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In November 2018, we provided a $5 million loan for the acquisition of a 1.8 acre property in the Glassell Park neighborhood of Los Angeles as the future site of a 36-home subdivision.

After more than a year spent working with architects, planners, and local officials, we’re pleased to report that the project’s sponsor recently entitled the property for the construction of 37 new homes (one more than initially anticipated). The resulting increase in the property value has in turn increased the margin of safety on our loan; our loan to value (LTV) ratio is now approximately 60% (vs. 77% at acquisition). This means that the property value would need to decrease by roughly 40% before the principal of our investment was threatened.

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, even as shelter-in-place orders have begun to lift across the country. 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 land. With our updated LTV now at approximately 60%, we have a considerable margin of safety.

Overall, we believe that a current return in the 8.7 – 10.0%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.

Investor FAQ: How does this project impact your portfolio?

This investment is structured as debt, where the project’s 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 this investment, the regular income it generates supports quarterly dividends for the Income eREIT.

As always, if you have any questions or feedback, please visit our help center or reach out to us at investments@fundrise.com.

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How we’re navigating the coronavirus (COVID-19) global outbreak

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.