MORTGAGE NOTES PAYABLE

12 Months Ended

Jun. 30, 2025

NOTE 9 – MORTGAGE NOTES PAYABLE

A. Mortgage and Mezzanine Loan History

In December 2013, Justice Investors Limited Partnership (“Justice”), then a consolidated subsidiary of Portsmouth Square, Inc. (the “Company”), obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan to fund the redemption of limited partnership interests and repay a prior $42,940,000 mortgage loan. The mortgage loan was secured by the Company’s principal asset, the Hilton San Francisco Financial District (the “Hotel”), and bore interest at 5.275% per annum. The loan required interest-only payments through January 2017 and began amortizing thereafter on a 30-year schedule, maturing on January 1, 2024. The mortgage loan was guaranteed in part by Portsmouth.

The mezzanine loan, originally bearing interest at 9.75% per annum and maturing concurrently with the senior loan, was secured by the membership interests of Justice Operating Company, LLC (“Operating”), held by Justice Mezzanine Company, LLC (“Mezzanine”), and was subordinated to the mortgage debt. The mezzanine loan was refinanced in July 2019 through a new agreement with CRED REIT Holdco LLC (“Mezzanine Lender”) in the amount of $20,000,000, at a reduced fixed interest rate of 7.25%, also maturing on January 1, 2024.

As of June 30, 2024, the outstanding mortgage loan balance was $76,962,000. As of December 31, 2024, the outstanding balance was $75,789,000.

B. Forbearance Agreements and Defaults

Due to the maturity of both loans on January 1, 2024, and the absence of full repayment by that date, the Company negotiated forbearance agreements with both lenders on April 29, 2024, as discussed in Note 2 – Liquidity.

Mortgage Loan Forbearance Agreement (U.S. Bank and others, the “Mortgage Lender”):

	●	Provided forbearance through January 1, 2025, assuming no termination event.
	●	Required a 10% principal paydown of $8,590,000.
	●	Included accrual of 4% default interest, retroactive to January 1, 2024, payable upon final maturity or prepayment.
	●	Included a 1% forbearance fee of $859,000, paid at execution.
	●	Operating continued timely monthly payments during the forbearance period.
	●	Guaranteed by Portsmouth.

Mezzanine Loan Forbearance Agreement (CRED REIT Holdco LLC):

	●	Provided forbearance through January 1, 2025, contingent on no termination event.
	●	Mezzanine Lender advanced $4.5 million to cover the senior loan principal paydown.
	●	Required 4% default interest accrual and a 1% forbearance fee ($245,000), both payable at final maturity or prepayment.
	●	No payments were required during the forbearance period.
	●	Guaranteed by Portsmouth.

Both agreements contained customary covenants, events of default, and representations and warranties. On January 3, 2025, the Company received a Notice of Termination from the Mortgage Lender, citing a termination event for failure to repay the debt by the forbearance expiration. On January 14, 2025, the Mezzanine Lender issued a Notice of Default, asserting its rights to pursue all remedies under the agreement.

C. Debt Refinancing Completed on March 28, 2025

On January 21, 2025, the Company executed a non-binding term sheet with Prime Finance (“Prime”) for a new senior loan. On March 28, 2025, the Company closed on both a senior mortgage loan and modified mezzanine loan (collectively, the “Loan Agreements”), fully retiring the prior debt with U.S. Bank and CRED REIT Holdco LLC.

	●	Mortgage Loan: Operating entered into a $67,000,000 Mortgage Loan Agreement with Prime. The loan bears interest at SOFR + 4.75%, with a SOFR cap of 4.50%, and is interest-only through maturity. Matures April 9, 2027, with three one-year extension options, subject to satisfaction of financial and operational covenants. The loan is secured by the Hotel and required the purchase of an interest rate cap at inception, for which the Company paid a premium of approximately $136,000.
	●	Mezzanine Loan: Mezzanine executed a modified Mezzanine Loan Agreement with CRED REIT Holdco LLC for a principal amount of $36,300,000 at a fixed rate of 7.25% per annum, on matching maturity and extension terms to the senior loan. The loan modifications were material in nature and therefore the transaction under ASC 470-50 accounted for as an extinguishment. The loan is secured by Mezzanine’s membership interest in Operating. The lender agreed to waive a forbearance fee of $245,000 and default interest of approximately $1.17 million, for a total waiver of $1.416 million. The waived amounts were recorded as a gain on extinguishment of debt.

Portsmouth continues to provide a limited guaranty in connection with both facilities. The Company is also subject to customary covenants, including financial ratios and affirmative obligations.

This successful refinancing, along with the mezzanine loan modification, was a key factor in management’s conclusion – discussed in Note 2 – that there is no longer substantial doubt about the Company’s ability to continue as a going concern.

D. Related Party Guarantee – InterGroup

Under the March 28, 2025 refinancing, guaranties tied to the prior loan structures were terminated. The current senior mortgage and amended mezzanine facilities are non-recourse subject to customary limited carve-outs and performance undertakings at the Portsmouth/operating-entity level. InterGroup is not a guarantor of these 2025 facilities.

E. DSCR and Lockbox Arrangements

Operating has not maintained compliance with the required Debt Service Coverage Ratio (“DSCR”) under both the original and refinanced loans. Operating did not maintain compliance with the required Debt Service Coverage Ratio (DSCR”) under the original December 2013 loan and is subject to ongoing DSCR requirements under the refinanced loans. Under the March 28, 2025, refinancing, a Cash Management Agreement with Prime Finance (“Lender”) and Wells Fargo Bank, N.A. (“Cash Management Bank”) requires that all Hotel cash receipts be deposited into a lender-controlled account. This lockbox arrangement remains in effect until DSCR conditions are met for two consecutive quarters. Funds are disbursed for approved operating expenses, debt service (including senior interest-only), and required reserves (insurance, real estate taxes, and furniture, fixtures and equipment) in accordance with lender-approved budgets. Excess cash, if any, is held in lender-controlled accounts for future interest-only payments to the Mezzanine lender, subject to certain conditions under the loan agreements with both lenders.

F. Governance and Related Party Disclosure

All members of Portsmouth’s Board of Directors — John V. Winfield, William J. Nance, John C. Love, Yvonne Murphy, and Steve H. Grunwald — also serve as directors of InterGroup. Mr. Winfield is Chairman of the Board and Chief Executive Officer of both Portsmouth and InterGroup. He served as Managing Director of Justice until its dissolution in December 2021.

Portsmouth encourages investments by its CEO and InterGroup in the same companies in which Portsmouth invests, as such alignment of interests places personal and affiliate capital at risk alongside Company capital.

As of June 30, 2025 and 2024, the Company had the following mortgages:

SCHEDULE OF MORTGAGES

June 30, 2025			Interest Rate	Origination Date	Maturity Date
$	67,000,000		SOFR (cap 4.50%) plus 4.75%	March 28, 2025	April 9, 2027
	36,300,000		Fixed 7.25%	March 28, 2025	April 9, 2027
	103,300,000		Mortgage notes payable - hotel
	(1,781,000	)	Net debt issuance costs
$	101,519,000		Total mortgage notes payable - Hotel

June 30, 2024			Interest Rate	Origination Date	Maturity Date
$	76,962,000		Fixed 5.28% plus 4% default rate	December 18, 2013	January 1, 2025
	24,500,000		Fixed 7.25% plus 4% default rate	July 31, 2019	January 1, 2025
	101,462,000		Mortgage notes payable - hotel
	(679,000	)	Net debt issuance costs
$	100,783,000		Total mortgage notes payable - Hotel