,437

Interest receivable 2,790,589 - - 2,790,589

Due from (to) related parties 3,039,740 - (3,039,740) -

Other assets 26,250 153,366 - 179,616

Total assets 378,339,851$ 303,968,602$ (303,460,302)$ 378,848,151$

Liabilities

Obligations under participation agreements, at fair value 18,346,610$ -$ -$ 18,346,610$

Note payable, net of financing costs 33,670,968 - - 33,670,968

Interest reserve and other deposits held on investments 24,533,441 - - 24,533,441

Accounts payable and accrued expenses 55,330 533,219 - 588,549

Unearned income 520,224 - - 520,224

Due to Manager 399,175 - - 399,175

Interest payable 187,366 - - 187,366

Taxes payable - 233,177 233,177

Due to Terra Property Trust, Inc. - 3,158,658 (3,158,658) -

Payable for unsettled subscriptions - 1,563,682 1,563,682

Distributions payable - 97,782 97,782

Syndication costs payable - 97,645 97,645

Due to related parties - - 118,918 118,918

Other liabilities 206,175 - - 206,175

Total liabilities 77,919,289 5,684,163 (3,039,740) 80,563,712

Equity

Preferred stock - - - -

149,130 - (149,130) -

Capital in excess of par 298,110,674 - (298,110,674) -

Accumulated net investment income, net of distributions 3,064,011 - (3,064,011) -

(910,833) - 910,833 -

7,580 - (7,580) -

Non-managing members - 298,284,439 - 298,284,439

Total Equity 300,420,562 298,284,439 (300,420,562) 298,284,439

Total Liabilities and Equity 378,339,851$ 303,968,602$ (303,460,302)$ 378,848,151$

Net realized gain on investments and obligations under participation agreements

Net unrealized depreciation on investments and obligations under participation agreements

Investments, at fair value

Investment through participation interests, at fair value

Investment in Terra Property Trust, Inc.

Common stock

17

Terra Secured Income Fund 5, LLC Combined Consolidated Statement of Operations



Investment income

Interest income $ 8,833,426 $ - $ - $ 8,833,426

Dividend income 413,555 3,423,961 (3,423,961) 413,555

Prepayment fee income 100,016 - - 100,016

Origination fee income 898,266 - - 898,266

Exit fee income 178,326 - - 178,326

Other 58,444 7,320 4 65,768

Total investment income 10,482,033 3,431,281 (3,423,957) 10,489,357

Operating expenses

Management and asset servicing fee 896,522 - - 896,522

Interest expense on participation agreements 742,129 - - 742,129

Interest expense on note payable 139,979 - - 139,979

Operating expenses 842,169 - - 842,169

Origination fee expense 1,136,547 - - 1,136,547

Disposition fee expense 178,326 - - 178,326

Professional fees 49,375 112,494 - 161,869

Merger transaction fees - 312,192 - 312,192

Other 9,014 18,572 - 27,586

Total operating expenses 3,994,061 443,258 - 4,437,319

Net investment income 6,487,972 2,988,023 (3,423,957) 6,052,038

Net unrealized depreciation on investments (964,274) 2,160,762 (2,160,762) (964,274)

Net unrealized depreciation on obligations under participation agreements

53,441 - - 53,441

Realized gain from obligations under participation agreements

7,580 - - 7,580

Net increase in net assets resulting from operations $ 5,584,719 $ 5,148,785 $ (5,584,719) $ 5,148,785

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Terra Secured Income Fund 5, LLC Combined Consolidated Statement of Changes in Members' Capital



Operations

Net investment income $ 6,487,972 $ 2,988,023 $ (3,423,957) $ 6,052,038

Net unrealized depreciation on investments (964,274) 2,160,762 (2,160,762) (964,274)

Net unrealized depreciation on obligations under participation agreements

53,441 - - 53,441

Realized gain from obligations under participation agreements

7,580 - - 7,580

Net increase in net assets resulting from operations 5,584,719 5,148,785 (5,584,719) 5,148,785

Distributions

Distributions from net investment income (3,423,961) (7,485,042) 3,423,961 (7,485,042)

Capital redemptions - (1,597,782) - (1,597,782)

Net decrease in net assets resulting from distributions (3,423,961) (9,082,824) 3,423,961 (9,082,824)

Capital transactions

Capital contributions from Merger Transactions - 155,643,000 - 155,643,000

Capital contributions from Rights Offering, net of syndication fees of $1,196,922)

- 23,907,817 - 23,907,817

Issuance of common stock in exchange for TSIF5 net operating assets

288,259,804 - (288,259,804) -

Issuance of common stock 10,000,000 - (10,000,000) -

Net increase in net assets resulting from capital share transactions

298,259,804 179,550,817 (298,259,804) 179,550,817

Net increase/(decrease) in net assets 300,420,562 175,616,778 (300,420,562) 175,616,778

Net assets, at beginning of period - 122,667,661 - 122,667,661

Net assets, at end of period $ 300,420,562 $ 298,284,439 $ (300,420,562) $ 298,284,439

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Combined Consolidated Statement of Cash Flows Three Months Ended March 31, 2016

TPT TSIF5 Elimination CombinedCash flows from operating activities:

Net increase in net assets resulting from operations $ 5,584,719 $ 5,148,785 $ (5,584,719) $ 5,148,785

Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) operating activities:

Paid-in-kind interest income, net (398,795) - - (398,795)Amortization of financing costs 10,968 - - 10,968 Amortization of premium on investments, net 949,660 - - 949,660 Loans made and purchase of other investments (64,286,956) - - (64,286,956)Purchases of investment in Terra Property Trust, Inc. - (10,000,000) 10,000,000 - Proceeds from principal payments 23,735,177 - - 23,735,177 Proceeds from obligations under participation agreements 1,523,559 - - 1,523,559 Repayments on obligations under participation agreements (7,120,552) - - (7,120,552)Realized gain from obligations under participation agreements (7,580) - - (7,580)Net unrealized depreciation on investments 964,274 (2,160,762) 2,160,762 964,274 Net unrealized depreciation on obligations under participation agreements

(53,441) - - (53,441)

- Changes in operating assets and liabilities: -

Cash, restricted (5,111,936) - - (5,111,936)

Interest receivable (408,044) 351,883 - (56,161)

Other assets 9,445 (153,366) - (143,921)

Due from related parties (3,039,740) - 3,039,740 -

Interest reserve and other deposits held on investments 3,111,940 - - 3,111,940

Accounts payable and accrued expenses 55,331 (5,235,660) - (5,180,329)

Due to Terra Property Trust, Inc. - 3,158,658 (3,158,658) -

Redemption liability - (3,514,785) - (3,514,785)

Payable for unsettled subscriptions - 1,563,682 - 1,563,682

Taxes payable - (388,000) - (388,000)

Unearned income (141,210) - - (141,210)

Due to Manager 399,175 (705,389) - (306,214)

Due to related parties - - 118,918 118,918

Interest payable 187,366 - - 187,366

Other liabilities (41,907) - - (41,907)

Net cash used in operating activities (44,078,547) (11,934,954) 6,576,043 (49,437,458)

Cash flows from investing activities:

Cash acquired in the Merger Transactions - 3,480,981 - 3,480,981

Cash transferred to Terra Property Trust, Inc. - (5,034,571) 5,034,571 -

Net cash used in investing activities - (1,553,590) 5,034,571 3,480,981


Cash contributed by TSIF5 5,034,571 - (5,034,571) - Proceeds from financing 34,000,000 - - 34,000,000 Proceeds from issuance of common stock 10,000,000 - (10,000,000) -

Proceeds from capital contributions, net of syndication fees paid

- 24,005,462 - 24,005,462

Payment of financing cost (340,000) - - (340,000)

Distributions paid (3,423,961) (7,485,042) 3,423,957 (7,485,046)

Payments for capital redemptions - (1,500,000) - (1,500,000)

Net cash provided by financing activities 45,270,610 15,020,420 (11,610,614) 48,680,416

Net increase in cash 1,192,063 1,531,876 - 2,723,939

Cash, at beginning of period - 1,862,798 - 1,862,798

Cash, at end of period $ 1,192,063 $ 3,394,674 $ - $ 4,586,737

Terra Property Trust, Inc.



