UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT
ANNUAL REPORT PURSUANT TO REGULATION A
For the fiscal year ended December 31, 2020
Fundrise eFund, LLC
(Exact name of registrant as specified in its charter)
Commission File Number: 024-11313
Delaware | 61-1775059 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
11 Dupont Circle NW, 9th Floor Washington, DC (Address of principal executive offices) | 20036 (Zip Code) |
(202) 584-0550
Registrant’s telephone number, including area code
Common Shares
(Title of each class of securities issued pursuant to Regulation A)
TABLE OF CONTENTS
Part II.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
We make statements in this Annual Report on Form 1-K (“Annual Report”) that are forward-looking statements within the meaning of the federal securities laws. The words “outlook,” “believe,” “estimate,” “expect,” “potential,” “projected,” “anticipate,” “intend,” “plan,” “seek,” “may,” “could,” and similar expressions or statements regarding future periods are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this Annual Report or in the information incorporated by reference into this Annual Report.
The forward-looking statements included in this Annual Report are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
· | our ability to effectively deploy the proceeds raised in our initial and subsequent offerings (the “Offering(s)”); | |
· | our ability to attract and retain members to the online investment platform located at www.fundrise.com (the “Fundrise Platform”) of Rise Companies Corp. (our “Sponsor”); | |
· | risks associated with breaches of our data security; | |
· | changes in economic conditions generally and the real estate and securities markets specifically; | |
· | limited ability to dispose of assets because of the relative illiquidity of real estate investments; | |
· | increased interest rates and operating costs; | |
· | our failure to obtain necessary outside financing; | |
· | difficulties in identifying properties to complete, and consummating, real estate acquisitions, developments, joint ventures and dispositions; | |
· | our failure to successfully operate acquired properties and operations; | |
· | public health crises, pandemics and epidemics, such as those caused by new strains of viruses such as H5N1 (avian flu), severe acute respiratory syndrome (SARS) and, most recently, the novel coronavirus (COVID-19); | |
· | climate change and natural disasters that could adversely affect our properties and our business; | |
· | exposure to liability relating to environmental and health and safety matters; | |
· | changes in real estate and zoning laws and increases in real property tax rates; | |
· | failure of acquisitions to yield anticipated results; | |
· | risks associated with breaches of our data security; | |
· | risks associated with derivatives or hedging activity; | |
· | our level of debt and the terms and limitations imposed on us by our debt agreements; | |
· | the need to invest additional equity in connection with debt refinancings as a result of reduced asset values; | |
· | our ability to retain our executive officers and other key personnel of our advisor, our property manager and their affiliates; | |
· | expected rates of return provided to investors; | |
· | the ability of our Sponsor and its affiliates to source, originate and service our loans and other assets, and the quality and performance of these assets; | |
· | our ability to retain and hire competent employees and appropriately staff our operations; | |
· | legislative or regulatory changes impacting our business or our assets and Securities and Exchange Commission (“SEC”) guidance related to Regulation A (“Regulation A”) of the Securities Act of 1933, as amended (the “Securities Act”), or the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”); | |
· | changes in business conditions and the market value of our assets, including changes in interest rates, prepayment risk, operator or borrower defaults or bankruptcy, and generally the increased risk of loss if our investments fail to perform as expected; | |
· | our ability to implement effective conflicts of interest policies and procedures among the various real estate investment opportunities sponsored by our Sponsor; | |
· | our ability to access sources of liquidity when we have the need to fund redemptions of common shares in excess of the proceeds from the sales of our common shares in our offerings and the consequential risk that we may not have the resources to satisfy redemption requests; |
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· | our compliance with applicable local, state and federal laws, including the Investment Advisers Act of 1940, as amended (the “Advisers Act”), the Investment Company Act of 1940, as amended, and other laws; and | |
· | changes to accounting principles generally accepted in the United States of America (“U.S. GAAP”). |
Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this Annual Report. All forward-looking statements are made as of the date of this Annual Report and the risk that actual results will differ materially from the expectations expressed in this Annual Report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this Annual Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Annual Report, including, without limitation, the risks described under “Risk Factors,” the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Annual Report will be achieved.
Item 1. | Business |
Fundrise eFund, LLC (formerly known as Fundrise For-Sale Housing eFUND – Los Angeles CA, LLC) is a Delaware limited liability company formed on November 19, 2015, to acquire property for the development of for-sale housing in the Los Angeles, CA metropolitan statistical area (“MSA”). Operations commenced on May 26, 2017. Effective November 30, 2020, Fundrise National For-Sale Housing eFund, LLC and Fundrise For-Sale Housing eFund – Washington DC, LLC, the (“Target eFunds”), merged with and into Fundrise For-Sale Housing eFund – Los Angeles CA, LLC, with the Company as the surviving entity (“the Merger”). For more information about the Merger, please see the offering circular file on November 30, 2020 here.
Following the Merger, we intend to acquire property for the development and rental of single-family attached and detached homes, townhomes and condominiums targeted to first-time, move-up and active adult homebuyers (referred to herein as “Single Family Housing”) without a focus on any MSA in the United States as opportunity dictates. We expect to use substantially all of the net proceeds from our initial and subsequent offerings (the “Offering(s)”) to continue to originate, invest in and manage a diversified portfolio primarily consisting of investments in commercial and residential real estate properties, as well as commercial real estate loans, commercial real estate debt securities (including commercial mortgage-backed securities, collateralized debt obligations, and REIT senior unsecured debt), development projects, and other select real estate-related assets, where the underlying assets primarily consist of such properties. We may make our investments through majority-owned subsidiaries, some of which may have rights to receive preferred economic returns. We intend to be treated as a partnership for U.S. federal income tax purposes, with the intent of offering investors a tax-efficient means of investing in real estate-related business plans that are generally non-REIT qualifying. The Company has one reportable segment consisting of investments in real estate. The use of the terms “Fundrise eFund”, the “Company”, “we”, “us” or “our” in this Annual Report refer to Fundrise eFund, LLC unless the context indicates otherwise.
We have elected to be taxed as a partnership under the Internal Revenue Code of 1986, as amended (“the Code”), commencing with our taxable year ending December 31, 2017. We have attempted to diversify our portfolio by investment type, investment size and investment risk with the goal of attaining a portfolio of real estate assets that provide attractive and stable returns to our investors.
We are externally managed by Fundrise Advisors, LLC (our “Manager”), which is an investment adviser registered with the SEC and a wholly-owned subsidiary of our Sponsor, the parent company of Fundrise, LLC, our affiliate. Fundrise, LLC owns and operates the Fundrise Platform, which allows investors to hold interests in real estate opportunities that may have been historically difficult to access for some investors. Our Manager has the authority to make all of the decisions regarding our investments, subject to the limitations in our operating agreement and the direction and oversight of our Manager’s investment committee. Our Sponsor also provides asset management, marketing, investor relations and other administrative services on our behalf. As such, we do not currently have any employees nor do we currently intend to hire any employees who will be compensated directly by us.
Investment Strategy
We believe that the near and intermediate-term market for investment in the acquisition of property for the development, sale, and/or rental of Single-Family Housing and last mile logistics centers serving those homes is compelling from a risk-return perspective. Given the growing work from home trends and the millennial demographic’s desire for more living space, we favor a strategy weighted toward targeting debt and equity investments in new homes and townhomes, and last mile industrial serving those homes. The millennial generation (generally defined as people born between 1980 and 2000), the largest generation in American history, is coming of age when many will increasingly start families and we believe will have a strong preference for single family home living. In addition, the Single Family Housing sector is only recently recovered from the 2008 recession. As described in the “Market Overview and Opportunity” section contained in the latest offering circular (“Offering Circular”) we use in connection with our Offering, a number of factors have created a pent up Single Family Housing demand for millennials, including education and cultural trends, a strong preference for walkable, urban centers, and an increasingly attractive buy vs. rent cost analysis.
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We may enter into one or more joint ventures, tenant-in-common investments or other co-ownership arrangements for the acquisition, development or improvement of properties with third parties or affiliates of our Manager, including present and future real estate investment offering and real estate investment trusts (“REITs”) sponsored by affiliates of our Sponsor. We also may serve as mortgage lender to, or acquire interests in or securities issued by, these joint ventures, tenant-in-common investments or other joint venture arrangements.
For real estate debt investments, our Manager intends to directly structure, underwrite and originate many of the debt products in which we invest as this provides for the best opportunity to manage our borrower and partner relationships and optimize the terms of our investments. Our proven underwriting process, which our management team has successfully developed over their extensive real estate careers in a variety of market conditions and implemented at our Sponsor, will involve comprehensive financial, structural, operational and legal due diligence of our borrowers and partners in order to optimize pricing and structuring and mitigate risk. We feel that the current and future market environment for the acquisition of property for the development and sale of Single Family Housing (including any existing or future government sponsored programs) provides a wide range of opportunities to generate compelling investments with strong risk-return profiles for our shareholders.
