We are excited to offer an opportunity to invest with us in the first phase of a three phase 14-unit luxury home development in the high-end Andreas Hills neighborhood of Palm Springs, California. The developer, Alta Verde Group, is an award-winning industry leader and has completed and sold over 91 homes with a market value of $82 million.
To begin to understand why we made this investment, first take a look at the 60-home development that the Alta Verde Group is currently building and selling located at the property directly adjacent to our investment site: http://www.altaverdemontesereno.com/.
We focused on the following considerations in making this investment:
1) The developer's track record for meticulous design and construction, along with their in-depth knowledge of this particular sub-market.
2) The low-cost basis of our investment which puts our position at 44% below the sales projections.
3) The strong multimillion-dollar corporate guarantee.
· Are the projected sale prices inline with other homes that have recently sold in the market? By how much can they miss their target before the Fundrise position is affected? The developer's projected sale prices are on the high-end of the market, however given the investment’s low basis, the takeout price required for our position has substantial support based on other recent comparable home sales. The developer would have to miss their sales projections by more than 44% to negatively impact our position.
· What happens if they run over budget? The developer is very experienced in this market and asset type (see adjacent development in the link above), and does all of the construction management in-house. In addition, our due diligence shows that the parent company is well-capitalized to meet potential shortfalls, and the investment features a corporate guaranty, helping mitigate the downside risk.
· Can the developer cash out equity from the project as homes are sold, thereby harming the investment’s basis? No, the senior loan documents and our investment agreement prohibit the developer from pulling cash proceeds out of the project until both the senior debt and our investment are paid back in full.
Neighborhood: Andreas Hills is one of the most scenic areas of Palm Springs, sitting against the San Jacinto Mountains in the Indian Canyons area. This community features some of the finest homes in the Palm Springs area, with most of the larger single-story homes priced above $1 million.
Market Comparable Sales Support of Stressed Basis: Our investment features a basis of $253/SF. Under a stressed scenario, the required sale prices needed to take-out our position are supported by the following market comps:
· The developer’s homes in the adjacent development are currently selling for $379/SF.
· Current on-market listings in the neighborhood greater than 4,000 SF feature an average listing price/SF of $349.
· Lender required appraisal concluded a retail value for the proposed homes of $399/SF.
Milestones & Exit Strategy: The developer closed on the land acquisition in January 2015 at a purchase price of $3,000,000, and anticipates the following phased development timeline:
· Complete Entitlements and Final Map Approval by June 2015
· Complete Phase I ($7,400,000 of infrastructure development and 6 units) by September 2016
*Phase I = Fundrise 18-month Note
· Complete Phase II (2-4 units) by March 2017
· Complete Phase III (4-6 units) by December 2017
· Exit via Completed Home Sales by March 2018
Financials: The project cost of Phase I is estimated at $11,375,000, and the total project cost of Phase I, II, III are estimated at $24,212,013.
The developer has projected total sales of all 14 homes at $32,200,000 which represents $2,300,000/home or $450/SF.
Phased Development: As is typical with home development, the amount of senior debt outstanding will fluctuate with the construction costs and sale proceeds of the phased development. All of the developer's equity will be required to remain in the deal until the Fundrise Investment has been fully repaid. Sale proceeds from Phases I will either (a) be rolled forward to meet the equity requirement needed to fund both Phase II and III, or (b) be used to pay back the senior debt and/or Fundrise Investment.
The senior lender outlined the following draws broken into phases:
Total Loan Amount: $13,800,000
· Phase I (Infrastructure + 6 Homes): $7,400,000
· Phase II (2-4 Homes): $3,200,000
· Phase III (4-6 Homes): $3,200,000
Funds from the senior loan cannot be drawn down from the lender until after the full $3,975,000 of equity has been invested into the project.
The project will feature the following capital stack through Phase I, yielding an LTC of 78.3% for the Fundrise position:
Total Phase I Cost: $11,375,000
· Debt: $7,400,000
· Preferred Equity: $1,500,000 Fundrise
· Equity: $2,475,000 Developer/LP
Payments: Interest payments on this series of notes will be as follows:
· Months 1-18: 15% annual interest all-accrued.