Contents Consolidated Financial Statements:

Consolidated Statement of Assets and Liabilities 22 Consolidated Statement of Operations 23 Consolidated Statement of Changes in Net Assets 24 Consolidated Statement of Cash Flows 25-26 Consolidated Schedule of Investments 27-28 Notes to Consolidated Financial Statements

29-44


Consolidated Statement of Assets and Liabilities

22


March 31, 2016

Assets

330,385,917$

14,371,855




Due from related parties 3,039,740

Other assets 26,250

Total assets 378,339,851

Liabilities

18,346,610

Note payable, net of financing costs 33,670,968

Interest reserve and other deposits held on investments 24,533,441

Accounts payable and accrued expenses 55,330

Unearned income 520,224

Due to Manager 399,175

Interest payable 187,366

Other liabilities 206,175


Net assets 300,420,562$


Components of Net assets:

Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued -$

149,130

Capital in excess of par 298,110,674

Accumulated net investment income, net of distributions 3,064,011

Net unrealized depreciation on investments and obligations under participation agreements (910,833)

Net realized gain on investments and obligations under participation agreements 7,580

Net assets 300,420,562$

Net asset value per share 20.14$

Common stock, $0.01 par value, 450,000,000 shares authorized and 14,912,990 shares issued and outstanding at March 31, 2016

Investment through participation interests, at fair value (par value and amortized cost of $14,371,855)

Investments, at fair value (par value of $324,237,563 and amortized cost of $331,350,193)

Obligations under participation agreements, at fair value (par value of $18,274,25 and amortized proceeds of $18,400,050)



23



Investment income

Interest income $ 8,833,426

Dividend income 413,555

Prepayment fee income 100,016

Origination fee income 898,266

Exit fee income 178,326

Other 58,444


Operating expenses

Management and asset servicing fee 896,522

Interest expense on participation agreements 742,129

Interest expense on note payable 139,979

Operating expenses 842,169

Origination fee expense 1,136,547

Disposition fee expense 178,326


Other 9,014

Total operating expenses 3,994,061


Net unrealized depreciation on investments (964,274)

Net unrealized depreciation on obligations under participation agreements 53,441

Realized gain from obligations under participation agreements 7,580

Net increase in net assets resulting from operations $ 5,584,719

Per common share date:

Net investment income per share $ 0.45

Net increase in net assets resulting from operations per share $ 0.38

Weighted average common shares outstanding 14,550,353


Consolidated Statement of Changes in Net Assets

24



Operations

Net investment income $ 6,487,972




Net increase in net assets resulting from operations 5,584,719

Shareholder distributions

Distributions from net investment income (3,423,961)

Net decrease in net assets resulting from shareholder distributions (3,423,961)

Capital share transactions

Issuance of common stock in exchange for Terra Secured Income Fund 5, LLC ("TSIF5") consolidated net operating assets

288,259,804

Issuance of common stock 10,000,000

Net increase in net assets resulting from capital share transactions 298,259,804

Net increase in net assets 300,420,562

Net assets, at beginning of period -

Net assets, at end of period $ 300,420,562

Capital Share Activity

Shares outstanding, at beginning of period -

Shares issued in exchange for TSIF5 consolidated net operating assets 14,412,990

Shares issued 500,000

Shares outstanding, at end of period 14,912,990



25

Three Months Ended

March 31, 2016Cash flows from operating activities:


Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:

Paid-in-kind interest income, net (398,795)Amortization of financing costs 10,968 Amortization of premium on investments, net 949,660 Loans made and purchase of other investments (64,286,956)Proceeds from principal payments 23,735,177 Proceeds from obligations under participation agreements 1,523,559 Repayments for obligations under participation agreements (7,120,552)Realized gain from obligations under participation agreements (7,580)Net unrealized depreciation on investments 964,274 Net unrealized depreciation on obligations under participation agreements (53,441)


Cash, restricted (5,111,936)

Interest receivable (408,044)

Other assets 9,445

Due from related parties (3,039,740)








Cash flows from investing activities:Cash contributed by TSIF5 5,034,571

Net cash provided by investing activities 5,034,571


Proceeds from financing 34,000,000

Proceeds from issuance of common stock 10,000,000

Payment of financing cost (340,000)

Distributions paid (3,423,961)


Net increase in cash 1,192,063

Cash, at beginning of period -

Cash, at end of period $ 1,192,063

Supplemental disclosure of cash flow information:

Cash paid for interest 694,742$


Consolidated Statement of Cash Flows Cont.

26


On January 1, 2016, Terra Secured Income Fund 5 LLC, the Company’s parent company, contributed its

consolidated net operating assets to the Company pursuant to a contribution agreement in exchange for 14,412,990 shares of the Company’s common stock. The following table presents a summary of assets and liabilities received and the fair value of the common stock issued:


Common Stock Issued 288,259,803$

Net Assets Received





Other assets 35,695





Cash transferred from TSIF5 5,034,571$


Consolidated Schedule of Investments March 31, 2016

27

Collateral Location Portfolio Company (a) Structure

Property Type Interest Rate

Maturity Date

Principal Amount Amortized Cost Fair Value (b)

% of Net

Assets (c)

Secured loans and preferred equity investments:

US - AL ASA Mgt. Holdings, LLC Preferred equity investment Multifamily 15.0% 8/1/2022 $ 2,100,000 $ 2,160,846 $ 2,146,091 0.7%

SVA Mgt. Holdings, LLC Preferred equity investment Multifamily 15.0% 8/1/2022 1,600,000 1,649,562 1,635,549 0.5%

Total US - AL 3,700,000 3,810,408 3,781,640 1.2%

US - CA Palmer City-Core Stockton Street, LLC Preferred equity investment Hotel 12.0% 12/17/2016 4,325,000 4,325,000 4,372,251 1.5%

Encino Courtyard Mezzanine, LLC Mezzanine loan Retail 13.5% 1/6/2023 2,500,000 2,611,254 2,561,345 0.9%

Maguire Partners-1733 Ocean, LLC (Note 5) First mortgage Office LIBOR + 8.5% 3/9/2018 49,960,000 49,960,000 49,960,000 16.6%

L.A. Warner Hotel Partners, LLC (d)(e)

Preferred equity investment Hotel 13.3% 8/4/2019 20,000,000 20,510,093 20,101,482 5.4%

SD Carmel Hotel Partners, LLC (d)(e)


TSG-Parcel 1, LLC (d)(e)(f)

First mortgage Land 12.0% 7/10/2016 18,000,000 18,000,000 18,000,000 3.7%

Total US - CA 100,785,000 101,406,347 101,039,666 29.8%

US - DE BPG Office Partners III/IV LLC Mezzanine loan Office 13.5% 6/5/2018 10,000,000 10,000,000 10,000,000 3.3%

US - FL Beach Resort Management, LLC Mezzanine loan Hotel 13.0% 8/1/2017 4,500,000 4,543,212 4,559,971 1.5%

CGI Mezz 55MM, LLC (d)(e)

Mezzanine loan Mixed use 12.0% current/2.0% PIK 9/6/2019 3,525,398 3,625,006 3,643,733 0.8%

1100 Biscayne Management Holdco, LLC (d)((e)

Mezzanine loan Hotel 12.0% current/3.0% PIK 10/9/2017 14,955,066 14,955,066 14,877,387 4.1%