We may selectively employ leverage to enhance total returns to our shareholders through a combination of senior financing on our real estate acquisitions, secured facilities, and capital markets financing transactions. Our target portfolio-wide leverage after we have acquired an initial substantial portfolio of diversified investments is between 50-85% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our assets. During the period when we are acquiring our initial portfolio, we may employ greater leverage on individual assets (that will also result in greater leverage of the interim portfolio) in order to quickly build a diversified portfolio of Single Family Housing assets. We will seek to secure conservatively structured leverage that is long-term, non-recourse, non-mark-to-market financing to the extent obtainable on a cost effective basis. To the extent a higher level of leverage is employed it may come either in the form of government-sponsored programs or other long-term, non-recourse, non-mark-to-market financing. Our Manager may from time to time modify our leverage policy in its discretion in light of then-current economic conditions, relative costs of debt and equity capital, market values of our assets, general conditions in the market for debt and equity securities, growth and acquisition opportunities, or other factors. However, other than during our initial period of operations, it is our policy to not borrow more than 85% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our assets. We cannot exceed the leverage limit of our leverage policy unless any excess in borrowing over such level is approved by our Manager’s investment committee.
In executing on our business strategy, we believe that we will benefit from our Manager’s affiliation with our Sponsor given our Sponsor’s strong track record, and extensive experience and capabilities as an online real estate origination and funding platform. These competitive advantages include:
· | our Sponsor’s experience and reputation as a leading real estate investment manager, which historically has given it access to a large investment pipeline similar to our targeted assets and the key market data we use to underwrite and portfolio manage assets; |
· | our Sponsor’s direct and online origination capabilities, which are amplified by a proprietary technology platform, business process automation, and a large user base, of which a significant portion are seeking capital for real estate projects; |
· | our Sponsor’s relationships with financial institutions and other lenders that originate and distribute commercial real estate debt and other real estate related products and that finance the types of assets we intend to acquire and originate; |
· | our Sponsor’s experienced portfolio management team which actively monitors each investment through an established regime of analysis, credit review and protocol; |
· | our Sponsor’s management team which has a successful track record of making commercial real estate investments in a variety of market conditions; and |
· | our Sponsor’s relationships with members of, and investors in, the Fundrise Platform that may enhance our ability to sell our Single Family Housing projects. |
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Investment Objectives
Our primary investment objectives are:
· | to realize growth in the value of our investments within approximately five to seven years from the one-year anniversary of the commencement of our initial Offering; |
· | to develop and sell homes, townhomes and condominiums for sale at a healthy profit margin; |
· | to pay attractive cash distributions as cash becomes available through the sale of our assets; |
· | to enable investors to realize a return on their investment by beginning the process of liquidating and distributing cash to investors within approximately five to seven years from the one-year anniversary of the commencement of our initial Offering, or providing liquidity through alternative means such as in-kind distributions of our own securities or other assets; |
· | to preserve, protect and return our investors’ capital contribution; and |
· | to provide homebuyer investors with the opportunity to gain valuable market and real estate knowledge about their future home options while also allowing them to capitalize on a trend that they are actively participating in. |
We cannot assure you that we will attain these objectives or that the value of our assets will not decrease. Furthermore, within our investment objectives and policies, our Manager has substantial discretion with respect to the selection of specific investments and the purchase and sale of our assets. Our Manager’s investment committee will review our investment guidelines at least annually to determine whether our investment guidelines continue to be in the best interests of our shareholders.
Investment Types
Our primary investment types are as follows:
· | Residential Rental Properties and Real Estate Held for Improvement – Our investments in residential rental properties and real estate held for improvement may include the acquisition of single-family homes, townhomes, and condominiums for the intended purpose of developing and renting, or developing and selling the properties, respectively. See Note 2, Summary of Significant Account Policies – Residential Rental Properties and Real Estate Held for Improvement, in our consolidated financial statements for further detail. |
· | Real Estate Debt Investments – Our real estate debt investments may include first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests in unconsolidated joint ventures. |
· | Real Estate Held for Sale – From time to time, we may identify residential properties to be sold. At the time that any such properties are identified, we perform an evaluation to determine whether or not such properties should be classified as held for sale or presented as discontinued operations in accordance with U.S. GAAP. |
We believe that these investment types are complementary to each other due to overlapping sources of investment opportunities and common reliance on real estate fundamentals and application of similar portfolio management skills to maximize value and to protect capital.
Competition
Our net income depends, in large part, on our ability to source, acquire and manage investments with attractive margins. We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, home builders, private real estate funds, and other entities engaged in real estate investment activities as well as online lending platforms that compete with the Fundrise Platform, many of which have greater financial resources and lower costs of capital available to them than we have. In addition, there are numerous REITs with asset acquisition objectives similar to ours, and others may be organized in the future, which may increase competition for the investments suitable for us. Competitive variables include market presence and visibility, amount of capital to be invested per project and underwriting standards. To the extent that a competitor is willing to risk larger amounts of capital in a particular transaction or to employ more liberal underwriting standards when evaluating potential investments than we are, our investment volume and profit margins for our investment portfolio could be impacted. Our competitors may also be willing to accept lower returns on their investments and may succeed in buying the assets that we have targeted for acquisition. Although we believe that we are well positioned to compete effectively in each facet of our business, there is enormous competition in our market sector and there can be no assurance that we will compete effectively or that we will not encounter increased competition in the future that could limit our ability to conduct our business effectively.
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Risk Factors
We face risks and uncertainties that could affect us and our business as well as the real estate industry generally. These risks are outlined under the heading “Risk Factors” contained in our latest offering circular filed with the SEC (“Offering Circular”), which may be accessed here, as the same may be updated from time to time by our future filings under Regulation A (“Regulation A”) of the Securities Act. In addition, new risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance. These risks could result in a decrease in the value of our common shares.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. For further information regarding forward-looking statements, see Statement Regarding Forward Looking Information. Unless otherwise indicated, latest results discussed below are as of December 31, 2020.
Offering Results
We have offered and may offer in the future up to $50.0 million in our common shares in any rolling twelve month period. The SEC adopted an amendment to increase the maximum offering amount under Tier 2 of Regulation A from $50.0 million to $75.0 million. This amendment is effective March 15, 2021, and the Company intends to utilize this increased offering amount in the future. The Offering is being conducted as a continuous offering pursuant to Rule 251(d)(3) of Regulation A, meaning that while the offering of securities is continuous, active sales of securities may occur sporadically over the term of the Offering. As of December 31, 2020 and 2019, we had raised total gross offering proceeds of approximately $86.9 million and $42.4 million, respectively, from settled subscriptions (including the $309,000 and $100,000, respectively, received in the private placements to our Sponsor and Fundrise, L.P., an affiliate of our Sponsor).
In connection with the Merger, we issued to the shareholders of the Target eFunds common shares based on an agreed upon exchange ratio (“Exchange Ratio”). The Exchange Ratio was based on each of the Target eFund’s projected net asset value (“NAV”) per share that was effective as of the date of the Merger, November 30, 2020. For additional information, see the Offering Circular, which may be accessed here. As of December 31, 2020 and 2019 we have settled subscriptions in our Offerings and private placements of approximately 8,095,000 and 4,206,000, respectively, of our common shares. Assuming the settlement for all subscriptions received as of December 31, 2020, approximately $5.5 million of our previously qualified common shares remained available for sale (based on our current share price) to the public under our Offering.
Until December 31, 2018, the per share purchase price for our common shares was $10.00 per share, an amount that was arbitrarily determined by our Manager. Thereafter, the per share purchase price of our common shares has been and will continue to adjusted semiannually and will equal the greater of (i) $10.00 per share or (ii) the sum of our NAV, divided by the number of our common shares outstanding as of the end of the prior fiscal semiannual period (“NAV per share”).
Below is the semi-annual NAV per share, as determined in accordance with our valuation policies. Linked in the table is the relevant Form 1-U detailing each NAV evaluation method, incorporated by reference herein.
Date | NAV Per Share | Link | ||||||||
December 31, 2018 | $ | 10.34 | Form 1-U | |||||||
June 30, 2019 | $ | 10.44 | Form 1-U | |||||||
December 31, 2019 | $ | 10.74 | Form 1-U | |||||||
June 30, 2020 | $ | 10.92 | Form 1-U | |||||||
November 30, 2020 | $ | 11.44 | Form 1-U |
Distributions
We do not expect to declare any distributions until the proceeds from our public offering are invested and returns, if any, have been received by the Company. In addition, as we expect primarily to invest in the acquisition of property for the development of Single Family Housing or in properties that have significant capital requirements, these properties may not immediately generate cash flow from sale. Thus, our ability to make distributions may be negatively impacted, especially during our early periods of operation. As of December 31, 2020, we have not declared any distributions.
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Once we begin to make distributions, we expect that our Manager will declare and make them on a periodic basis based on appreciation of, or operating cash flow from, the sale of our assets, as determined by our Manager, in arrears. Any distributions we make will be at the discretion of our Manager, and will be based on, among other factors, our present and reasonably projected future cash flow, the appreciated value of the underlying assets and/or our need to maintain reserves. Given the expectation that most of our distributions will come from the sale of assets, it is likely that we will not make distributions at a consistent rate nor on a consistent periodic basis, if at all. Distributions will be paid to shareholders as of the record dates selected by the Manager.
