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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Note 7. Fair Value Measurements The Company adopted the provisions of ASC 820, Fair Value Measurement (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows: Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access. Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs. Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of investments. Fair value for these investments are determined using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. As of September 30, 2021 and December 31, 2020, the Company has not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, obligations under participation agreements, secured borrowing, term loan payable, mortgage loan payable and revolving line of credit. Such financial instruments are carried at cost, less impairment or less net deferred costs, where applicable. Marketable securities are financial instruments that are reported at fair value. Financial Instruments Carried at Fair Value on a Recurring Basis From time to time, the Company may invest in short-term debt and equity securities which are classified as available-for-sale securities, which are presented at fair value on the consolidated balance sheet. Changes in the fair value of equity securities are recognized in earnings. Changes in the fair value of debt securities are reported in other comprehensive income until the securities are realized. The following tables present fair value measurements of marketable securities, by major class, as of September 30, 2021 and December 31, 2020, according to the fair value hierarchy:
|  | September 30, 2021
|  | Fair Value Measurements
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Marketable Securities: |  |  |  |  |  |  |  |
Equity securities |  | $ | 4,437,855 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,437,855 |
Total |  | $ | 4,437,855 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,437,855 |
|  | December 31, 2020
|  | Fair Value Measurements
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Marketable Securities: |  |  |  |  |  |  |  |
Equity securities |  | $ | 1,287,500 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,287,500 |
Total |  | $ | 1,287,500 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,287,500 |
The following table presents the activities of the marketable securities for the periods presented.
|  | Nine Months Ended September 30,
|  | 2021 |  | 2020
Beginning balance |  | $ | 1,287,500 |  |  | $ | — |
Purchases |  | 6,479,147 |  |  | 6,039,567 |
Proceeds from sale |  | (3,328,157) |  |  | (6,023,723) |
Reclassification of net realized gains on marketable securities into earnings |  | 22,428 |  |  | 1,160,162 |
Unrealized (losses) gains on marketable securities |  | (23,063) |  |  | 28,995 |
Ending balance |  | $ | 4,437,855 |  |  | $ | 1,205,001 |
Financial Instruments Not Carried at Fair Value The following table presents the carrying value, which represents the principal amount outstanding, adjusted for the accretion of purchase discounts on loans and exit fees, and the amortization of purchase premiums on loans and origination fees, and estimated fair value of the Company’s financial instruments that are not carried at fair value on the consolidated balance sheets:
|  |  | September 30, 2021 |  | December 31, 2020
| Level |  | Principal Amount |  | Carrying Value |  | Fair Value |  | Principal Amount |  | Carrying Value |  | Fair Value
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for investment, net | 3 |  | $ | 482,089,565 |  |  | $ | 484,782,215 |  |  | $ | 478,397,706 |  |  | $ | 419,924,758 |  |  | $ | 421,725,220 |  |  | $ | 415,113,225 |
Loans held for investment acquired through participation, net | 3 |  | — |  | — |  |  | — |  |  | 4,250,000 |  |  | 4,294,053 |  |  | 4,293,969 |
Allowance for loan losses |  |  | — |  |  | (4,319,563) |  |  | — |  |  | — |  |  | (3,738,758) |  |  | — |
Total loans |  |  | $ | 482,089,565 |  |  | $ | 480,462,652 |  |  | $ | 478,397,706 |  |  | $ | 424,174,758 |  |  | $ | 422,280,515 |  |  | $ | 419,407,194 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Term loan payable | 3 |  | $ | 93,595,027 |  |  | $ | 91,633,624 |  |  | $ | 94,197,966 |  |  | $ | 107,584,451 |  |  | $ | 105,245,801 |  |  | $ | 107,248,555 |
Unsecured notes payable | 1 |  | 85,125,000 |  |  | 81,706,136 |  |  | 85,193,100 |  |  | — |  |  | — |  |  | — |
Obligations under participation agreements | 3 |  | 105,566,232 |  |  | 106,190,225 |  |  | 105,281,167 |  |  | 71,266,303 |  |  | 71,581,897 |  |  | 70,693,207 |
Mortgage loan payable | 3 |  | 32,164,575 |  |  | 32,301,666 |  |  | 32,391,423 |  |  | 44,020,225 |  |  | 44,117,293 |  |  | 44,348,689 |
Secured borrowing | 3 |  | 31,477,882 |  |  | 31,525,439 |  |  | 31,169,148 |  |  | 18,281,848 |  |  | 18,187,663 |  |  | 17,037,032 |
Revolving line of credit payable | 3 |  | 25,299,713 |  |  | 24,832,405 |  |  | 25,299,713 |  |  | — |  |  | — |  |  | — |
Total liabilities |  |  | $ | 373,228,429 |  |  | $ | 368,189,495 |  |  | $ | 373,532,517 |  |  | $ | 241,152,827 |  |  | $ | 239,132,654 |  |  | $ | 239,327,483 |