Caton Mezz, LLC (d)(e)

Mezzanine loan Office 12.0% current/2.0% PIK 7/27/2016 5,072,185 5,072,185 5,096,366 1.2%

Total US - FL 28,052,649 28,195,469 28,177,457 7.6%

US - GA Millgreen Properties, LLC Mezzanine loan Hotel 15.0% 9/8/2016 2,275,000 2,275,000 2,340,572 0.8%

Peachtree Pointe Interest, LLC Mezzanine loan Office 12.0% 11/1/2016 7,500,000 7,500,000 7,555,463 2.5%

YMP Georgia Portfolio Mezzanine, LLC Mezzanine loan Multifamily 14.0% 1/6/2019 5,000,000 5,444,957 5,049,514 1.7%

OHM Atlanta Member, LLC (d)(e)(g)

Mezzanine loan Land 14.0% current/4.0% PIK 5/2/2016 5,605,506 5,605,506 5,666,129 1.9%

Total US - GA 20,380,506 20,825,463 20,611,678 6.9%US - IN Muncie Mezz, LLC Mezzanine loan Student housing 13.0% 9/6/2023 2,700,000 2,669,605 2,881,424 1.0%

US - MAPhoenix CR 2012A, LLC, Phoenix CR 2012B, LLC, & Phoenix CR 2012C, LLC Mezzanine loan Multifamily 12.0% 8/11/2022 4,000,000 4,104,437 4,077,103 1.4%

US - NC Milestone Greensboro Holdings, LLC Mezzanine loan Hotel 14.0% 3/1/2018 3,500,000 3,535,149 3,604,440 1.2%

US - NJ Essence 144 Urban Renewal, LLC First mortgage Multifamily 12.0% 1/14/2017 22,639,955 22,639,955 22,878,223 7.6%

US - NY 1101 43rd Avenue Mezz, LLC Mezzanine loan Hotel 13.0% 12/6/2017 4,500,000 4,805,203 4,518,218 1.5%

Cape Church Mezz, LLC Mezzanine loan Multifamily 12.0% 3/31/2019 6,382,638 6,382,638 6,382,638 2.1%

WWML96MEZZ, LLC Mezzanine loan Multifamily 13.0% 12/31/2018 2,446,229 2,446,229 2,446,229 0.8%

WWML96, LLC Preferred equity investment Multifamily 13.0% 12/31/2018 1,180,992 1,180,992 1,180,992 0.4%

Total US - NY 14,509,859 14,815,062 14,528,077 4.8%

US - OR Pollin Hotels PDX Mezzanine, LLC Mezzanine loan Hotel 13.0% 10/6/2018 5,000,000 5,454,169 5,336,926 1.8%

US - PA PHL Hotel Partners, LLC Preferred equity investment Land 13.0% 10/8/2016 3,742,000 3,742,000 3,792,478 1.3%

Millennium Waterfront Associates, L.P First mortgage Multifamily 12.0% 7/2/2016 13,980,000 13,980,000 13,980,000 4.7%

Total US - PA 17,722,000 17,722,000 17,772,478 5.9%

US - SC High Pointe Mezzanine Investments, LLC Mezzanine loan Student housing 13.0% 1/6/2024 3,000,000 3,476,034 3,186,907 1.1%

SMR Hospitality II, LLC Mezzanine loan Hotel 13.5% 2/5/2019 3,000,000 3,246,113 3,117,440 1.0%

Total US - SC 6,000,000 6,722,147 6,304,347 2.1%



28

___________________________

(a) All the Company’s investments are issued by an eligible U.S. portfolio company, as defined in the Investment Company Act of 1940. (b) Because there is no readily available market for these investments, the fair values of these investments are approved in good faith by the Company’s board of directors. (c) Percentages are based on net assets of $300,084,291 as of March 31, 2016. (d) Participation interest is with Terra Secured Income Fund 5 International, a related party fund managed by the Manager. (e) The loan participants from the Company do not qualify for sale accounting under ASC Topic 860 – Transfers and Servicing, and therefore, these loans remain in the Schedule

of Investments. See “Obligations under Participation Agreements” in Note 3 and “Transfers of Participation Interest by the Company” in Note 4 in the accompanying notes to the financing statements.

(f) Participation interest is with Terra Income Fund 6, Inc., a related party fund managed by an affiliate of the Company’s sponsor. (g) This loan was repaid in full in May 2016. (h) The Company owns two commercial office building parks and the related operations. Amount represents total equity invested. This investment generally pays a monthly

distribution of 12%, which is recorded as dividend income. (i) See “Participation Interests Purchased by the Company” in Note 4 in the accompanying notes to the financial statements.



Maturity Date


% of Net

Assets (c)

US -TN Kingsport 925-Mezz LLC Mezzanine loan Multifamily 13.0% 12/5/2018 3,000,000 3,258,193 3,132,995 1.0%

315 JV, LLC Mezzanine loan Office 15.0% 5/28/2016 6,673,603 6,846,281 6,914,450 2.3%

Total US - TN 9,673,603 10,104,474 10,047,445 3.3%

US - TX Northland Museo Member, LLC Mezzanine loan Multifamily 12.0% 12/6/2018 4,000,000 3,925,807 4,095,691 1.4%

Austin H. I. Owner LLC Mezzanine loan Hotel 12.5% 10/6/2020 3,500,000 3,500,000 3,500,000 1.2%

AHF-Heritage #1, LLC Mezzanine loan Multifamily 14.0% 8/11/2022 3,869,381 4,153,687 4,053,440 1.3%

Brass Centerview 2012, LLC Preferred equity investment Office 15.0% current/1.5% PIK 6/3/2016 16,219,443 16,219,443 16,219,443 5.4%

1701 TPC Mezzco, LLC Mezzanine loan Hotel 14.5% 8/6/2016 8,700,000 8,701,999 8,821,672 2.9%

Total US - TX 36,288,824 36,500,936 36,690,246 12.2%

US - Various Capital Square Realty Advisors, LLC Facility Various 13.0% 9/6/2016 10,500,000 10,500,000 10,500,000 3.5%

Matrix Realty Group Mezzanine loanManufactured

housing 12.5% 8/6/2018 15,000,000 15,798,530 15,254,767 5.1%

Total US - Various 25,500,000 26,298,530 25,754,767 8.6%

Total secured loans and preferred equity investments 310,452,396 314,804,151 313,485,917 104.3%

Real estate owned

US - SC Terra Park Green Member, LLC (h) Office 13,785,167 16,546,042 16,900,000 5.6%

Loans through participation interests (f)(i):

US - NY QPT 24th Street Mezz LLCParticipation in mezzanine loan Land 12.0% current/2.0% PIK 6/15/2017 12,571,855 12,571,855 12,571,855 4.2%

US - PA KOP Hotel XXXI Mezz LPParticipation in mezzanine loan Hotel 13.0% 12/6/2022 1,800,000 1,800,000 1,800,000 0.6%

Total loans through participation interest 14,371,855 14,371,855 14,371,855 4.8%

Total investments 338,609,418$ 345,722,048$ 344,757,772$ 114.8%



29

Note 1. Principal Business and Organization

Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company”) was incorporated under the general corporation laws of the State of Maryland on December 31, 2015 and commenced operations on January 1, 2016 when its parent company, Terra Secured Income Fund 5, LLC, contributed all of its operating net assets to the Company (See Note 8) in exchange for the common shares of the Company. The Company is an externally-managed, non-diversified, closed-end management investment company that intends to elect to be taxed, and to qualify annually thereafter, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 as amended (the “Code”). As a REIT, the Company is not subject to federal income taxes on income and gains that distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors

The Company was formed to originate, acquire and structure real estate-related loans, including mezzanine

loans, first and second mortgage loans, subordinated mortgage loans, bridge loans, preferred equity investments and other loans related to high quality commercial real estate. The Company’s investment strategy is to invest in, and manage a diverse portfolio of, real estate-related loans. The Company seeks to create and maintain a portfolio of investments that generates a low volatility income stream for attractive and consistent cash distributions. The real-estate loans are typically mezzanine loans and preferred equity investments between $3 million and $25 million, with interest rates ranging from 12% to 16% and maturities between one to ten years.