Redemption Plan
Our common shares are currently not listed on a national securities exchange or included for quotation on a national securities market, and currently there is no intention to list our common shares. In order to provide our shareholders with some limited liquidity, we have adopted a redemption plan whereby, on a monthly basis, a shareholder may obtain liquidity as described in detail in our Offering Circular. However, the Manager may, in its sole discretion, amend, suspend, or terminate the redemption plan at any time without notice, including to protect our operations and our non-redeemed shareholders, to prevent an undue burden on our liquidity, following any material decrease in our NAV, to comply with the publicly traded partnership Safe Harbor, or for any other reason.
Effective as of March 31, 2020, our Manager determined to (i) suspend the processing and payment of redemptions under our redemption plan until further notice, and (ii) delay the consideration and processing of all outstanding redemption requests until further notice. We have resumed the processing and payment of redemptions under our redemption plan as of June 30, 2020. Additionally, in connection with the Merger, our Manager determined to temporarily waive certain provisions of our redemption plan, effective from October 20, 2020 until consummation of the Merger, to allow our shareholders to redeem their shares (i) without any discount to the per share price for our common shares in effect at the time of the redemption request, and (ii) without any limits on the number of shares that may be redeemed pursuant to a redemption request. Further, in connection with the Merger, we accelerated outstanding redemption requests for shares that were not otherwise eligible for redemption under the terms of our redemption plan. All other provisions of the redemption plan remained unchanged. The waiver to certain provisions of the redemption plan applied to all outstanding redemption requests as of October 20, 2020 and to any redemption request submitted prior to the consummation of the Merger. We temporarily ceased accepting redemption requests on November 15, 2020. After consummation of the Merger, and as of December 31, 2020, our redemption plan has reverted to its pre-Merger provisions. All redemption requests submitted prior to the Merger were fulfilled on November 30, 2020; therefore, redemptions payable have decreased on the balance sheet from December 31, 2019 to December 31, 2020.
As of December 31, 2020, approximately 1,034,000 common shares had been submitted for redemption since operations commenced, and 100% of such redemption requests have been honored.
Critical Accounting Policies
Our accounting policies have been established to conform with U.S. GAAP. The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the consolidated financial statements.
We believe the following accounting estimates are the most critical to aid in fully understanding our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Real Estate Debt Investment Impairment
We recognize losses on both principal and interest of real estate debt investments if it is probable that we will be unable to collect all amounts due according to the contractual terms of the agreement. If indicators of impairment are present, we evaluate the net undiscounted cash flows estimated to be generated by those assets compared to the asset’s carrying value. Estimates of undiscounted cash flows are based on forward-looking assumptions which require us to make judgments, including annual and residual cash flows and our estimated holding period for each asset. Such assumptions could be affected by future economic and market conditions. If such carrying value is in excess of the estimated undiscounted cash flows of the investment, we would recognize an impairment loss equivalent to the amount required to adjust the carrying value to its estimated fair value, calculated in accordance with current U.S. GAAP fair value provisions. The estimated fair value is based on our estimation of expected future cash flows discounted at the effective interest rate which involves a high degree of judgment. Changes in the facts and circumstances that drive management’s assumptions may result in an impairment to the Company’s assets in a future period that could be material to the Company’s results of operations.
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Investments in Equity Method Investees Impairment
The Company evaluates its investments in equity method investees for impairment at least annually, or whenever events or changes in circumstances indicate that there may be an other-than-temporary decline in value. The Company estimates the fair value of the investment using various valuation techniques including, but not limited to, discounted cash flow models, the Company’s intent and ability to retain its investment in the entity, the financial condition and long-term prospects of the entity, and the expected term of the investment. Such assumptions involve a high degree of judgment and could be impacted by future economic and market conditions. If the Company determined any decline in value is other-than-temporary, the Company would recognize an impairment loss to reduce the carrying value of its investment to fair value.
Impairment of Rental Real Estate Properties and Real Estate Held for Improvement
Long-lived assets are reviewed for impairment at least annually, or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. When determining if a property has indicators of impairment, we evaluate the property's occupancy and cash flows, our expected holding period for the property, strategic decisions regarding the property's future operations or development, and other market factors. Impairment exists if estimated future undiscounted cash flows associated with those assets are less than the assets' carrying value. Estimates of undiscounted cash flows are based on forward-looking assumptions, including annual and residual cash flows, terminal capitalization rates, and our estimated holding period for each asset. Such assumptions involve a high degree of judgment and could be affected by future economic and market conditions. When impairment exists, the long-lived asset is adjusted to its fair value, calculated as the excess of carrying value over the fair value. Fair value is determined using industry techniques, which include a discounted cash flow, comparable sales or income approaches. These valuation techniques require assumptions regarding future occupancy, rental rates, capital requirements, capitalization rate and discount rate that could differ materially from actual results and involve a high degree of judgment. Assets held for sale are recorded at the lower of cost or fair value less costs to sell.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has released several Accounting Standards Updates (each an “ASU”) that may have an impact on our consolidated financial statements. See Recent Accounting Pronouncements in Note 2, Summary of Significant Accounting Policies – Recent Accounting Pronouncements, in our consolidated financial statements, for discussion of the relevant ASUs. We are currently evaluating the impact of the various ASUs on our financial statements and determining our plan for adoption.
Extended Transition Period
Under Section 107 of the Jumpstart Our Business Startups Act of 2012, we are permitted to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This permits us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B). By electing to extend the transition period for complying with new or revised accounting standards, our consolidated financial statements may not be comparable to companies that adopt accounting standard updates upon the public business entity effective dates.
Sources of Operating Revenues and Cash Flows
We expect to primarily generate revenues from investments in the development and rental, or development and sale of Single Family Housing. We may also invest in commercial, industrial, or residential properties and, to a lesser extent, as real estate-related debt and other real estate-related assets. See Note 2, Summary of Significant Accounting Policies – Revenue Recognition, in our consolidated financial statements for further detail.
Results of Operations
On May 26, 2017, we commenced operations upon our satisfying the $1.0 million minimum offering requirement (not including the initial $100,000 received in the private placements to our Sponsor and Fundrise, L.P.). The Company had eighty and thirty-six investments as of December 31, 2020 and 2019, respectively. For the years ended December 31, 2020 and 2019, we had total net income of approximately $50,000 and $509,000, respectively.
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Revenue
Interest Revenue
For the years ended December 31, 2020 and 2019, we earned approximately $126,000 and $321,000 of interest revenue, respectively. The decrease in interest revenue was due to one of our real estate debt investments being classified as non-accrual and therefore, not accruing interest during the year ended December 31, 2020. During the year ended December 31, 2020, we acquired direct ownership of our previously held real estate debt investments through deeds in lieu executed on September 2, 2020 and title was subsequently transferred to the Company on December 15, 2020. See Note 5, Investments in Real Estate Debt Investments, in our consolidated financial statements for further detail.
Rental Revenue
For the years ended December 31, 2020 and 2019, we earned rental revenue of approximately $934,000 and $745,000, respectively. The increase in rental revenue was due to one month of increased rental operations following the Merger, in which we operated fifty-nine rental revenue producing properties as of December 31, 2020, compared to only twenty-four rental revenue producing properties as of December 31, 2019.
Expenses
Property Operating and Maintenance
For the years ended December 31, 2020 and 2019, we incurred property operating and maintenance expenses of approximately $429,000 and $233,000, respectively. The increase in property-related expenses was due to operating thirty-five additional rental real estate properties following the Merger and during the year ended December 31, 2020 as compared to the prior year.
General and Administrative Expenses
For the years ended December 31, 2020 and 2019, we incurred general and administrative expenses of approximately $541,000 and $325,000, respectively, which includes auditing and professional fees, bank fees, and other costs associated with operating our business. The increase in general and administrative expenses was primarily attributable to increased regulatory expenses, increased legal fees and increased professional fees in connection with the Merger during the year ended December 31, 2020.
Other income (expense)
Equity in Earnings (Losses)
For the years ended December 31, 2020 and 2019, we incurred equity in earnings (losses) of approximately $414,000 and ($42,000), respectively, from our equity method investments. The increase in equity in earnings is primarily attributable to the sale of an equity method investment during the year ended December 31, 2020 for which a gain of approximately $609,000 was recognized.
Gain on Sale of Real Estate
For the years ended December 31, 2020 and 2019, we earned approximately $0 and $181,000, respectively, of gain on the sale of real estate. The decrease is from the sale of one single-family home in 2019.
Loss on Troubled Debt Restructuring
For the years ended December 31, 2020 and 2019, we incurred losses on troubled debt restructuring of approximately $185,000 and $0, respectively. The increase in loss on troubled debt restructuring was attributable to the direct acquisition through a deed in lieu of our two previously held real estate debt investments during the year ended December 31, 2020. See Note 5, Investments in Real Estate Debt Investments, in our consolidated financial statements for further detail.
Our Investments
As of December 31, 2020, we have entered into the following investments. No investments have been made since December 31, 2020. Note: the use of the term “controlled subsidiary” is not intended to conform with U.S. GAAP definition and does not correlate to a subsidiary that would require consolidation under U.S. GAAP.
