LOANS RECEIVABLE

9 Months Ended

Sep. 30, 2023

5. LOANS RECEIVABLE

Loans receivable consist of the following (in thousands):


	September 30, 2023		December 31, 2022
SBA 7(a) loans receivable, subject to credit risk	$	5,329	$	56,116
SBA 7(a) loans receivable, subject to loan-backed notes	48,133		—
SBA 7(a) loans receivable, subject to secured borrowings	4,661		6,127
SBA 7(a) loans receivable, held for sale	2,809		117
Loans receivable	60,932		62,360
Deferred capitalized costs, net	1,176		1,293
Loan loss reserves (1)	(1,704)		(1,106)
Loans receivable, net	$	60,404	$	62,547

____________________

(1)On January 1, 2023, the Company adopted ASU 2016-13. As such, the amounts as of September 30, 2023 reflect the Company’s current estimate of potential credit losses related to the Company’s loans receivable.

SBA 7(a) Loans Receivable, Subject to Credit Risk—Represents the unguaranteed portions of loans originated under the SBA 7(a) Program which were retained by the Company.

SBA 7(a) Loans Receivable, Subject to Loan-Backed Notes—Represents the unguaranteed portions of loans originated under the SBA 7(a) Program which were transferred to a trust and are held as collateral in connection with a securitization transaction. The proceeds received from the transfer were reflected as loan-backed notes payable (Note 7). These loans were subject to credit risk.

SBA 7(a) Loans Receivable, Subject to Secured Borrowings—Represents the government guaranteed portions of loans originated under the SBA 7(a) Program which were sold with the proceeds received from the sale reflected as secured borrowings—government guaranteed loans. There was no credit risk associated with these loans since the SBA has guaranteed payment of the principal.

SBA 7(a) Loans Receivable, Held for Sale— Represents the government guaranteed portion of loans held for sale at the end of the period or that had been sold but in respect of which proceeds had not been received as of the end of the period.

Current Expected Credit Losses

Current expected credit losses (“CECL”) reflect the Company’s current estimate of potential credit losses related to loans receivable included in the Company’s consolidated balance sheets as of September 30, 2023 pursuant to ASU 2016-13 as implemented effective January 1, 2023. Refer to Note 2 for further discussion of CECL.

The following table presents the activity in the Company’s current expected credit losses for the nine months ended September 30, 2023 (dollar amounts in thousands):


	Loans Receivable
Allowance for credit losses as of December 31, 2022	$	1,106
Transition adjustment on January 1, 2023	783
Reserve for expected credit losses	51
Current expected credit losses as of March 31, 2023	1,940
Write-offs	(85)
Reserve for expected credit losses	(142)
Current expected credit losses as of June 30, 2023	$	1,713

Reserve for expected credit losses	(9)
Current expected credit losses as of September 30, 2023	$	1,704

The Company’s initial estimate of its current expected credit losses against the loans receivable of $783,000, net of a $164,000 deferred tax asset, was recorded on January 1, 2023 directly to distributions in excess of earnings on the Company’s consolidated statements of equity. Subsequent changes to the allowance for credit losses are recognized through net income on the Company’s consolidated statements of operations. During the three and nine months ended September 30, 2023, the Company recorded a decrease of $9,000 and $100,000, respectively, in its current expected credit losses related to its loans receivable, which is recorded in general and administrative expenses in the consolidated statement of operations, and recorded a decrease due to write-offs of $85,000 during the nine months ended September 30, 2023, bringing the total current expected credit loss to $1.7 million as of September 30, 2023.

Other

As of September 30, 2023 and December 31, 2022, the Company’s loans subject to credit risk were 100.0% and 99.9%, respectively, concentrated in the hospitality industry. As of September 30, 2023 and December 31, 2022, 99.0% and 98.4%, respectively, of the Company’s loans subject to credit risk were current. The Company classifies loans with negative characteristics in substandard categories ranging from special mention to doubtful. As of September 30, 2023 and December 31, 2022, $1.3 million and $1.0 million, respectively, of loans subject to credit risk were classified in substandard categories.