The Company’s actively wholly-owned subsidiaries (all Delaware limited liability companies) were formed for

the sole purpose of originating and structuring certain preferred equity investments. These subsidiaries are consolidated on the Company’s financial statements.

The Company’s investment activities are externally managed by Terra Capital Advisors, LLC (the “Manager”),

a private investment firm affiliated with the Company, pursuant to a management agreement (the “Management Agreement”), under the oversight of the Company’s board of directors (the “Board”) (see Note 4). Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation: The consolidated financial statements include the

accounts of the Company and its wholly-owned subsidiaries. The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).



Restricted Cash: Restricted cash represents cash held as additional collateral by the Company on behalf of the borrower related to the investments in loans or preferred equity instruments for the purpose of such borrowers making interest and property-related operating payments. Restricted cash also includes amount funded by the Company to an escrow account held by the lender for debt services. There is a corresponding liability related to cash held as additional collateral by the Company on the consolidated statement of assets, liabilities and members’ capital called “Interest reserve and other deposits held on investments”.

Investment Transactions and Investment Income (Expense): The Company records investment transactions

on the trade date. Realized gains or losses on dispositions of investments represent the difference between the



30

original cost of the investment, based on the specific identification method, and the proceeds received from the sale or maturity (exclusive of any prepayment penalties). The Company applies a fair value accounting policy to its investments with changes in unrealized gains and losses recognized in the consolidated statement of operations. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Discounts and premiums on investments purchased are accreted/amortized over the expected life of the respective investment using the effective yield method, and are included in interest income in the consolidated statement of operations. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortizations of premiums on investments. Origination fee income and expense are recognized on an accrual basis. Excess origination fee income over expense (and excess origination expense over origination fee income) is amortized over the life of the related investment. As prepayment(s) or payment(s), partial or full, occurs on an investment, prepayment and exit fee income, respectively, are recognized.

The Company holds debt investments in its portfolio that contain payment-in-kind (“PIK”) interest provisions.

The PIK interest, which represents contractually deferred interest that add to the principal balance that is generally due at maturity, are generally recorded on the accrual basis.

Participation Interests: The Company follows the guidance in ASC Topic 860 – Transfers and Servicing (“ASC

Topic 860”), when accounting for loan participations. Such guidance requires participations interests meet certain criteria in order for the interest transaction to be recorded as a sale. Loan participations from the Company which do not qualify for sale treatment remain on the Company’s statements of assets and liabilities and the proceeds are recorded as obligations under participation agreements. For the investments which participation has been granted, the interest earned on the entire loan balance is recorded within “interest income” and the interest related to the participation interest is recorded within “interest expense from obligations under participation agreements” in the accompanying consolidated statement of operations. See “Obligations under Participation Agreements” in Note 3 for additional information.

Valuation of Investments: The Company determines the value of its investments on a quarterly basis in accordance with fair value accounting guidance promulgated under U.S. GAAP, which establishes a three-tier hierarchical disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. These tiers include: • Level 1 — observable inputs, such as quoted prices in active markets. Publicly listed equities and publicly listed derivatives will be included in Level 1. In addition, securities sold, but not yet purchased, and call options will be included in Level 1. • Level 2 — observable inputs such as for similar securities in active markets and quoted prices for identical securities in markets that are not active. In certain cases, debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments and various relationships between investments. Investments which are generally expected to be included in this category include corporate bonds and loans, convertible debt indexed to publicly listed securities and certain over-the-counter derivatives. • Level 3 — unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. The inputs into the determination of fair value require significant judgment or estimation.

Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices, generally, will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. 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.



31

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires subjective judgment and consideration of factors specific to the investment. The fair values of the Company’s investments are determined in good faith by the Manager pursuant to the Company’s valuation policy and consistently applied valuation process. It is expected that the Company’s investments will primarily be classified as Level 3 investments.

Dividends and Distributions: Dividends and distributions to stockholders, which are determined in accordance with federal income tax regulations, are recorded on the record date. The amount to be paid out as a dividend or distribution is approved by the Board. Net realized capital gains, if any, are generally distributed or deemed distributed at least annually. Fair Value of Financial Instruments: The fair values of the Company’s assets and liabilities, which qualify as financial instruments, approximate the carrying amount presented on the consolidated statement of assets, liabilities and members’ capital. Deferred Financing Costs: Deferred financing costs represent fees and expenses incurred in connection with obtaining financing for investments. These costs are presented in the consolidated statement of assets and liabilities as a direct deduction of the debt liability to which the costs pertain. These costs are amortized using the effective interest method and are included in interest expense in the consolidated statement of operations over the life of the borrowings.

Income Taxes: The Company intends to elect to operate so as to qualify to be taxed as a REIT under Sections

856 through 860 of the Internal Revenue Code. In order to qualify as a REIT, the Company is required, among other things, to distribute at least 90% of its REIT net taxable income to the stockholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income taxes on income and gains that distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors.

The Company did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, Income Taxes, nor did the Company have any unrecognized tax benefits as of the periods presented herein. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its statements of operations. For the three months ended March 31, 2016, the Company did not incur any interest or penalties. Although the Company files federal and state tax returns, our major tax jurisdiction is federal. The Company’s inception-to-date federal tax years remain subject to examination by the Internal Revenue Service.

Recent Accounting Pronouncements: In August 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments provide a definition of the term “substantial doubt” and include principles for considering the mitigating effect of management’s plans. The amendments also require an evaluation every reporting period, including interim periods for a period of one year after the date that the financial statements are issued (or available to be issued), and certain disclosures when substantial doubt is alleviated or not alleviated. The amendments in this update are effective for reporting periods ending after December 15, 2016. Management is currently evaluating the impact of adopting this new accounting guidance update on the financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (ASC Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 significantly changes the consolidation analysis required under U.S. GAAP and ends the deferral granted to investment companies from applying the variable interest entity guidance. ASU 2015-02 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015 and early adoption is permitted. The Company adopted ASU 2015-02 beginning January 1, 2016. The adoption of ASU 2015-02 did not have a material impact on its financial statements and disclosures.



32

In April 2015, the FASB issued ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 is effective for fiscal years that begin after December 15, 2015 and early adoption is permitted. The Company adopted ASU 2015-03 beginning January 1, 2016. The adoption of ASU 2015-03 did not have a material impact on its financial statements and disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted for public business entities. Management is currently evaluating the impact these changes will have on the Company’s financial statements and disclosures.

Note 3. Investments

The following table shows the composition of the investment portfolio, at amortized costs and fair value at March 31, 2016 (with corresponding percentage of total portfolio investments):

As discussed in Note 8, on January 1, 2016, TSIF5 contributed its consolidated net operating assets to the Company. The investments contributed by TSIF5 were recorded at fair value on January 1, 2016. If the fair value of an investment is higher/lower than the par value, a premium/discount is recorded. Discounts and premiums on investments are accreted/amortized over the expected life of the respective investment using the effective yield method. For the three months ended March 31, 2016, amortization of premium on investments, net was approximately $0.9 million, which is included in interest income on the consolidated statement of operations. Obligations under Participation Agreements

The Company has elected the fair value option under ASC Topic 825 — Financial Instruments (“ASC Topic 825”) relating to accounting for debt obligations at their fair value for its obligations under participation agreements which arose due to partial loan sales which did not meet the criteria for sale treatment under ASC Topic 860. The Company employs the same yield approach valuation methodology used for the real-estate related loan investments on the Company’s obligations under participation agreements. As of March 31, 2016, obligations under participation agreements at fair value totaled approximately $73.4 million and the fair value of the loans that are associated with these obligations under participation agreements is approximately $18.3 million. The weighted average interest rate on the obligations under participation agreements was approximately 13.51% as of March 31, 2016. See “Participation Agreements” in Note 4.