The Company estimated that its other financial assets and liabilities, not included in the tables above, had fair values that approximated their carrying values at both September 30, 2021 and December 31, 2020 due to their short-term nature. Valuation Process for Fair Value Measurement The fair value of the Company’s investment in equity securities and its unsecured notes payable is determined based on quoted prices in an active market and is classified as Level 1 of the fair value hierarchy. Market quotations are not readily available for the Company’s real estate-related loan investments, all of which are included in Level 3 of the fair value hierarchy, and therefore these investments are valued utilizing a yield approach, i.e. a discounted cash flow methodology to arrive at an estimate of the fair value of each respective investment in the portfolio using an estimated market yield. In following this methodology, investments are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of the Company’s investments, relevant factors, which may include available current market data on applicable yields of comparable debt/preferred equity instruments; market credit spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions; the portfolio company’s ability to make payments, net operating income and debt-service coverage ratio; construction progress reports and construction budget analysis; the nature, quality and realizable value of any collateral (and loan-to-value ratio); the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates and replacement costs; and the anticipated duration of each real estate-related loan investment. The Manager designates a valuation committee to oversee the entire valuation process of the Company’s Level 3 loans. 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. Because there is no readily available market for these investments, the fair values of these investments are approved in good faith by the Manager pursuant to the Company’s valuation policy. The fair values of the Company’s mortgage loan payable, secured borrowing, term loan payable and revolving line of credit are determined by discounting the contractual cash flows at the interest rate the Company estimates such arrangements would bear if executed in the current market. The following table summarizes the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 loans as of September 30, 2021 and December 31, 2020. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
|  | Fair Value at September 30, 2021 | Primary Valuation Technique |  | Unobservable Inputs |  | September 30, 2021
Asset Category |  |  |  | Minimum | Maximum | Weighted Average
Assets: |  |  |  |  |  |  |  |  |  |
Loans held for investment, net |  | $ | 478,397,706 |  |  | Discounted cash flow |  | Discount rate |  | 4.28 | % | 15.00 | % | 9.19 | %
Loans held for investment acquired through participation, net |  | — |  |  | Discounted cash flow |  | Discount rate |  | 0.00 | % | 0.00 | % | 0.00 | %
Total Level 3 Assets |  | $ | 478,397,706 |  |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |  |  |
Term loan payable |  | $ | 94,197,966 |  |  | Discounted cash flow |  | Discount rate |  | 4.00 | % | 4.00 | % | 4.00 | %
Obligations under Participation Agreements |  | 105,281,167 |  |  | Discounted cash flow |  | Discount rate |  | 7.13 | % | 15.00 | % | 11.65 | %
Mortgage loan payable |  | 32,391,423 |  |  | Discounted cash flow |  | Discount rate |  | 6.08 | % | 6.08 | % | 6.08 | %
Secured borrowing |  | 31,169,148 |  |  | Discounted cash flow |  | Discount rate |  | 7.12 | % | 7.12 | % | 7.12 | %
Revolving line of credit |  | 25,299,713 |  |  | Discounted cash flow |  | Discount rate |  | 4.00 | % | 4.00 | % | 4.00 | %
Total Level 3 Liabilities |  | $ | 288,339,417 |  |  |  |  |  |  |  |  |
|  | Fair Value at December 31, 2020 | Primary Valuation Technique |  | Unobservable Inputs |  | December 31, 2020
Asset Category |  |  |  | Minimum | Maximum | Weighted Average
Assets: |  |  |  |  |  |  |  |  |  |
Loans held for investment, net |  | $ | 415,113,225 |  |  | Discounted cash flow |  | Discount rate |  | 5.29 | % | 20.05 | % | 10.38 | %
Loans held for investment acquired through participation, net |  | 4,293,969 |  |  | Discounted cash flow |  | Discount rate |  | 12.89 | % | 12.89 | % | 12.89 | %
Total Level 3 Assets |  | $ | 419,407,194 |  |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |  |  |
Term loan payable |  | $ | 107,248,555 |  |  | Discounted cash flow |  | Discount rate |  | 5.25 | % | 5.25 | % | 5.25 | %
Obligations under Participation Agreements |  | 70,693,207 |  |  | Discounted cash flow |  | Discount rate |  | 9.75 | % | 20.05 | % | 12.58 | %
Mortgage loan payable |  | 44,348,689 |  |  | Discounted cash flow |  | Discount rate |  | 6.08 | % | 6.08 | % | 6.08 | %
Secured borrowing |  | 17,037,032 |  |  | Discounted cash flow |  | Discount rate |  | 11.25 | % | 11.25 | % | 11.25 | %
Total Level 3 Liabilities |  | $ | 239,327,483 |  |  |  |  |  |  |  |  |

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- Definition The entire disclosure of the fair value measurement of assets and liabilities, which includes financial instruments measured at fair value that are classified in shareholders' equity, which may be measured on a recurring or nonrecurring basis. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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