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Residential Properties:
Asset Name | Zip Code | Beds / Baths at Acquisition | Approximate Square Footage at Acquisition | Date of Acquisition | Approximate Acquisition Cost | Overview (Form 1-U) | ||||||||
La Vista Property (A) | 90004 | 2 / 1 | 697 | 05/31/2017 | $ | 405,000 | Initial | Update | ||||||
H41 | 90062 | 2 / 1 | 1,446 | 06/22/2017 | $ | 486,000 | Initial | |||||||
463 | 90037 | 3 / 1 | 1,176 | 07/07/2017 | $ | 532,000 | Initial | |||||||
W48 | 90062 | 2 / 1 | 1,446 | 08/09/2017 | $ | 553,000 | Initial | |||||||
416 | 90062 | 3 / 1 | 1,448 | 08/10/2017 | $ | 485,000 | Initial | |||||||
H412 | 90062 | 2 / 1.75 | 1,956 | 08/18/2017 | $ | 509,000 | Initial | |||||||
511 | 90037 | 3 / 2 | 1,792 | 09/01/2017 | $ | 435,000 | Initial | |||||||
413 | 90037 | 2 / 1 | 1,092 | 09/12/2017 | $ | 435,000 | Initial | |||||||
291 | 90011 | 3 / 2 | 1,747 | 12/13/2017 | $ | 451,000 | Initial | |||||||
J28 | 90018 | 2 / 1 | 1,204 | 06/12/2018 | $ | 717,000 | Initial | |||||||
D32 (C) | 90065 | 3 / 2 | 1,613 | 07/31/2018 | $ | 736,916 | Initial | |||||||
L60 (D) | 90042 | 3 / 1.5 | 1,217 | 08/03/2018 | $ | 794,000 | Initial | |||||||
S15 | 90004 | 2 / 1 | 1,335 | 08/17/2018 | $ | 716,000 | Initial | |||||||
L602 (D) | 90042 | 2 / 2 | 1,365 | 09/11/2018 | $ | 952,000 | Initial | |||||||
E91 | 90011 | (B) | (B) | 12/11/2018 | $ | 1,790,000 | Initial | N/A | ||||||
E62 | 90011 | 3 / 2 | 1,900 | 12/12/2018 | $ | 512,000 | Initial | Update 1 | ||||||
W18 | 90062 | 2 / 1 | 1,500 | 12/14/2018 | $ | 512,000 | Initial | Update 1 | ||||||
E855 | 90011 | 3 / 1 | 1,300 | 12/20/2018 | $ | 415,000 | Initial | Update 1 | ||||||
S41 | 90037 | 2 / 1 | 1,300 | 01/31/2019 | $ | 527,000 | Initial | Update 1 | ||||||
E42 | 90016 | 3 / 2 | 1,350 | 02/14/2019 | $ | 717,000 | Initial | Update 1 | ||||||
H30 | 90018 | 5 / 3.5 | 1,500 | 02/22/2019 | $ | 651,000 | Initial | Update 1 | ||||||
G55 | 90016 | 3 / 2 | 1,500 | 03/21/2019 | $ | 728,000 | Initial | Update 1 | ||||||
344 (F) | 20011 | 4 / 3.5 | 1,660 | 11/30/2020 | $ | 765,000 | Initial | Update 1 Update 2 | ||||||
H61 (E) (F) | 20011 | 2 / 1.5 | 832 | 11/30/2020 | $ | 595,000 | Initial | Update 1 Update 2 | ||||||
I81 (E) (F) | 20011 | 3 / 1 | 1,936 | 11/30/2020 | $ | 650,000 | Initial | Update 1 Update 2 | ||||||
P91 (F) | 22202 | 2 / 1.5 | 2,100 | 11/30/2020 | $ | 975,000 | Initial | Update | ||||||
473 (F) | 90037 | 4 / 2 | 1,800 | 11/30/2020 | $ | 535,000 | Initial | Update | ||||||
S37 (F) | 90018 | 3 / 1 | 900 | 11/30/2020 | $ | 560,000 | Initial | Update | ||||||
317 (F) | 90018 | 3 / 2 | 1,400 | 11/30/2020 | $ | 675,000 | Initial | Update | ||||||
E81 (F) | 90011 | 3 / 1 | 1,700 | 11/30/2020 | $ | 540,000 | Initial | Update | ||||||
S48 (F) | 90062 | 3 / 2 | 1,100 | 11/30/2020 | $ | 550,000 | Initial | Update | ||||||
E35 (F) | 90011 | 3 / 1 | 1,148 | 11/30/2020 | $ | 530,000 | Initial | Update |
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Asset Name | Zip Code | Beds / Baths at Acquisition | Approximate | Date of Acquisition | Approximate Acquisition Cost | Overview (Form 1-U) | ||||||||
W47 (F) | 90011 | 3 / 1 | 1,305 | 11/30/2020 | $ | 455,000 | Initial | Update | ||||||
E22 (F) | 90011 | 2 / 1 | 1,008 | 11/30/2020 | $ | 455,000 | Initial | Update | ||||||
C33 (F) | 90011 | 3 / 2 | 1,113 | 11/30/2020 | $ | 470,000 | Initial | Update | ||||||
W11 (F) | 90037 | 2 / 1 | 1,210 | 11/30/2020 | $ | 505,000 | Initial | Update | ||||||
E19 (F) | 90018 | 2 / 1 | 1,308 | 11/30/2020 | $ | 670,000 | Initial | Update | ||||||
E85 (F) | 90011 | 3 / 1 | 1,320 | 11/30/2020 | $ | 510,000 | Initial | Update | ||||||
W114 (F) | 90037 | 5 / 1 | 2,401 | 11/30/2020 | $ | 680,000 | Initial | Update | ||||||
P50 (F) | 90011 | 3 / 2 | 1,841 | 11/30/2020 | $ | 530,000 | Initial | Update | ||||||
E44 (F) | 90011 | 4 / 2 | 1,584 | 11/30/2020 | $ | 535,000 | Initial | Update | ||||||
C38 (F) | 90011 | 4 / 2 | 1,730 | 11/30/2020 | $ | 530,000 | Initial | Update | ||||||
M34 (F) | 90011 | 2 / 1 | 1,200 | 11/30/2020 | $ | 460,000 | Initial | Update | ||||||
W145 (F) | 90062 | 3 / 1.5 | 1,500 | 11/30/2020 | $ | 630,000 | Initial | N/A | ||||||
P29 (F) | 90016 | 3 / 1 | 1,600 | 11/30/2020 | $ | 875,000 | Initial | N/A | ||||||
H95 (F) | 30310 | 3 / 2 | 1,300 | 11/30/2020 | $ | 288,000 | Initial | N/A | ||||||
A49 (F) | 30310 | 3 / 2 | 1,500 | 11/30/2020 | $ | 350,000 | Initial | N/A | ||||||
A50 (F) | 30310 | 3 / 2 | 1,400 | 11/30/2020 | $ | 345,000 | Initial | N/A | ||||||
251 (F) | 90043 | 2 / 1 | 1,000 | 11/30/2020 | $ | 550,000 | Initial | N/A | ||||||
M77 (F) | 30316 | 2 / 1 | 1,000 | 11/30/2020 | $ | 247,000 | Initial | N/A | ||||||
C387 (F) | 90062 | 3 / 2.5 | 1,100 | 11/30/2020 | $ | 700,000 | Initial | N/A | ||||||
S56 (F) | 90016 | 3 / 3 | 1,300 | 11/30/2020 | $ | 840,000 | Initial | N/A | ||||||
236 (F) | 90018 | 3 / 2 | 1,800 | 11/30/2020 | $ | 735,000 | Initial | N/A | ||||||
O92 (F) | 30310 | 3 / 3 | 2,000 | 11/30/2020 | $ | 330,000 | Initial | N/A | ||||||
935 (F) | 90018 | 3 / 1 | 1,300 | 11/30/2020 | $ | 755,000 | Initial | N/A | ||||||
536 (F) | 90018 | 4 / 2 | 1,269 | 11/30/2020 | $ | 790,000 | Initial | N/A | ||||||
S375 (F) | 90018 | 4 / 3 | 1,678 | 11/30/2020 | $ | 760,000 | Initial | N/A | ||||||
M184 (F) | 90062 | 4 / 2 | 1,629 | 11/30/2020 | $ | 750,000 | Initial | N/A |
(A) | La Vista Property sold on 3/23/2018 for a sales price of approximately $550,000. | |
(B) | Property is improved with three separate structures: a multi-tenant building containing four residential units and approximately 2,500 square feet, a single-family home with approximately 2,000 square feet, and a three-story commercial building with approximately 7,200 square feet. | |
(C) | D32 sold on 1/23/2019 for a sales price of approximately $995,000. | |
(D) | These assets were classified as single family residential properties at acquisition. As of 6/30/2019, these assets are included as part of the RSE L6025 entitlement project. See (E) under "Entitlement and Development Properties" below. | |
(E) | These assets were classified as held for sale as of 12/31/2020. | |
(F) | These assets were acquired by the Company on November 30, 2020 in connection with the Merger. See Note 2 – Summary of Significant Accounting Policies – Merger Transaction – Asset Acquisition for more information on the assets acquired from the Merger. |
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Entitlement and Development Properties:
Asset Name | Zip Code | Approximate Square Footage of Lot(s) at Acquisition | Date of Acquisition |
Approximate | Projected Number of Entitled Lots | Overview (Form 1-U) | ||||||||
CNP 36 Properties | 90034 | 15,800 | (A) | $ | 2,705,000 | 12 | Initial | Update 1 | ||||||
Update 1 | ||||||||||||||
NPSC Westmoreland- Controlled Subsidiary | 90029 | 13,000 | (B) | $ | 2,143,000 | 14 | Initial | Update 2 | ||||||
Update 1 | ||||||||||||||
R13 and R14- Controlled Subsidiary | 90026 | 13,460 | (C) | $ | 2,061,000 | 10 | Initial | Update 2 | ||||||
Update 1 | ||||||||||||||
Update 2 | ||||||||||||||
NPSC Virgil- Controlled Subsidiary | 90029 | 19,150 | (D) | $ | 2,881,000 | 15 | Initial | Update 3 | ||||||
RSE L6025- Controlled Subsidiary | 90042 | 27,000 | (E) | $ | 2,976,000 | 18 | Initial | N/A |
(A) | CNP 36 Properties comprised of two parcels: an approximately 8,300 square foot lot purchase on 5/3/2018 for $1,555,000 and an approximately 7,500 square foot lot purchase on 3/23/18 for approximately $1,150,000. | |
(B) | NPSC Westmoreland- Controlled Subsidiary comprised of two parcels: an approximately 5,800 square foot lot purchased on 3/15/2018 for approximately $1,103,000 and an approximately 7,200 square foot lot purchased on 11/9/17 for approximately $1,040,000. | |
(C) | R13 and R14- Controlled Subsidiary comprised of two parcels: an approximately 6,730 square foot lot purchased on 1/4/2018 for approximately $1,138,000 and an approximately 6,730 square foot lot purchased on 11/14/2017 for approximately $923,000. | |