Investments at Par Value

% of Par

Value

Investments at Amortized

Costs

% of Amortized

Cost

Investments at

Fair Value

% of Fair

Value

Loans 255,284,961$ 75.4% 259,016,215$ 74.9% 257,993,043$ 74.8%

Preferred equity investments 55,167,435 16.3% 55,787,936 16.1% 55,492,874 16.1%

Loans through participation interests (Note 4) 14,371,855 4.2% 14,371,855 4.2% 14,371,855 4.2%

Real estate owned 13,785,167 4.1% 16,546,042 4.8% 16,900,000 4.9%

Total 338,609,418$ 100.0% 345,722,048$ 100.0% 344,757,772$ 100.0%



33

Significant Risk Factors

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

Market Risk

The Company’s investments are highly illiquid and there is no assurance that the Company will achieve its

investment objectives, including targeted returns. Due to the illiquidity of the investments, valuation of the investments may be difficult, as there generally will be no established markets for these investments. As the Company's investments are carried at fair value with fair value changes recognized in the consolidated statement of operations, all changes in market conditions will directly affect stockholders’ capital. Credit Risk

Credit risk represents the potential loss that the Company would incur if the borrowers failed to perform

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

Mezzanine loans and preferred equity investments are subordinate to senior mortgage loans and, therefore, involve a higher degree of risk. In the event of a default, mezzanine loans and preferred equity investments will be satisfied only after the senior lender's investment is fully recovered. As a result, in the event of a default, the Company may not recover all of its investment. The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.

Concentration Risk

The Company holds real estate related investments. Thus, the investment portfolio of the Company may be

subject to a more rapid change in value than would be the case if the Company were required to maintain a wide diversification among industries, companies and types of investments. The result of such concentration in real estate assets is that a loss in such investments could materially reduce the Company’s capital.

Liquidity Risk

Liquidity risk represents the possibility that the Company may not be able to sell its positions at a reasonable

price in times of low trading volume, high volatility and financial stress.

Interest Rate Risk

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

Prepayment Risk

Prepayments can either positively or adversely affect the yields on investments. Prepayments on debt

instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a



34

variety of economic, geographic and other factors beyond the Company’s control, and consequently, such prepayment rates cannot be predicted with certainty. If the Company does not collect a prepayment fee in connection with a prepayment or is unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, the Company may acquire assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios the Company may fail to recoup fully our cost of acquisition of certain investments.

Use of Leverage

As part of the Company’s investment strategy, the Company may borrow and utilize leverage. While

borrowing and leverage present opportunities for increasing total return, they may have the effect of potentially creating or increasing losses.

Property Acquisitions

The Company may find it necessary to take possession of collateral including, without limitation, an asset or

business, through a purchase or foreclosure action. Borrowers may resist mortgage foreclosure or sales actions by asserting numerous claims and defenses, which delay both repayments of existing loan investments and/or acquisition of the collateral and add cost to such actions.

There can be no assurance that the Company will be able to successfully operate, hold or maintain the collateral

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

Valuation Process

The Manager develops, establishes and reviews the valuation processes and procedures used to value the investments of the Company. 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.

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



35

The following table presents fair value measurements of investments, by major class, as of March 31, 2016,

according to the fair value hierarchy:

Changes in Level 3 investments for the three months ended March 31, 2016 were as follows:

Purchases represent the acquisition of new investments at cost. Redemptions represent principal payments

received during the period.

Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the three months ended March 31, 2016, there were no transfers.

Level 1 Level 2 Level 3 Total

Investments:

Loans and preferred equity investments -$ -$ 313,485,917$ 313,485,917$

Investments through participation interests - - 14,371,855 14,371,855

Real estate owned - - 16,900,000 16,900,000

Total Investments -$ -$ 344,757,772$ 344,757,772$

Liabilities:

Obligations under Participation Agreements -$ -$ 18,346,610$ 18,346,610$

Note payable - - 33,670,968 33,670,968

Total liabilities: -$ -$ 52,017,578$ 52,017,578$

Fair Value Measurements

March 31, 2016

Loans and

Preferred

Equity

Investments

Investments

through

Participation

Interests

Real Estate

Owned

Total

Investments

Obligations

under

Participation

Agreements

Note

Payable

Total

Liabilities

Balance at January 1, 2016 -$ -$ -$ -$ -$ -$ -$ Investments and obligations contributed by TSIF5 275,090,651 13,687,053 16,900,000 305,677,704 23,961,197 - 23,961,197 Net unrealized appreciation (deprecation) on investments (1,318,232) - 353,958 (964,274) (53,441) - (53,441)

Loans made and purchases 63,666,197 620,759 - 64,286,956 1,523,559 33,660,000 35,183,559

Redemptions and Repayments (23,735,177) - - (23,735,177) (7,120,552) - (7,120,552)

PIK interest 387,351 64,043 - 451,394 52,599 - 52,599

Net amortization of premium on investments (604,873) - (353,958) (958,831) (9,172) - (9,172)

Amortization of financing costs - - - - - 10,968 10,968 Net realized gain on obligations under participation agreements - - - - (7,580) - (7,580)

Balance at March 31, 2016 313,485,917$ 14,371,855$ 16,900,000$ 344,757,772$ 18,346,610$ 33,670,968$ 52,017,578$

Unrealized gain (loss) for the period relating to those Level 3 assets that were still held by the Company at the end of the period (1,318,232)$ -$ 353,958$ (964,274)$ (53,441)$ -$ (53,441)$



36

Significant Unobservable Inputs

The following table summarizes the significant unobservable inputs used by the Company to value the Level 3 investments as of March 31, 2016. The table is not intended to be all-inclusive, but instead identifies the significant unobservable inputs relevant to the determination of fair values.

Asset Category Fair Value

Primary

Valuation

Technique Unobservable Inputs Minimum Maximum

Weighted

Average

Assets:

Loans and preferred equity investments $313,485,917

Discounted cash flow

Yield based on the Investment 's Position in the Capital Structure:

Capital Structure Discount Rate 7.00% 14.00% 10.64%

Transitional DSCR Add-on 0.00% 3.00% 1.48%

Property and market quality add-on -3.00% 2.50% -0.47%

Yield based on Risk Adjusted Discount Rate:

Interpolated swap rate 0.44% 1.46% 0.77%

Debt-structure based add-on 0.00% 5.00% 3.01%

Market position loan spread 7.13% 15.25% 10.87%


Property and market quality add-on -3.00% 2.50% -0.47%Investments through participation interests $14,371,855





Property and market quality add-on 0.00% 0.00% 0.00%







Real estate owned $16,900,000

Discounted cash flow Discount rate 10.50% 10.50% 10.50%

Capitalization rate 9.00% 9.00% 9.00%

Total Level 3 Assets $344,757,772

Liabilities:

Obligations under Participation Agreements $18,346,610



Captial structure discount rate 7.00% 14.00% 12.49%











37

Note 4. Related Party Transactions

Management Agreement

On January 1, 2016, the Company entered to the Management Agreement with the Manager. The Manager is

responsible for the Company’s day-to-day operations. Origination Fee Expense

Pursuant to the Management Agreement, the Manager or its affiliates receives an origination fee in the amount of 1% of the amount used to originate, fund, acquire or structure real estate-related loans, including any third party expenses related to such investments. In the event that the term of any real estate-related loan held by the Company is extended, the Manager or its affiliates also receives an origination fee equal to the lesser of (i) 1% of the principal account of the loan being extended or (ii) the amount of fee paid to the Company by the borrower in connection with such extension. For the three months ended March 31, 2016, the Company recorded origination fee expense of approximately $1.1 million, as reflected on the consolidated statement of operations, of which approximately $0.7 million was paid to the Manager and the remaining $0.4 million was included in Due to Manager on the consolidated statement of assets and liabilities.

