In September 2019, we committed to invest $7 million in the construction of a 195-unit apartment community in Lake Stevens, Washington, a northern suburb of Seattle. After breaking ground last fall, the project made steady progress through the winter, before coming to a standstill in March as the state government shut down non-essential business activity in response to the COVID-19 outbreak.
Recently, the project’s sponsor opted to pay back our investment ahead of schedule, citing the recent changes in the macroeconomic environment. As with many of our other construction projects, this investment was structured like debt and funded incrementally in draws as certain construction milestones were reached. Per the terms of our agreement, we were entitled to earn returns on the entire $7 million commitment, even though only a fraction of that amount had actually been deployed into the project since it was in its early phases. As a result, we realized a net return on investment of roughly 15.0%¹ in under nine months (equivalent to a 22.8% annualized return), compared with our underwritten projection of a 10.8% annualized return over an expected 3 to 5 year term.
As we stated in our recent letter on how we plan to invest through the current crisis, we believe that attractive investment opportunities will begin to present themselves in the coming months. While we’d have been happy to hold this investment through to completion, an earlier-than-expected payoff like this one serves to further bolster our cash reserves as we look to acquire assets that have the potential to outperform over the long term due to more permanent structural changes that emerge from the pandemic.
Investor FAQ: How did this project impact your portfolio?
This investment was structured like debt, where the project’s sponsor 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 this investment, the regular income it generated supported quarterly dividends for the Income eREIT II.
As always, if you have any questions or feedback, please visit our help center or reach out to us at investments@fundrise.com.