(D) | NPSC Virgil- Controlled Subsidiary comprised of three parcels: an approximately 5,750 square foot lot purchased on 1/25/18 for approximately $921,000, an approximately 6,700 square foot lot purchased on 1/19/2018 for approximately $910,000, and an approximately 6,700 square foot lot purchased on 12/27/2017 for approximately $1,050,000. | |
(E) | RSE L6025 Controlled Subsidiary comprised of three parcels: L60 (acquired 8/3/2018), L602 (acquired 9/11/2018), and the latest investment, L6025, was acquired on 6/26/19 for an initial purchase price of approximately $1,230,000. Proceeds were used to acquire an approximately 9,000 square feet of land, which is currently improved with an approximately 1,500 square foot single-family home. The acquisition of L6025 is the last property required to assemble the three lots. Combined, the three parcels achieve a lot size of approximately 27,000 square feet, which will be entitled for 18 single-family homes. |
Residential Properties – Intended for Renovation:
Asset Name | Zip Code | Beds / Baths at Acquisition | Approximate Square Footage at Acquisition | Date of Acquisition | Approximate Acquisition Cost | Overview (Form 1-U) | ||||||||
W41 | 90062 | 3 / 1 | 1,400 | 01/11/2019 | $ | 494,000 | Initial | Update 1 | ||||||
W418 | 90062 | 3 / 2 | 2,200 | 09/24/2019 | $ | 687,000 | Initial | N/A | ||||||
749 (A) (D) | 20011 | 4 / 2 | 1,288 | 11/30/2020 | $ | 900,000 | Initial | Update 2 | ||||||
F64 (A) (D) | 20011 | 4 / 3 | 1,152 | 11/30/2020 | $ | 955,000 | Initial | Update 2 | ||||||
F42 (B) (D) | 20011 | 5 / 2 | 1,280 | 11/30/2020 | $ | 940,000 | Initial | Update 2 | ||||||
H13 - Controlled Subsidiary (D) | 20009 | 2 / 1 | 2,072 | 11/30/2020 | $ | 1,228,000 | Initial | Update 3 | ||||||
S17 - Controlled Subsidiary (C) (D) | 20009 | 4 / 2 | 1,254 | 11/30/2020 | $ | 1,291,000 | Initial | Update 3 | ||||||
N22 - Controlled Subsidiary (D) | 20018 | 4 / 1 | 1,140 | 11/30/2020 | $ | 589,000 | Initial | Update 2 | ||||||
M20 - Controlled Subsidiary (D) | 20018 | 3 / 1 | 1,760 | 11/30/2020 | $ | 600,000 | Initial | Update 2 | ||||||
G12 - Controlled Subsidiary (D) | 20009 | 6 / 2 | 3,316 | 11/30/2020 | $ | 1,252,000 | Initial | Update 2 | ||||||
R13 - Controlled Subsidiary (D) (E) | 20009 | 4 / 2 | 2,664 | 11/30/2020 | $ | 1,550,000 | Initial | Update 2 |
(A) | These assets were classified as held for sale as of 12/31/2020. | |
(B) | Property was classified as held for sale as of 12/31/2020. The property was subsequently sold on January 18, 2021. See Note 12, Subsequent Events, for further information. | |
(C) | Property was classified as held for improvement as of 12/31/2020. The property was subsequently sold on February 25, 2021. See Note 12, Subsequent Events, for further information. | |
(D) | These assets were acquired by the Company on November 30, 2020 in connection with the Merger. See Note 2 – Summary of Significant Accounting Policies – Merger Transaction – Asset Acquisition for more information on the assets acquired from the Merger. | |
(E) | Property was classified as held for improvement as of 12/31/2020. The property was subsequently sold on March 31, 2021. See Note 12, Subsequent Events, for further information. |
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Joint Venture Entitlement and Development Properties, Senior Loans, and Other Assets:
Real Property Controlled Subsidiaries | Zip Code | Approximate Square Footage of Lot at Acquisition | Date of Acquisition | Purchase Price (1) | # Lots/Homes | Overview (Form 1-U) | ||||||||
RRE F1 | 90731 | 28,800 | 05/04/2018 | $ | 2,023,000 | 19 | Initial | N/A | ||||||
Marathon 12 (2) | 90026 | 15,620 | 05/17/2018 | $ | 1,279,000 | 12 | Initial | Update |
(1) | Purchase Price refers to the total price paid by us for our pro rata share of the equity in the controlled subsidiary. | |
(2) | On August 24, 2020, we received our final cash flow distribution from the Marathon 12 Controlled Subsidiary. This completed the sale of the Marathon 12 Property and hence, the liquidation of the Marathon 12 Investment. |
Senior Loans | Zip Code | Date of Acquisition | Interest Rate (1) | Maturity Date (2) | Total Commitment (3) | LTV (4) | LTC (5) | Overview (Form 1-U) | ||||||||||
Update 1 | ||||||||||||||||||
Update 2 | ||||||||||||||||||
SC Group 6845 Figueroa, LLC (7) | 90042 | 08/04/2017 | 9.0 % | 02/04/2019 | $ | 2,250,000 | 90.0 % | 97.5 % | Initial | Update 3 | ||||||||
Update 1 | ||||||||||||||||||
SGGP 1300 Douglas, LLC (8) | 90026 | 11/20/2017 | 9.0 % | 05/13/2019 | $ | 2,923,350 | 89.0 % | 97.0 % | Initial | Update 2 | ||||||||
600 Block Commonwealth, LLC (6) | 90004 | 02/08/2018 | 18.0 % | 07/31/2018 | $ | 500,000 | — | 42.0 % | Initial | Update 1 |
(1) | Interest Rate refers to the projected the annual interest rate on each senior loan as contractually outlined at acquisition. The interest rate presented does not distinguish between interest that is paid current and interest that accrues to the maturity date, nor does it include any increases in interest rate that may occur in the future. | |
(2) | Maturity Date refers to the initial maturity date of each senior loan, and does not take into account any extensions that may be available. | |
(3) | Total Commitment refers to the total commitment made by the Company to fund the senior loan, not all of which may have been funded on the acquisition date. | |
(4) | LTV, or loan-to-value ratio, is the approximate amount of the total commitment amount plus any other debt on the asset, divided by the anticipated future value of the underlying asset at stabilization as determined by our Manager. LTVs presented are as of the date of acquisition by the Company, and have not been subsequently updated. There can be no assurance that such value will be achieved. We generally use LTV for properties that are generating cash flow. | |
(5) | LTC, or loan-to-cost ratio, is the approximate amount of the total commitment plus any other debt on the asset, divided by the anticipated cost to complete the project. We generally use LTC for properties that are subject to construction. LTCs presented are as of the date of acquisition by the Company, and have not been subsequently updated. There can be no assurance that the anticipated completion cost will be achieved. | |
(6) | On July 20, 2018, 600 Block Commonwealth, LLC paid off the loan for the full amount of the outstanding principal balance plus interest. |
(7) | On February 3, 2019, SC Group 6845 Figueroa, LLC (“Stradella Court – La Prada”) executed a loan modification extending the maturity date of the senior loan to May 3, 2019. The loan principal increased to $2,396,545. In April 2020, the investment was issued a notice of maturity default for failing to repay the outstanding principal and contractual interest amounts owed. On September 2, 2020, the Company executed a deed in lieu for the underlying property of the real estate debt investment. In full satisfaction of the loan, the transfer of title occurred on December 15, 2020. |
(8) | In April 2020, the investment was issued a notice of maturity default for failing to repay the outstanding principal and contractual interest amounts owed. On September 2, 2020, the Company executed a deed in lieu for the underlying property of the real estate debt investment. In full satisfaction of the loan, the transfer of title occurred on December 15, 2020. As of December 31, 2020, the underlying property of the restructured debt with an approximate recorded investment balance of $2.9 million was in agreement of sale. The property was subsequently sold on March 18, 2021. See Note 12, Subsequent Events, for further information. |
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Liquidity and Capital Resources
We require capital to fund our investment activities and operating expenses. Our capital sources may include net proceeds from our Offerings, cash flow from operations, net proceeds from asset repayments and sales, borrowings under credit facilities, other term borrowings and securitization financing transactions.