Management Fee

Under the terms of the Management Agreement, the Manager or its affiliates provides the Company with

certain investment management services in return for a management fee. The Company pays a monthly asset management fee at an annual rate of 1% of the aggregate funds under management, which includes the loan origination price or aggregate gross acquisition price, as defined in the Management Agreement, for each real estate related investment and cash held by the Company. For the three months ended March 31, 2016, the Company paid the Manager an asset management fee of approximately $0.7 million, which is included in management and asset servicing fees on the consolidated statement of operations. Asset Servicing Fee

The Manager or its affiliates receives from the Company a monthly servicing fee at an annual rate of .25% of the aggregate gross origination price or acquisition price for each real estate-related loan held by the Company. For


Primary

Valuation


Weighted

Average

Liabilities:

Note payable $33,670,968











Property and market quality add-on 0.00% 0.00% 0.00%Total Level 3 Liabilities $52,017,578



38

the three months ended March 31, 2016, the Company paid the Manager an asset servicing fee of approximately $0.2 million, which is included in management and asset servicing fees on the consolidated statement of operations.

Operating Expenses

The Company reimburses the Manager for operating expenses incurred in connection with services provided to the operations of the Company, including the Company’s allocable share of the Manager’s overhead, such as rent, employee costs, utilities, and technology costs. For the three months ended March 31, 2016, the Company reimbursed the Manager for operating expenses of approximately $0.8 million as reflected in the consolidated statement of operations. Disposition Fee

Pursuant to the Management Agreement, the Manager or its affiliates receives a disposition fee in the amount of 1% of the gross sale price received by the Company from the disposition of any real estate-related investment, or any portion of, or interest in, any real estate-related investment. The disposition fee is paid concurrently with the closing of any such disposition of all or any portion of any real estate-related investment or any interest therein. The Company does not pay a disposition fee upon the maturity, prepayment, workout, modification or extension of a loan or other debt-related investment unless there is a corresponding fee paid by the borrower, in which case the disposition fee is the lesser of (i) 1.0% of the principal amount of the loan or debt-related investment prior to such transaction or (ii) the amount of the fee paid by the borrower in connection with such transaction. If the Company takes ownership of a property as a result of a workout or foreclosure of a loan, the Company will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price. For the three months ended March 31, 2016, the Company recorded a disposition fee of approximately $0.2 million. Participating Agreements

In the normal course of business, the Company may enter into Participation Agreements (the “PAs”) with related parties, primarily other affiliated funds managed by the Terra Capital Partners and/or its affiliates (“the Participants”). The purpose of the PAs 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. In addition, the Company sells participation interests to an affiliate not less than 90 days after the origination of an investment to allow for greater diversification within the Company’s portfolio as well as sharing investment economics with the affiliate.

ASC 860, Transfers and Servicing, 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 860 (See “Participation interests” in Note 2 and “Obligations under Participation Agreements” in Note 3). Participation Interests Purchased by the Company

The below table lists the investment interests participated in by the Company via PAs as of March 31, 2016. Per the terms of each PA, each Participant’s rights and obligations, as well as the proceeds received from the related borrower/issuer of the investment, are based upon their respective pro rata participation interest in the investment.

Participating

Interests Face Value

QPT 24th Street Mezz LLC (1)

83.33% 12,571,855$

KOP Hotel XXXI Mezz LP (1)

31.03% 1,800,000

14,371,855$



39

_____________ (1) Participation through Terra Income Fund 6, Inc., an affiliated fund. Transfers of Participation Interest by the Company The following table summarizes the investments that were subject to PAs with affiliated entities as of March 31, 2016:

_____________ (1) Participant is Terra Secured Income Fund 5 International, an affiliated fund. (2) Participant is Terra Income Fund 6, Inc., an affiliated fund.

These investments are held in the name of the Company, but each of the Participant’s rights and obligations, including interest income and other income (e.g., exit fee, prepayment income) and related fees/expenses (e.g., disposition fees, asset management and asset servicing fees), are based upon their respective pro-rata participation interest in such participated investments, as specified in the respective PA. The Participants’ share of the investments is repayable only from the proceeds received from the related borrower/issuer of the investments and, therefore, the Participants also are subject to credit risk (i.e., risk of default by the underlying borrower/issuer). Pursuant to the PAs with these entities, the Company receives and allocates the interest income and other related investment income in respect of the investments to the Participants. The Participants pay related expenses (i.e., asset management and asset servicing fees, disposition fees) directly to the Manager. Due from Related Parties

As of March 31, 2016, amount due from related parties was approximately $3.0 million, consisting of approximately $3.2 million due from TSIF5 primarily related to interest income received by Terra Funds 1 through 4, approximately $0.03 million due from Terra Secured Income Fund 5 International as a result of duplicate participation interest payment paid, partially offset by approximately $0.2 million due to Terra Income Fund 6, Inc. for interest income erroneously sent to the Company related to an investment the Company has a participation interest in. Due to Manager

As of March 31, 2016, amount due to the Manager was approximately $0.4 million primarily related to unpaid origination fees on several loan extensions.

Principal Fair Value % Transferred Principal Fair Value

1100 Biscayne Management Holdco, LLC (1)

14,955,066$ 14,877,387$ 17.81% 2,663,304$ 2,649,470$

CGI Mezz 55MM, LLC (1)

3,525,398 3,643,733 30.00% 1,057,624 1,093,125

L.A. Warner Hotel Partners, LLC (1)

20,000,000 20,101,482 18.75% 3,750,000 3,769,028

OHM Atlanta Member, LLC (1)

5,605,506 5,666,129 30.01% 1,681,939 1,700,129

SD Carmel Hotel Partners, LLC (1)

6,000,000 6,044,588 13.33% 800,000 805,945

Caton Mezz, LLC (1)

5,072,185 5,096,366 30.00% 1,521,659 1,528,913

TSG-Parcel 1, LLC (1)

18,000,000 18,000,000 26.67% 4,800,000 4,800,000


18,000,000 18,000,000 11.11% 2,000,000 2,000,000

18,274,526$ 18,346,610$

Transfers Treated as

Obligations Under Participation Agreements



40

Note 5. Note Payable

For the three months ended March 31, 2016, the Company obtained a $34.0 million interest-only loan for an investment it originated. The loan has an annual interest rate of LIBOR plus 5.25% and a term of two years. The Company may extend the loan by a six-month period and another 18-months period subject to certain conditions provided in the loan agreement. The loan is collateralized by the investment and the Company serves as the guarantor under the terms of the loan. In connection with the financing, the Company incurred financing costs of approximately $0.3 million, which is recorded as a reduction to note payable on the consolidated statement of assets and liabilities, to be amortized to interest expense using the effective interest rate method over the term of the loan.

The following table presents certain information about the loan at March 31, 2016:

____________ (1) Amount is net of unamortized financing costs of approximately $0.3 million.


In the ordinary course of business, the Company may enter into future funding commitments. As of March 31, 2016, these unfunded commitments were approximately $36.1 million.



