Investment in mixed-use construction in Washington, DC, pays back, following borrower default

Important note: The realized return on an individual project may vary significantly from your portfolio-level return as an investor. To learn more about why this may be the case, see the “How did this project impact your portfolio?” section.

In June 2018, we provided roughly $6.6 million to finance the construction of a mixed-use development in Washington, DC, as the future site of seven for-sale condominiums and two ground floor retail spaces.

Despite construction at the site proceeding as planned, the first of the residential units was unfortunately listed for sale in February 2020, shortly before the onset of the COVID-19 pandemic. As a result, our sponsor was forced to revise the pricing of the units; after a year, all seven units were successfully sold, and our sponsor was able to pay down a portion of the principal and interest of our loan.

However, in light of the pandemic, our sponsor was unable to sell the retail spaces as originally planned, impacting their ability to pay back our investment. In lieu of a foreclosure, we came to an agreement with the sponsor, in which they would locate a buyer for the spaces, at a market value of our determination. In March 2022, that buyer was secured, and the sponsor used the proceeds to recoup a portion of our outstanding principal and accrued interest.

Ultimately, despite the sponsor’s difficulty in selling the units at the prices as originally planned, the proceeds we received over the duration of our investment still yielded a positive annualized return, of roughly 0.7%.¹ We believe that a smart investor must expect from the outset that some percentage of investments will not go according to plan, while simultaneously acknowledging that it’s impossible to predict which ones will be affected and what exactly will go wrong. This is why it’s so important to build in safeguards through the underwriting process to protect the downside when the unexpected does occur.

To recapitulate: Good investors try to prevent risk, but great investors prepare for it.

Investor FAQ: How does 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 income it generated supported 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.