The Fundrise Opportunity Fund has acquired a soon to be vacated commercial property in the South Los Angeles area — near Culver City — which we intend to rehabilitate for future retail and/or creative office use. The asset, which is located within a designated Opportunity Zone census tract, was acquired for approximately $7.2 million, and we intend to invest approximately $3.8 million into property improvements as part of the redevelopment¹. The acquisition of the asset was financed with approximately $5.7 million of proceeds from our offering and $1.5 million of proceeds from a promissory note with our Sponsor, Rise Companies Corp. We intend for the Opportunity Fund to repay the promissory note as soon as proceeds from the offering are available, and to fund the entire purchase and redevelopment costs of the asset with Fundrise Opportunity Fund equity.
Business plan
Our intent is to reposition the asset, converting it from its existing industrial warehouse use to a mix of creative office and retail uses to meet the growing demand in the area. In addition, as the neighborhood continues to develop, the property provides the potential opportunity to undertake a more extensive redevelopment into a multi-story mixed-use apartment or condo project in the future. This flexibility, which is afforded by the property’s strong location and multiple viable redevelopment options, is expected to help de-risk the investment.
Pursuant to the stipulations of the Opportunity Zone legislation as outlined in the Internal Revenue Code section 1400Z-2 and clarified by the IRS, we intend to substantially improve the property by deploying capital in excess of our cost basis in the building. This will include an interior rehabilitation, and possible spec or tenant-specific build-out of the existing structure. We expect to complete these improvements within the 30-month time frame that is required in the Opportunity Zone legislation.
Why we invested
Growing demand for office space
The impetus for our strategy of developing the asset for retail and/or creative office use is predicated upon the targeted corridor’s growing cache both with area residents and businesses – particularly tenants in the entertainment or technology industry moving out of Santa Monica, Silicon Beach, or Culver City in search of more affordable space.
This area around Culver City offers access to a robust talent pool — the city of Los Angeles on the whole is home to a plethora of prestigious universities that cumulatively churn out more than 20,000 engineers annually. Meanwhile, Culver City, in particular, is ascending as an early-stage technology hub. In 2018, total startup funding in LA topped $4B — including $100M for a Culver City-based mobile game developer and $60M for a local athleisure company.
With a number of tenants — including behemoths Apple, Amazon, and HBO — actively signing new leases and growing their footprints within the Culver City area, it is expected that additional technology and entertainment sector tenants will follow, both due to the area’s inherent appeal, as well as to capitalize on the benefits of industry agglomeration. This, in turn, not only can bring additional jobs and wage growth to the area but also presages strong appreciation in office rents, and should support our value-add strategy for the Opportunity Fund asset.
Growing residential demand and incomes
On the retail side, we are encouraged by growing residential demand in the neighborhood surrounding the acquired asset. According to Zillow, South Los Angeles saw 7.5% home price appreciation over the past year, and is categorized as a seller’s market. Forecasted appreciation is also expected to be robust.
South Los Angeles has been benefiting of late from spillover residential demand due to many would be home buyers being priced out of other neighborhoods. As residents seek respite from high pricing in more expensive areas, they are increasingly deeming South LA neighborhoods attractive due to its convenient location and historic housing stock. Residential inventory in the area largely consists of bungalows, Victorian mansions, craftsmen homes, and other styles offering timeless architectural appeal. This may help draw residents to the area, just as it has in now established neighborhoods like Silver Lake and Culver City.
Additionally, median incomes in South LA are rising as the area revitalizes. In the census tract where the Opportunity Fund asset is located, the median income swelled by more than 17% from 2010-17. This trend augurs growing purchasing power, which should support incumbent local retailers as well as help draw new retailers to the area, which today still consists of many vacant and unoccupied storefronts.
Significant public investment in infrastructure
The introduction of the new Metro Expo Line connecting South LA to Downtown and Santa Monica should go a long way toward helping the area build and maintain strong appeal among both residents and commercial tenants. Moreover, soon a new $2 billion Crenshaw/LAX Line will run along an approximately 8.5-mile route in the region, further expanding public transit options for area residents and workers.
Central location
The area surrounding the Opportunity Fund asset offers access to multimodal transit and a number of major arterial routes. In addition to the new Metro Expo Line and forthcoming Crenshaw/LAX Line mentioned previously, the neighborhood provides convenient access to the Santa Monica Freeway, as well as to Interstate 5, which connects area residents and workers to virtually every part of the city. In addition, South LA is proximate to USC to the east and LAX to the south. Both serve as important anchors and potent generators of commercial and residential demand.
On the whole, we’re confident in the acquired asset’s location — which stands to benefit both from significant public investment and regional market trends — our site improvement plan, and our granular familiarity with the LA market, where we have engaged in a significant number of development and redevelopment projects since our inception.
We look forward to continuing to update you on the performance of this investment as it progresses.
