As part of an increased focus on Opportunistic Credit, we’ve invested roughly $10.5 million to provide financing in the form of preferred equity for the development of The Pointe at Palm Bay, a 252-unit luxury multifamily community on centrally located land in Palm Bay, Florida. We believe that because of the current macroeconomic conditions and dislocations in the credit markets, we are able to deliver higher risk-adjusted returns than were previously available.

In this instance, under the terms of the investment agreement, the borrower has agreed to pay us a 13% fixed annual rate that will accrue for as long as it takes to finish the project, and our investment will be paid back upon its completion.

Business plan

Our loan will be used to finance the completion of the construction and stabilization of this class-A multifamily community, which the borrower, Waypoint Residential, expects will take roughly another eighteen months to complete. They plan to lease up the units and pay back our preferred equity investment, either using proceeds from a sale or by refinancing the property once it’s stabilized. (In the world of real estate investing, “stabilized” refers to a property that is almost completely leased up — typically an occupancy rate over 90%, therefore producing a “stable” flow of rental revenue.)

In early 2021, Waypoint acquired the vacant land already zoned for residential development. Shortly after, they began construction of six three-story apartment buildings, with a total of 252 luxury units. The development will offer a diverse unit mix of one-bedroom, two-bedroom, and three-bedroom floorplans and community amenities. Construction is anticipated to be completed in the second quarter of 2024. Under the investment terms, our preferred equity will receive priority ahead of the common equity (i.e., the borrower's equity), in regards to any distributions, profits, or payback. By structuring this investment (and most of our other investments in construction) like debt, we aim to mitigate risk to our investors’ principal and negate the impact of delays on performance.

The borrower has agreed to pay us a 13%1 fixed annual rate that will accrue for as long as it takes to finish the project business plan. This means delays do not negatively impact returns as long as the project eventually reaches a successful completion. To further increase our margin of safety, the sponsor signed as a guarantor for the preferred equity and provided standard carve-out provisions and guarantees. In addition, the sponsor invested an amount of equity, representing approximately 29% of the total expected costs, which is larger than our investment but junior to our position. That means they would lose their entire investment before our principal would be threatened.

Our approximately $10.5 million investment represents our full commitment to the project, and at closing, the sponsor drew the full amount. This investment was made by two Fundrise sponsored funds: the Fundrise Income Fund, which invested roughly $8.4 million, and the Fundrise Opportunistic Credit Fund, which invested roughly $2.1 million.

Dislocation in credit market creates opportunity

As we’ve referenced in our 2023 mid-year letter and our Private Credit investment strategy analysis, we believe the current macroeconomic environment has created a temporary period of market dislocation and, as a result, there exists a window of opportunity, specifically in the credit and lending markets, to achieve outsized returns relative to actual risk.

Consequently, we are seeing attractive opportunities to invest in high-quality assets or developments that are in the midst of value-enhancing activities — such as construction, renovations, or lease-up — before they reach stabilization and are ready for long-term fixed-rate debt or a sale. We believe that these opportunities can deliver a highly attractive risk-adjusted return by focusing on creditworthy borrowers.

While we often gravitate towards preferred equity investment structures given our preference for the risk-return profile, we believe the current dynamics are even more favorable for such a structure, and we expect to see lower relative loan-to-value/loan-to-cost (i.e., risk) paired with higher effective returns. This can be seen in the preferred return achieved in this investment of 13%1 vs. pricing for similar investments just 12-24 months ago, often in the range of only 9-10%.

Additionally, while this investment is initiating with a 71.2% LTC, we believe that we should be able to exit the deal at a 42% LTV (the ratio of the loan amount against the value of the property, as opposed to cost) once the construction is complete and community is leased up; this substantial difference between the initial LTC and the expected LTV highlights the project’s huge potential for value creation.

Why we invested

  • Trusted and reliable partnership: Waypoint Residential is a vertically-integrated developer, owner, and operator of apartment properties with a 12-year track record of success. Since inception, Waypoint has successfully completed over 140 transactions representing more than $6.2 billion in total capitalization across the Sunbelt region. Our first project with Waypoint dates back to 2017; since then, we’ve partnered on six successful, completed investments.

  • Prime location: The site for The Pointe at Palm Bay is conveniently located within a short drive of white sand beaches, major highways, port of Palm Bay, and the Palm Bay International Airport, rated as the fourth top airport in the U.S.

  • Healthy local economy: The Palm Bay-Melbourne-Titusville metro area is recognized for its thriving high-tech industry, ranking 11th nationwide in terms of the fastest-growing and highest concentration of high-tech jobs in the nation. In addition, between 2016 and 2021, Palm Bay experienced a remarkable growth rate in its high-tech sector, with employment increasing by an impressive 39%, nearly four times higher than the overall national growth rate of high-tech employment during the same period

As always, if you have any questions or feedback, please visit our help center or reach out to us at investments@fundrise.com.

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Additional Information: An investor in the Fundrise Income Real Estate Fund (the “Fund”) should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. The Fund’s prospectus contains this and other information about the Fund and may be obtained here. Investors should read the prospectus carefully before investing.