We will obtain the capital required to purchase and originate real estate-related investments and conduct our operations from the proceeds of our Offering and any future offerings we may conduct, from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations. As of December 31, 2020, we have eighty investments totaling approximately $67.0 million in deployed capital and had approximately $10.9 million in cash and cash equivalents. As of December 31, 2019, we had thirty-six investments totaling approximately $37.3 million in deployed capital and had approximately $1.7 million in cash and cash equivalents. The Company also had a future commitment of up to 5% of its assets under management to National Lending. See Note 9, Related Party Arrangements, for further information regarding National Lending.
For information regarding the anticipated use of proceeds from our Offering, see our “Estimated Use of Proceeds” in our Offering Circular here. As of December 31, 2020, we anticipate that cash on hand and proceeds from our Offering will provide sufficient liquidity to meet future funding commitments and costs of operations.
As of both December 31, 2020 and 2019, we had no outstanding debt from our Sponsor (See Note 9, Related Party Arrangements in our consolidated financial statements). Our targeted portfolio-wide leverage after we have acquired an initial substantial portfolio of diversified investments is between 50-85% of the greater of the cost (before deducting depreciation or other non-cash reserves) or fair market value of our assets. During periods when we are growing our initial portfolio, we may employ greater leverage on individual assets (that will also result in greater leverage of the interim portfolio) in order to quickly build a diversified portfolio of assets. Our Manager may from time to time modify our leverage policy in its discretion in light of then-current economic conditions, relative costs of debt and equity capital, market values of our assets, general conditions in the market for debt and equity securities, growth and acquisition opportunities or other factors. However, other than during our initial period of operations, it is our policy to not borrow more than 85% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our assets. We cannot exceed the leverage limit of our leverage policy unless any excess in borrowing over such level is approved by our Manager’s investment committee.
We face challenges in order to ensure liquidity and capital resources on a long-term basis. If we are unable to raise additional funds from the issuance of common shares, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and we may be subject to more fluctuations based on the performance of the specific assets we acquire. Further, we have certain direct and indirect operating expenses. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income and would limit our ability to make distributions.
Outlook and Recent Trends
According to the IMF, the COVID-19 global pandemic was the worst economic crisis since the Great Depression. The Vanguard Real Estate Index was down -9.05% at the end of Q3 and -4.72% for the year 2020. Despite these adverse circumstances, the Company achieved a net return in 2020 of 3.78%. The positive performance represents a validation of the Company’s investment strategies, sound underwriting, and active asset management.
We are encouraged by the stability of our real estate performance in the face of such headwinds. First, residential property, like food, is a basic good rather than a discretionary expense so should perform more resiliently in a downturn as well as perform strongly in the upswing. Second, as of February 2021, the Company’s real estate portfolio has taken on zero debt. Management chose to place no senior debt on the properties in order to protect against the risk that credit markets freeze or become disrupted. Our belief is a portfolio of single family housing in Los Angeles, Atlanta, and Washington D.C. is likely to see healthy growth as a result of the increased demand for more residential living space and outdoor amenities.
The US economy is rapidly recovering from the downturn with most major indicators showing strong signs of growth, including new job gains, consumer spending, consumer confidence, and investor sentiment:
"With the vaccine rollout in full swing, and now with a third supplier in the mix, job growth and economic recovery are expected to strengthen. LaborIQ® forecasts a strong rebound that will set off a tidal wave of hiring during the second half of the year, especially for sectors within Leisure and Hospitality, which we're already seeing as consumers return to pre-pandemic behaviors and resume spending," said Jay Denton, Chief Analyst and SVP of Business Intelligence for ThinkWhy, on March 5, 2021.
15
The economic tailwinds are likely broadly to drive rent growth, occupancy and asset pricing. On the other hand, economic vibrancy generally raises interest rates, construction costs, and will generally create a more competitive environment for the Company. The current interest rate environment dramatically eased as a result of the Federal Reserve materially lowering rates and broad based liquidity injections. Capital markets are vigilantly monitoring the Federal Reserve’s policy stance. Historically when markets recover, hard assets, such as real estate, see an increase in value as a result of economic expansion.
Off-Balance Sheet Arrangements
As of December 31, 2020 and 2019, we had no off-balance sheet arrangements.
Related Party Arrangements
For further information regarding “Related Party Arrangements,” please see Note 9, Related Party Arrangements in our consolidated financial statements.
Recent Developments
Investments
The following table summarizes the real estate investments sold by the Company since December 31, 2020 (through April 19, 2021):
Asset Name | Zip Code | Date of Acquisition | Date of Disposition | Sales Price | ||||||||||||
F42 | 20011 | 11/30/2020 | 01/28/2021 | $ | 975,000 | |||||||||||
S17 | 20009 | 11/30/2020 | 02/25/2021 | $ | 1,325,000 | |||||||||||
SGGP 1300 Douglas, LLC | 90026 | 11/20/2017 | 03/18/2021 | $ | 3,100,000 | |||||||||||
R13 | 20009 | 11/30/2020 | 03/31/2021 | $ | 1,750,001 |
Other
Event | Date | Description | ||
Status of our Offering | 04/19/2021 | As of April 19, 2021, we had raised total gross offering proceeds of approximately $86.9 million from settled subscriptions (including the $309,000 and $100,000, respectively, received in the private placements to our Sponsor, and Fundrise, L.P., an affiliate of our Sponsor), and had settled subscriptions in our Offering and private placements for an aggregate of approximately 8.1 million of our common shares. |
Item 3. | Directors and Officers |
Our Manager
We operate under the direction of our Manager, which is responsible for directing the management of our business and affairs, managing our day-to-day affairs, and implementing our investment strategy. Our Manager has established an investment committee that makes decisions with respect to all acquisitions and dispositions. The Manager and its officers and directors are not required to devote all of their time to our business and are only required to devote such time to our affairs as their duties require.
We follow investment guidelines adopted by our Manager and the investment and borrowing policies set forth in our Offering Circular unless they are modified by our Manager. Our Manager may establish further written policies on investments and borrowings and will monitor our administrative procedures, investment operations and performance to ensure that the policies are fulfilled. Our Manager may change our investment objectives at any time without approval of our shareholders.
Our Manager performs its duties and responsibilities pursuant to our operating agreement. Our Manager maintains a contractual, as opposed to a fiduciary relationship, with us and our shareholders. Furthermore, we have agreed to limit the liability of our Manager and to indemnify our Manager against certain liabilities.
Executive Officers of Our Manager
As of the date of this Annual Report, the executive officers of our Manager and their positions and offices are as follows:
Name | Age | Position | ||
Benjamin S. Miller | 44 | Chief Executive Officer and Interim Chief Financial Officer and Treasurer | ||
Brandon T. Jenkins | 35 | Chief Operating Officer | ||
Bjorn J. Hall | 40 | General Counsel, Chief Compliance Officer and Secretary |
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Benjamin S. Miller currently serves as Chief Executive Officer of our Manager and has served as Chief Executive Officer and a Director of our Sponsor since its inception on March 14, 2012. As of February 9, 2016, Mr. Miller is also serving as Interim Chief Financial Officer and Treasurer of our Manager. Prior to Rise Companies Corp., Mr. Miller had been a Managing Partner of the real estate company WestMill Capital Partners from October 2010 to June 2012, and before that, was President of Western Development Corporation one of the largest mixed-use real estate companies in the Washington, DC metro area, from April 2006 to October 2010, after joining the company in early 2005 as its Chief Operating Officer. From 2003 until 2005, Mr. Miller was an Associate and part of the founding team of Democracy Alliance, a progressive investment collaborative. In 2001, Mr. Miller co-founded and was a Managing Partner of US Nordic Ventures, a private equity and operating company that works with Scandinavian green building firms to penetrate the U.S. market. Mr. Miller has a Bachelor of Arts from the University of Pennsylvania.
Brandon T. Jenkins currently serves as Chief Operating Officer of our Manager and has served in such capacities with the Sponsor since February of 2014, prior to which time he served as Head of Product Development and Director of Real Estate which he continues to do currently. Additionally, Mr. Jenkins has served as Director of Real Estate for WestMill Capital Partners since March of 2011. Previously, Mr. Jenkins spent two and a half years as an investment advisor and sales broker at Marcus & Millichap, the largest real estate investment sales brokerage in the country. Prior to his time in brokerage, Mr. Jenkins also worked for Westfield Corporation, a leading shopping center owner. Mr. Jenkins earned his Bachelor of Arts in Public Policy and Economics from Duke University.
