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CURRENT EXPECTED CREDIT LOSSES
 9 Months Ended
Sep. 30, 2023
Credit Loss [Abstract]  
CURRENT EXPECTED CREDIT LOSSES CURRENT EXPECTED CREDIT LOSSES
The Company estimates its current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broader range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform the “CECL Reserve” using a model that considers multiple datapoints and methodologies that may include the likelihood of default and expected loss given default for each individual loan, discounted cash flows (“DCF”), and other inputs which may include the risk rating of the loan, how recently the loan was originated compared to the measurement date, and expected prepayment if applicable. Calculation of the CECL Reserve requires loan specific data, which may include fixed charge coverage ratio, loan-to-value, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors, including but not limited to (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of the Company’s loan portfolio and (iv) the Company’s current and future view of the macroeconomic environment. The Company may consider loan-specific qualitative factors on certain loans to estimate its CECL Reserve, which may include (i) whether cash from the borrower’s operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and (iii) the liquidation value of collateral. For loans where the Company has deemed the borrower/sponsor to be experiencing financial difficulty, the Company may elect to apply a practical expedient in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a specific CECL allowance. In order to estimate the future expected loan losses relevant to the Company’s portfolio, the Company may consider historical market loan loss data provided by a third-party data service. The third party’s loan database includes historical loss data for commercial mortgage-backed securities (“CMBS”), which the Company believes is a reasonably comparable and available data set to its type of loans.
As of September 30, 2023 and December 31, 2022, the Company’s CECL Reserve for its loans held at carrying value and loan receivable held at carrying value is approximately $14.4 million and $14.3 million, respectively, or 4.66% and 4.97%, respectively, of the Company’s total loans held at carrying value and loan receivable held at carrying value of approximately $310.1 million and $287.4 million, respectively, and is bifurcated between the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value and loan receivable held at carrying value of approximately $14.3 million and $13.5 million, respectively, and a liability for unfunded commitments of approximately $0.2 million and $0.8 million, respectively. The liability was based on the unfunded portion of the loan commitment over the full contractual period over which the Company is exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion.
Activity related to the CECL Reserve for outstanding balances and unfunded commitments on the Company’s loans held at carrying value and loan receivable held at carrying value as of and for the three and nine months ended September 30, 2023 was as follows:
Outstanding (1)
Unfunded (2)
Total
Balance at June 30, 2023$13,129,270 $259,174 $13,388,444 
Provision for current expected credit losses1,145,727 (92,329)1,053,398 
Write-offs— — — 
Recoveries— — — 
Balance at September 30, 2023$14,274,997 $166,845 $14,441,842 
Outstanding (1)
Unfunded (2)
Total
Balance at December 31, 2022$13,538,077 $754,128 $14,292,205 
Provision for current expected credit losses736,920 (587,283)149,637 
Write-offs— — — 
Recoveries— — — 
Balance at September 30, 2023$14,274,997 $166,845 $14,441,842 
(1)As of September 30, 2023 and December 31, 2022, the CECL Reserve related to outstanding balances on loans held at carrying value and loan receivable held at carrying value is recorded within current expected credit loss reserve in the Company’s consolidated balance sheets.
(2)As of September 30, 2023 and December 31, 2022, the CECL Reserve related to unfunded commitments on loans held at carrying value is recorded within current expected credit loss reserve as a liability in the Company’s consolidated balance sheets.
The Company continuously evaluates the credit quality of each loan by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, projected cash flow, loan structure and exit plan, loan-to-value ratio, fixed charge coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows:
RatingDefinition
1Very Low Risk — Materially exceeds performance metrics included in original or current credit underwriting and business plan
2Low Risk — Collateral and business performance exceeds substantially all performance metrics included in original or current credit underwriting and business plan
3Medium Risk — Collateral and business performance meets, or is on track to meet underwriting expectations; business plan is met or can reasonably be achieved
4High Risk/ Potential for Loss — Collateral performance falls short of underwriting, material differences from business plans, defaults may exist, or may soon exist absent material improvement. Risk of recovery of interest exists
5Impaired/ Loss Likely — Performance is significantly worse than underwriting with major variances from business plan observed. Loan covenants or financial milestones have been breached; exit from loan or refinancing is uncertain. Full recovery of principal is unlikely
The risk ratings are primarily based on historical data as well as taking into account future economic conditions.
As of September 30, 2023, the carrying value, excluding the CECL Reserve, of the Company’s loans held at carrying value and loan receivable held at carrying value within each risk rating by year of origination is as follows:
Risk Rating:2023202220212020Total
1$— $— $— $— $— 
2— — — — — 
325,477,552 82,005,077 102,996,756 14,733,641 225,213,026 
4— — 82,798,050 — 82,798,050 
5— — — 2,040,058 2,040,058 
Total$25,477,552 $82,005,077 $185,794,806 $16,773,699 $310,051,134