See Note 4 for a discussion of the Company’s commitments to the Manager and its affiliates. Note 7. Income Taxes

The Company intends to elect to operate so as to qualify to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. In order to qualify as a REIT, the Company is required, among other things, to distribute at least 90% of its REIT net taxable income to the stockholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income taxes on income and gains that distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. As of March 31, 2016, the Company has satisfied all the requirements for a REIT and accordingly, no provision for federal income taxes has been included in the accompanying consolidated financial statements for the three months ended March 31, 2016.

Borrower

Principal

Amount

Outstanding

Amortized

Costs (1)

Fair Value Interest Rate Maturity Date

Maguire Partners-1733 Ocean, LLC 34,000,000$ 33,670,968$ 33,670,968$ 5.69% March 7, 2018



41

Note 8. Equity Capital Contributions

On January 1, 2016, TSIF5, the Company’s parent company, contributed its consolidated net operating assets to the Company pursuant to a contribution agreement in exchange for 14,412,990 shares of the Company’s common stocks. The following table presents a summary of assets and liabilities received and the fair value of the common stocks issued:

For the three months ended March 31, 2016, TSIF5 purchased another 500,000 of its common shares for $10.0

million. As of March 31, 2016, the Company had 14,912,990 common shares issued and outstanding. Capital Distributions

The Company’s sole common share holder is TSIF5. For the three months ended March 31, 2016, the Company made distributions totaling approximately $3.4 million to TSIF5. Earnings per Common Share

Earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period.

Total ConsiderationFair value of common shares issued 288,259,803$

288,259,803$

Assets AcquiredInvestments at fair value 291,990,652$ Investments through participation interests, at fair value 13,687,053 Cash and cash equivalents 5,034,571 Cash, restricted 21,421,501 Interest receivable 2,382,545 Other assets 35,695

334,552,017 Liabilities Assumed Obligations under participation agreements, at fair value 23,961,197 Interest reserve and other deposits held on investments 21,421,501 Unearned income 661,434 Other liabilities 248,082

46,292,214 288,259,803$



42

The following information sets forth the computation of the weighted average net increase in net assets per

share from operations during the three months ended March 31, 2016:

Note 9. Portfolio Activities New Investments

For the three months ended March 31, 2016, the Company made the following investments for a total of approximately $73.1 million:

A first mortgage for a total commitment of approximately $54.0 million, of which approximately $50.0

million has been funded as of March 31, 2016. This mortgage has an annual interest rate of LIBOR plus 8.5% and matures on March 9, 2018; and

A mezzanine loan for a total commitment of approximately $19.1 million, of which approximately $6.4 million has been funded as of March 31, 2016. This loan has an annual interest rate of 12% and matures on March 31, 2019.

Additionally, for the three months ended March 31, 2016, the Company provided approximately $7.9 million of

subsequent funding to existing investments. Repayments For the three months ended March 31, 2016, the Company received principal repayments of approximately $23.5 million, consisting of the following:

A payment of approximately $12.3 million was received in full satisfaction of a preferred equity investment. This investment had an annual interest rate of 14%. In connection with the repayment, the Company settled approximately $3.7 million of its obligation under the related PA with Terra Secured Income Fund 5 International; and

A payment of approximately $11.3 million was received in full satisfaction of a first mortgage. This mortgage had an annual interest rate of 12%. In connection with the repayment, the Company received prepayment income of approximately $0.1 million and settled approximately $3.4 million of its obligation under the related PA with Terra Secured Income Fund 5 International.

Transfer of Participation Interest

For the three months ended March 31, 2016, the Company entered into a PA with Terra Secured Income Fund 5 International whereby the Company transferred a 30% interest in a mezzanine loan to Terra Secured Income Fund 5 International for approximately $1.5 million. In connection with this transaction, the Company recognized a realized appreciation on investment of $7,580.

Three Months

Ended

March 31, 2016

Net increase in net assets resulting from operations 5,584,719$


Income per common share 0.38$



43

Extensions For the three months ended March 31, 2016, the Company granted short-term extensions to five maturing loans and received extension fees of approximately $0.2 million. Two of these loans were repaid as discussed in “Repayments” above.

Note 10. Financial Highlights The following per common share data and financial ratios have been derived from information provided in the financial statements. The following is a schedule of financial highlights during the three months ended March 31, 2016:

____________ (1) The per share data was derived by using the weighted average shares outstanding during the applicable period. (2) The per share data for distributions reflects the actual amount of distributions declared per share during the

period. (3) Represents the impact of the different share amounts used in calculating per share data as a result of calculating

certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.

Three Months Ended

March 31, 2016

Per common share operating performance:

Net asset value, beginning of period -$

Results of operations (1)

:

Net investment income 0.45

Net unrealized depreciation on investments (0.07)

Net unrealized depreciation on obligations under participation agreements -

Realized gain from obligations under participation agreements -

Net increase in net assets resulting from operations 0.38

Distributions to common shareholders:

Distributions from net investment income (2) (0.23)

Net decrease resulting from distributions (0.23)

Capital share transactions:

Capital contribution from TSIF 5 20.00

Other (3) (0.01)

Net increase in asset assets resulting from capital share transactions 19.99

Net asset value, end of period 20.14$

Shares outstanding at the end of period 14,912,990

Total return (4) 0.70%

Ratio/Supplemental data:

Net assets, end of period 300,420,562$

Ratio of net investment income to average net assets 8.82%

Ratio of operating expenses to average net assets 5.43%



44

(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.


Management has evaluated subsequent events through May 20, 2016, the date the consolidated financial statements were available to be issued. Management has determined that there are no material events that would require adjustment to, or disclosure in, the Company’s consolidated financial statements other than those listed below.

In May 2016, a $5.5 million mezzanine loan was repaid in full.


Contents Consolidated Financial Statements:

Consolidated Statement of Assets and Liabilities 22 Consolidated Statement of Operations 23 Consolidated Statement of Changes in Net Assets 24 Consolidated Statement of Cash Flows 25-26 Consolidated Schedule of Investments 27-28 Notes to Consolidated Financial Statements

29-44


Consolidated Statement of Assets and Liabilities

22


March 31, 2016

Assets

330,385,917$

14,371,855




Due from related parties 3,039,740

Other assets 26,250

Total assets 378,339,851

Liabilities

18,346,610

Note payable, net of financing costs 33,670,968



Unearned income 520,224



Other liabilities 206,175


Net assets 300,420,562$


Components of Net assets:

Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued -$

149,130

Capital in excess of par 298,110,674

Accumulated net investment income, net of distributions 3,064,011

Net unrealized depreciation on investments and obligations under participation agreements (910,833)

Net realized gain on investments and obligations under participation agreements 7,580

Net assets 300,420,562$

Net asset value per share 20.14$

Common stock, $0.01 par value, 450,000,000 shares authorized and 14,912,990 shares issued and outstanding at March 31, 2016

Investment through participation interests, at fair value (par value and amortized cost of $14,371,855)

Investments, at fair value (par value of $324,237,563 and amortized cost of $331,350,193)

Obligations under participation agreements, at fair value (par value of $18,274,25 and amortized proceeds of $18,400,050)



23



Investment income

Interest income $ 8,833,426

Dividend income 413,555

Prepayment fee income 100,016

Origination fee income 898,266

Exit fee income 178,326

Other 58,444


Operating expenses

Management and asset servicing fee 896,522

Interest expense on participation agreements 742,129

Interest expense on note payable 139,979

Operating expenses 842,169

Origination fee expense 1,136,547

Disposition fee expense 178,326


Other 9,014

Total operating expenses 3,994,061






Per common share date:

Net investment income per share $ 0.45

Net increase in net assets resulting from operations per share $ 0.38



Consolidated Statement of Changes in Net Assets

24



Operations

Net investment income $ 6,487,972




Net increase in net assets resulting from operations 5,584,719

Shareholder distributions

Distributions from net investment income (3,423,961)

Net decrease in net assets resulting from shareholder distributions (3,423,961)