Bjorn J. Hall currently serves as the General Counsel, Chief Compliance Officer and Secretary of our Manager and has served in such capacities with our Sponsor since February 2014. Prior to joining our Sponsor in February 2014, Mr. Hall was a counsel at the law firm of O’Melveny & Myers LLP, where he was a member of the Corporate Finance and Securities Group. Mr. Hall has a Bachelor of Arts from the University of North Dakota and received a J.D. from Georgetown University Law Center.
Compensation of Executive Officers
Each of the executive officers of our Sponsor also serves as an executive officer of our Manager. Each of these individuals receives compensation for his services, including services performed for us on behalf of our Manager, from our Sponsor. As executive officers of our Manager, these individuals serve to manage our day-to-day affairs, oversee the review, selection and recommendation of investment opportunities, service acquired investments and monitor the performance of these investments to ensure that they are consistent with our investment objectives. Although we indirectly bear some of the costs of the compensation paid to these individuals, through fees and reimbursements we pay to our Manager, we do not pay any compensation directly to these individuals.
Compensation of our Manager
For information regarding the compensation of our Manager, please see “Management Compensation” in our Offering Circular and Note 9, Related Party Arrangements – Fundrise Advisors, LLC, Manager in our consolidated financial statements.
Item 4. | Security Ownership of Management and Certain Securityholders |
Principal Members
The following table sets forth the approximate beneficial ownership of our common shares as of March 31, 2021 for each person or group that holds more than 10.0% of our common shares, for each director and executive officer of our Manager and for the directors and executive officers of our Manager as a group. To our knowledge, each person that beneficially owns our common shares has sole voting and disposition power with regard to such shares.
Number of Shares | ||||||||
Name of Beneficial Owner (1) (2) | Beneficially Owned | Percent of All Shares | ||||||
Benjamin S. Miller | 683 | * | ||||||
Brandon T. Jenkins | 6 | * | ||||||
Bjorn J. Hall | 215 | * | ||||||
All directors and executive officers of our Manager as a group (3 persons) | 904 | * |
* | Represents less than 1% of our outstanding common shares. |
(1) | Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to dispose of or to direct the disposition of such security. A person also is deemed to be a beneficial owner of any securities which that person has a right to acquire within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which he or she has no economic or pecuniary interest. |
(2) | Each listed beneficial owner has an address in care of our principal executive offices at 11 Dupont Circle NW, 9th Floor, Washington, DC 20036. |
Item 5. | Interest of Management and Others in Certain Transactions Other Information |
For further details, please see Note 9, Related Party Arrangements, in our consolidated financial statements
Item 6. | Other Information |
None.
17
Item 7. | Financial Statements |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
Fundrise eFund, LLC
18
Members
Fundrise eFund, LLC
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Fundrise eFund, LLC (formerly, Fundrise For-Sale Housing eFund – Los Angeles CA, LLC) and its subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2020 and 2019, the related consolidated statements of operations, members’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fundrise eFund, LLC and subsidiaries as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ RSM US LLP
McLean, Virginia
April 19, 2021
F-1
Fundrise eFund, LLC
(Amounts in thousands, except share data)
As of | As of | |||||||
December 31, 2020 | December 31, 2019 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 10,924 | $ | 1,676 | ||||
Other assets | 777 | 292 | ||||||
Real estate deposits | - | 50 | ||||||
Investments in residential rental properties, net | 30,793 | 11,765 | ||||||
Investments in real estate held for improvement | 25,650 | 14,164 | ||||||
Investments in real estate held for sale | 7,165 | 1,199 | ||||||
Investments in equity method investees | 2,567 | 4,611 | ||||||
Investments in real estate debt investments | - | 5,243 | ||||||
Total Assets | $ | 77,876 | $ | 39,000 | ||||
LIABILITIES AND MEMBERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 1,512 | $ | 299 | ||||
Rental security deposits and other liabilities | 468 | 114 | ||||||
Due to related party | 42 | 3 | ||||||
Redemptions payable | 3 | 190 | ||||||
Below market leases, net | 33 | 37 | ||||||
Total Liabilities | 2,058 | 643 | ||||||
Commitments and Contingencies | ||||||||
Members’ Equity: | ||||||||
Common shares; unlimited shares authorized; 8,095,316 and 4,205,591 shares issued, and 7,061,449 and 3,800,487 outstanding as of December 31, 2020 and 2019, respectively | 86,034 | 41,888 | ||||||
Redemptions - common shares | (10,770 | ) | (4,035 | ) | ||||
Retained Earnings (Accumulated deficit) | 554 | 504 | ||||||
Total Members’ Equity | 75,818 | 38,357 | ||||||
Total Liabilities and Members’ Equity | $ | 77,876 | $ | 39,000 |
The accompanying notes are an integral part of these consolidated financial statements
F-2
Fundrise eFund, LLC
Consolidated Statements of Operations
(Amounts in thousands, except share and per share data)
For the Year Ended | For the Year Ended | |||||||
December 31, 2020 | December 31, 2019 | |||||||
Revenue | ||||||||
Interest revenue | $ | 126 | $ | 321 | ||||
Rental revenue | 934 | 745 | ||||||
Other revenue | 27 | 16 | ||||||
Total revenue | 1,087 | 1,082 | ||||||
Expenses | ||||||||
Rental properties operating and maintenance | 429 | 233 | ||||||
Depreciation and amortization | 279 | 154 | ||||||
General and administrative expenses | 541 | 325 | ||||||
Total expenses | 1,249 | 712 | ||||||
Other income (expense) | ||||||||
Equity in earnings (losses) | 414 | (42 | ) | |||||
Interest expense – related party note | (17 | ) | - | |||||
Gain on sale of real estate | - | 181 | ||||||
Loss on debt restructuring | (185 | ) | - | |||||
Total other income (expense) | 212 | 139 | ||||||
Net income (loss) | $ | 50 | $ | 509 | ||||
Net income (loss) per common share | $ | 0.01 | $ | 0.14 | ||||
Weighted average number of common shares outstanding, basic and diluted | 3,973,389 | 3,526,509 |
The accompanying notes are an integral part of these consolidated financial statements
F-3
Fundrise eFund, LLC
Consolidated Statements of Members’ Equity
(Amounts in thousands, except share data)
Common Shares | Retained Earnings (Accumulated | Total Members' | ||||||||||||||
Shares | Amount | deficit) | Equity | |||||||||||||
December 31, 2018 | 3,240,374 | $ | 31,965 | $ | (5 | ) | $ | 31,960 | ||||||||
Proceeds from issuance of common shares | 829,833 | 8,623 | - | 8,623 | ||||||||||||
Redemptions of common shares | (269,720 | ) | (2,705 | ) | - | (2,705 | ) | |||||||||
Offering costs | - | (30 | ) | - | (30 | ) | ||||||||||
Net income (loss) | - | - | 509 | 509 | ||||||||||||
December 31, 2019 | 3,800,487 | $ | 37,853 | $ | 504 | $ | 38,357 | |||||||||
Proceeds from issuance of common shares | 3,889,725 | 44,484 | - | 44,484 | ||||||||||||
Redemptions of common shares | (628,763 | ) | (6,735 | ) | - | (6,735 | ) | |||||||||
Offering costs | - | (338 | ) | - | (338 | ) | ||||||||||
Net income (loss) | - | - | 50 | 50 | ||||||||||||
December 31, 2020 | 7,061,449 | $ | 75,264 | $ | 554 | $ | 75,818 |
The accompanying notes are an integral part of these consolidated financial statements
F-4
Fundrise eFund, LLC
Consolidated Statements of Cash Flows
(Amounts in thousands)
For the Year Ended | For the Year Ended | |||||||
December 31, 2020 | December 31, 2019 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | 50 | $ | 509 | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Equity in (earnings) losses | (414 | ) | 42 | |||||
Depreciation and amortization | 279 | 154 | ||||||
Amortization of below-market lease | (4 | ) | (5 | ) | ||||
Bad debt expense | 97 | - | ||||||
Accrued interest converted to principal | (125 | ) | (227 | ) | ||||
Other income | (9 | ) | - | |||||
Gain on sale of real estate | - | (181 | ) | |||||
Loss on debt restructuring | 185 | - | ||||||
Changes in assets and liabilities: | ||||||||
Net decrease (increase) in other assets | (190 | ) | (153 | ) | ||||
Net increase (decrease) in due to related party | (70 | ) | (109 | ) | ||||
Net increase (decrease) in accounts payable and accrued expenses | (76 | ) | 71 | |||||
Net increase (decrease) in rental security deposits and other liabilities | 343 | (64 | ) | |||||
Net cash provided by (used in) operating activities | 66 | 36 | ||||||
INVESTING ACTIVITIES: | ||||||||
Investment in real estate debt investments | - | (199 | ) | |||||
Acquisitions of real estate held for improvement | - | (1,759 | ) | |||||
Improvements of real estate held for improvement | (647 | ) | (970 | ) | ||||
Acquisitions of residential rental properties | - | (2,093 | ) | |||||
Improvements in residential rental properties | (15 | ) | (240 | ) | ||||
Acquisitions of real estate held for sale | - | (1,167 | ) | |||||
Improvements in real estate held for sale | (28 | ) | (19 | ) | ||||
Cash received in connection with the Merger | 14,417 | - | ||||||
Proceeds from sale of real estate | - | 929 | ||||||
Investment in equity method investees | (194 | ) | (1,174 | ) | ||||
Repayment of equity method investees | 2,652 | - | ||||||
Release (issuance) of real estate deposits | - | 124 | ||||||
Net cash provided by (used in) investing activities | 16,185 | (6,568 | ) | |||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of common shares | 227 | 8,623 | ||||||
Proceeds from note payable - related party | 7,000 | - | ||||||
Repayment of notes payable – related party | (7,000 | ) | - | |||||
Offering costs paid | (299 | ) | (507 | ) | ||||
Redemptions | (6,931 | ) | (2,663 | ) | ||||
Net cash provided by (used in) financing activities | (7,003 | ) | 5,453 | |||||
