We’ve invested $10 million in a senior secured loan to be used for the construction of eleven new small-lot urban homes on a 26,037 square foot (0.59 acre) site in Hollywood. The borrower, Index Real Estate Investment, is a vertically integrated real estate firm specializing in property development in Los Angeles, having deployed more than $50 million in development to date.

Why we invested

  • Approved for development: The property has already received the necessary permitting and entitlements for the construction of 11 small lot homes on the site.
  • Senior loan with guarantees: The borrower has provided customary bad boy carve-out guarantees as well as full recourse completion guarantees.
  • Great location: The property is conveniently located on North Gramercy Place among the Larchmont Village, Koreatown, and Hollywood submarkets in Central Los Angeles.

Your construction lending primer

This new $10 million construction loan is in a senior secured position. However, it’s important to note that construction loans tend to involve more risk and therefore greater required due diligence than other loans.

Real estate investments are often classified by the phase of the project: ground-up, value-add or stabilized. Since there is uncertainty in construction, the risk of the project tends to increase with the amount of work that needs to be done. To mitigate the risks involved in ground-up construction projects, the lender must carefully monitor the construction.

Given the enhanced due diligence process associated with construction lending, these loans typically do not operate like a mortgage, which disburse the entire balance of the loan right away. Rather, construction lenders typically release portions of the loan proceeds in small “draws” over time upon completion of pre-designated milestones, such as building the foundation, framing the structure, and adding roofing. The lender must approve these draws after visiting the site to assure that the work has been completed.

With the proper due diligence and a strong relationship with a quality sponsor, investors can earn an attractive risk-adjusted return. Fundrise investors benefit from taking a passive position in this time-intensive investment, therefore reaping the benefits without all the hard work.