Back in February 2017, we invested $1.7 million in the development of eight small lot homes in the Larchmont Village neighborhood of Los Angeles. In May of 2018, we increased our investment by about $1 million after the sponsor, Square One Homes, showed strong progress on the project. We are pleased to announce that our loan has successfully paid back, earning approximately a 9%¹ annual return over the course of the investment.
Our initial principal was used by Square One Homes to purchase several adjacent lots totaling approximately 10,000 square feet. Our additional investment funded the “soft costs” for the project, including design and the subsequent procurement of construction documents and building permits required by the city. Since developers will pay a premium for shovel-ready projects, Square One was able to sell the permitted land for significantly more than the acquisition price and pay back our loan in full with interest.
The city of Los Angeles suffers from a chronic shortage of new housing supply. The Small Lot Ordinance (SLO) is an amendment to the Los Angeles Municipal Code that helps alleviate this problem by allowing developers to subdivide an existing parcel of land and construct multiple homes, thereby increasing density.
For sponsors who are comfortable navigating the SLO entitlement process, there is an opportunity to earn attractive returns by taking a relatively low risk. We have invested in several SLO deals with Square One Homes and other similarly experienced local sponsors. Given this successful payback and the continued undersupply of housing in LA, we remain optimistic about this strategy.
Investor FAQ: How does an individual project impact your portfolio?
This investment was structured as debt, where the borrower must pay us a fixed rate of return before they can earn a return for themselves, and their equity provides us with a cushion against losses. Throughout the term of the investment, the regular income it generated has supported quarterly dividends for the West Coast eREIT.
