In August 2018, we provided a $3.1 million loan for the acquisition of a 26,500 square foot (0.6 acre) property in the Eagle Rock neighborhood of Los Angeles. While the property is currently improved with two office buildings and a parking lot, the borrower acquired the site with plans to redevelop the land into a new housing subdivision.
Today, we’re pleased to report that the borrower has successfully secured entitlements from the City of Los Angeles to subdivide the property into 17 smaller lots, upon each of which a new home can now be built. The now-entitled property is valued at approximately $4.2 million, based on a third-party appraisal, which is roughly 34% higher than the original $3.1 million purchase.
The next step is to secure the building permits necessary to break ground. At that point, the borrower plans to either refinance into a construction loan or sell the property to a home builder to pay back our investment.
How might the impact of COVID-19 affect this investment?
While LA has so far kept their planning and permitting offices open, it is reasonable to assume that the standard approval processes may move slower as a result of the broader shelter-in-place orders. Additionally, the borrower could encounter difficulties obtaining construction financing in the event that lenders pull back until there is more clarity in the market. Either of these scenarios could delay the repayment of our investment.
To mitigate the risk of these unexpected delays, we structured this investment as debt, so we’re entitled to a fixed rate of return over the period that our loan is outstanding. Additionally, our investment is secured by the value of the land, which was recently appraised at $4.2 million. To date, the borrower has drawn $2.7 million of our $3.1 million loan, putting our current loan to value (LTV) at roughly 65%, or 74% in the event they draw down the remaining $400,000 — a considerable margin of safety in either case.
Overall, we believe that a current return in the 9 - 10%¹ range secured by entitled land in one of the most supply-constrained cities in the US, represents a highly attractive risk-adjusted return that should be resistant to even an extended economic downturn.
As always, if you have any questions or feedback, please visit our help center or reach out to us at investments@fundrise.com.
————
How we’re navigating the coronavirus (COVID-19) pandemic
Though black swan events like the current coronavirus pandemic are impossible to predict, nearly every decade has experienced some form of significant economic disruption. Recognizing this, we’ve spent the last several years structuring our investments to withstand a sudden and prolonged period of distress. Given today’s extreme uncertainty, we have begun taking decisive action aimed at further fortifying your portfolio.
Broadly, we expect to pause most new acquisitions and anticipate holding more cash in reserve. We plan to focus on pushing existing projects like this one forward, and in rare instances, look to deploy strategically into properties that we feel are particularly well suited to withstand near term stress or even benefit from the current disruption in the market. That said, given how quickly things are unfolding, we will continue to reevaluate the situation daily and keep you updated on all things relevant to your investments with us.