Capital share transactions

Issuance of common stock in exchange for Terra Secured Income Fund 5, LLC ("TSIF5") consolidated net operating assets

288,259,804

Issuance of common stock 10,000,000

Net increase in net assets resulting from capital share transactions 298,259,804

Net increase in net assets 300,420,562

Net assets, at beginning of period -

Net assets, at end of period $ 300,420,562

Capital Share Activity

Shares outstanding, at beginning of period -

Shares issued in exchange for TSIF5 consolidated net operating assets 14,412,990

Shares issued 500,000

Shares outstanding, at end of period 14,912,990



25

Three Months Ended

March 31, 2016Cash flows from operating activities:


Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:

Paid-in-kind interest income, net (398,795)Amortization of financing costs 10,968 Amortization of premium on investments, net 949,660 Loans made and purchase of other investments (64,286,956)Proceeds from principal payments 23,735,177 Proceeds from obligations under participation agreements 1,523,559 Repayments for obligations under participation agreements (7,120,552)Realized gain from obligations under participation agreements (7,580)Net unrealized depreciation on investments 964,274 Net unrealized depreciation on obligations under participation agreements (53,441)


Cash, restricted (5,111,936)

Interest receivable (408,044)

Other assets 9,445

Due from related parties (3,039,740)








Cash flows from investing activities:Cash contributed by TSIF5 5,034,571

Net cash provided by investing activities 5,034,571


Proceeds from financing 34,000,000

Proceeds from issuance of common stock 10,000,000

Payment of financing cost (340,000)

Distributions paid (3,423,961)


Net increase in cash 1,192,063

Cash, at beginning of period -

Cash, at end of period $ 1,192,063

Supplemental disclosure of cash flow information:

Cash paid for interest 694,742$


Consolidated Statement of Cash Flows Cont.

26


On January 1, 2016, Terra Secured Income Fund 5 LLC, the Company’s parent company, contributed its

consolidated net operating assets to the Company pursuant to a contribution agreement in exchange for 14,412,990 shares of the Company’s common stock. The following table presents a summary of assets and liabilities received and the fair value of the common stock issued:


Common Stock Issued 288,259,803$

Net Assets Received





Other assets 35,695





Cash transferred from TSIF5 5,034,571$



27



Maturity Date


% of Net

Assets (c)

Secured loans and preferred equity investments:

US - AL ASA Mgt. Holdings, LLC Preferred equity investment Multifamily 15.0% 8/1/2022 $ 2,100,000 $ 2,160,846 $ 2,146,091 0.7%

SVA Mgt. Holdings, LLC Preferred equity investment Multifamily 15.0% 8/1/2022 1,600,000 1,649,562 1,635,549 0.5%

Total US - AL 3,700,000 3,810,408 3,781,640 1.2%

US - CA Palmer City-Core Stockton Street, LLC Preferred equity investment Hotel 12.0% 12/17/2016 4,325,000 4,325,000 4,372,251 1.5%

Encino Courtyard Mezzanine, LLC Mezzanine loan Retail 13.5% 1/6/2023 2,500,000 2,611,254 2,561,345 0.9%

Maguire Partners-1733 Ocean, LLC (Note 5) First mortgage Office LIBOR + 8.5% 3/9/2018 49,960,000 49,960,000 49,960,000 16.6%

L.A. Warner Hotel Partners, LLC (d)(e)


SD Carmel Hotel Partners, LLC (d)(e)


TSG-Parcel 1, LLC (d)(e)(f)

First mortgage Land 12.0% 7/10/2016 18,000,000 18,000,000 18,000,000 3.7%

Total US - CA 100,785,000 101,406,347 101,039,666 29.8%

US - DE BPG Office Partners III/IV LLC Mezzanine loan Office 13.5% 6/5/2018 10,000,000 10,000,000 10,000,000 3.3%

US - FL Beach Resort Management, LLC Mezzanine loan Hotel 13.0% 8/1/2017 4,500,000 4,543,212 4,559,971 1.5%

CGI Mezz 55MM, LLC (d)(e)

Mezzanine loan Mixed use 12.0% current/2.0% PIK 9/6/2019 3,525,398 3,625,006 3,643,733 0.8%

1100 Biscayne Management Holdco, LLC (d)((e)

Mezzanine loan Hotel 12.0% current/3.0% PIK 10/9/2017 14,955,066 14,955,066 14,877,387 4.1%

Caton Mezz, LLC (d)(e)

Mezzanine loan Office 12.0% current/2.0% PIK 7/27/2016 5,072,185 5,072,185 5,096,366 1.2%

Total US - FL 28,052,649 28,195,469 28,177,457 7.6%

US - GA Millgreen Properties, LLC Mezzanine loan Hotel 15.0% 9/8/2016 2,275,000 2,275,000 2,340,572 0.8%

Peachtree Pointe Interest, LLC Mezzanine loan Office 12.0% 11/1/2016 7,500,000 7,500,000 7,555,463 2.5%

YMP Georgia Portfolio Mezzanine, LLC Mezzanine loan Multifamily 14.0% 1/6/2019 5,000,000 5,444,957 5,049,514 1.7%

OHM Atlanta Member, LLC (d)(e)(g)

Mezzanine loan Land 14.0% current/4.0% PIK 5/2/2016 5,605,506 5,605,506 5,666,129 1.9%

Total US - GA 20,380,506 20,825,463 20,611,678 6.9%US - IN Muncie Mezz, LLC Mezzanine loan Student housing 13.0% 9/6/2023 2,700,000 2,669,605 2,881,424 1.0%

US - MAPhoenix CR 2012A, LLC, Phoenix CR 2012B, LLC, & Phoenix CR 2012C, LLC Mezzanine loan Multifamily 12.0% 8/11/2022 4,000,000 4,104,437 4,077,103 1.4%

US - NC Milestone Greensboro Holdings, LLC Mezzanine loan Hotel 14.0% 3/1/2018 3,500,000 3,535,149 3,604,440 1.2%

US - NJ Essence 144 Urban Renewal, LLC First mortgage Multifamily 12.0% 1/14/2017 22,639,955 22,639,955 22,878,223 7.6%

US - NY 1101 43rd Avenue Mezz, LLC Mezzanine loan Hotel 13.0% 12/6/2017 4,500,000 4,805,203 4,518,218 1.5%

Cape Church Mezz, LLC Mezzanine loan Multifamily 12.0% 3/31/2019 6,382,638 6,382,638 6,382,638 2.1%

WWML96MEZZ, LLC Mezzanine loan Multifamily 13.0% 12/31/2018 2,446,229 2,446,229 2,446,229 0.8%

WWML96, LLC Preferred equity investment Multifamily 13.0% 12/31/2018 1,180,992 1,180,992 1,180,992 0.4%

Total US - NY 14,509,859 14,815,062 14,528,077 4.8%

US - OR Pollin Hotels PDX Mezzanine, LLC Mezzanine loan Hotel 13.0% 10/6/2018 5,000,000 5,454,169 5,336,926 1.8%

US - PA PHL Hotel Partners, LLC Preferred equity investment Land 13.0% 10/8/2016 3,742,000 3,742,000 3,792,478 1.3%

Millennium Waterfront Associates, L.P First mortgage Multifamily 12.0% 7/2/2016 13,980,000 13,980,000 13,980,000 4.7%

Total US - PA 17,722,000 17,722,000 17,772,478 5.9%

US - SC High Pointe Mezzanine Investments, LLC Mezzanine loan Student housing 13.0% 1/6/2024 3,000,000 3,476,034 3,186,907 1.1%

SMR Hospitality II, LLC Mezzanine loan Hotel 13.5% 2/5/2019 3,000,000 3,246,113 3,117,440 1.0%

Total US - SC 6,000,000 6,722,147 6,304,347 2.1%