Net increase (decrease) in cash and cash equivalents | 9,248 | (1,079 | ) | |||||
Cash and cash equivalents, beginning of year | 1,676 | 2,755 | ||||||
Cash and cash equivalents, end of year | $ | 10,924 | $ | 1,676 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Interest paid - related party note | $ | 17 | $ | - | ||||
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITY: | ||||||||
Improvements in real estate held for improvement included in accounts payable | $ | 420 | $ | 35 | ||||
Improvements in residential rental properties included in accounts payable | $ | 58 | $ | - | ||||
Improvements of real estate held for sale included in accounts payable | $ | 192 | $ | - | ||||
Restructuring of real estate debt investments | $ | 5,243 | $ | - | ||||
Non-cash transactions related to the merger of Fundrise National For-Sale Housing eFund, LLC & Fundrise For-Sale Housing eFund – Washington DC, LLC (“Target Funds”) with Fundrise For-Sale Housing eFund - Los Angeles CA, LLC in which Fundrise eFund, LLC was the surviving entity: | ||||||||
Issuance of common shares to shareholders of the Target Funds | $ | 44,048 | $ | - | ||||
Issuance of common shares to Fundrise L.P. | $ | 199 | $ | - | ||||
Issuance of common shares to Rise Companies Corp. | $ | 10 | $ | - |
The accompanying notes are an integral part of these consolidated financial statements
F-5
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
1. | Formation and Organization |
Fundrise eFund, LLC was formed on November 19, 2015, as a Delaware limited liability company to acquire and invest in property, for development or redevelopment. Operations commenced on May 26, 2017. Effective November 30, 2020, Fundrise National For-Sale Housing eFund, LLC and Fundrise For-Sale Housing eFund – Washington DC, LLC, the (“Target eFunds”), merged with Fundrise For-Sale Housing eFund – Los Angeles CA, LLC in which Fundrise eFund, LLC was the surviving entity (“the Merger”). Following the Merger, we intend to acquire property for the development and rental of single-family attached and detached homes, townhomes and condominiums targeted to first-time, move-up and active adult homebuyers (referred to herein as “Single Family Housing”) without a focus on any MSA in the United States as opportunity dictates. We expect to use substantially all of the net proceeds from our initial and subsequent offerings (the “Offering(s)”) to continue to originate, invest in and manage a diversified portfolio primarily consisting of investments in commercial and residential real estate properties, as well as commercial real estate loans, commercial real estate debt securities (including commercial mortgage-backed securities, collateralized debt obligations, and REIT senior unsecured debt), development projects, and other select real estate-related assets, where the underlying assets primarily consist of such properties. We may make our investments through majority-owned subsidiaries, some of which may have rights to receive preferred economic returns. We intend to be treated as a partnership for U.S. federal income tax purposes, with the intent of offering investors a tax-efficient means of investing in real estate-related business plans that are generally non-REIT qualifying. As used herein, the “Company,” “we,” “our,” and “us” refer to Fundrise eFund, LLC except where the context otherwise requires. The Company has one reportable segment consisting of investments in real estate.
Each residential real estate property investment of the Company is acquired by a limited liability company that is a subsidiary of ours. These subsidiaries are wholly owned by the Company and consolidated in these consolidated financial statements.
The Company’s business is externally managed by Fundrise Advisors, LLC (the “Manager”), a Delaware limited liability company and an investment adviser registered with the Securities and Exchange Commission (the “SEC”). Subject to certain restrictions and limitations, the Manager is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company.
The Company’s initial and subsequent offering of its common shares (the “Offering(s)”) is being conducted as a continuous offering pursuant to Rule 251(d)(3) of Regulation A, meaning that while the offering of securities is continuous, active sales of securities may happen sporadically over the term of an Offering. Currently, a maximum of $50.0 million of the Company’s common shares may be sold to the public in its Offering in any given twelve-month period. The SEC adopted an amendment to increase the maximum offering amount under Tier 2 of Regulation A from $50.0 million to $75.0 million. This amendment is effective March 15, 2021, and the Company intends to utilize this increased offering amount in the future. However, each Offering is subject to qualification by the SEC. The Manager has the authority to issue an unlimited number of common shares. Most recently, the Company qualified $49.7 million of shares on November 27, 2020, which represents the value of shares available to be offered as of the date of its most recent offering circular out of the rolling 12-month maximum offering amount of $50.0 million.
As of December 31, 2020 and 2019, after redemptions, the Company has net common shares outstanding of approximately 7,061,000 and 3,800,000, respectively, including common shares held by Rise Companies Corp. (the “Sponsor”), the owner of the Manager. As of December 31, 2020, 1,414 common shares were held by the Sponsor at an average of $10.93 per share for an aggregate purchase price of approximately $15,500. As of December 31, 2019, there were 500 common shares held by the Sponsor at $10.00 per share for an aggregate purchase price of $5,000. In addition, Fundrise, L.P., an affiliate of the Sponsor, had purchased an aggregate of 26,872 common shares at an average of $10.93 per share for an aggregate purchase price of approximately $293,700. As of December 31, 2019, Fundrise, L.P. had purchased an aggregate of 9,500 common shares at $10.00 per share in a private placement for an aggregate purchase price of $95,000.
As of December 31, 2020 and 2019, the Company’s total amount of equity outstanding on a gross basis was approximately $86.9 million and $42.4 million, respectively, and there were no settling subscriptions for each of the years ended. These amounts were based on a $11.44 and a $10.44 per share price, respectively.
F-6
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting and conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Article 8 of Regulation S-X of the rules and regulations of the SEC.
Merger Transaction – Asset Acquisition
As a result of the Merger, the financial information being presented represents a continuation of the financial information of the acquired assets. The properties we acquire typically are not businesses as defined by ASU 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business. Per this definition, a set of transferred assets and activities is not a business when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. We therefore account for such acquisitions as asset acquisitions. Acquisition costs are capitalized and identifiable assets (including physical assets and in-place leases), liabilities assumed and any noncontrolling interests are measured by allocating the cost of the acquisition on a relative fair value basis. Acquisitions executed prior to our adoption of ASU 2017-01 as of January 1, 2017 were accounted for as business combinations. The historical information included herein, covering periods prior to the Merger, refers to our business as operated by Fundrise For-Sale Housing eFund – Los Angeles CA, LLC.
The Company acquired forty-five residential real estate properties in connection with the Merger. The table below summarizes the assets acquired from the Merger (dollar amounts in thousands):
Asset Type | Number of Properties | Real Estate Acquired (1) | |||||
Residential rental properties | 34 | $ | 19,838 | ||||
Real estate held for improvement | 6 | 6,503 | |||||
Real estate available for sale | 5 | 4,033 | |||||
Total | 45 | $ | 30,374 |
(1) | Real estate acquired is inclusive of acquisition-related costs, including approximately $139,000 of transfer taxes related to the Merger. |
The following table further details the purchase price allocation for the properties acquired in connection with the Merger (dollar amounts in thousands):
Description | Asset Acquisition Allocation | |||
Land | $ | 18,323 | ||
Building and building improvements | 11,780 | |||
Site improvements | 4 | |||
Furniture, fixtures and equipment | 40 | |||
In-place lease intangibles | 227 | |||
Working capital, net | (534 | ) | ||
Cash acquired | 14,417 | |||
Issuance of common shares | $ | 44,257 |
Principles of Consolidation
We consolidate entities when we own, directly or indirectly, a majority interest in the entity or are otherwise able to control the entity. We consolidate variable interest entities (“VIE”) in accordance with Accounting Standards Codification (“ASC”) 810, Consolidation, if we are the primary beneficiary of the VIE as determined by our power to direct the VIE’s activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
F-7
Cash and Cash Equivalents
Cash and cash equivalents consist of money market funds, demand deposits and highly liquid investments with original maturities of three months or less.
Cash may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250,000 per institution. The Company mitigates credit risk by placing cash with major financial institutions. To date, the Company has not experienced any losses with respect to cash.
Organizational and Offering Costs
Organizational and offering costs of the Company are being paid by the Manager on behalf of the Company. These organizational and offering costs include all expenses to be paid by the Company in connection with the formation of the Company and the qualification of the Offering. These may also include marketing and distribution of shares, including, without limitation, expenses for printing, amending offering statements or supplementing offering circulars, mailing and distributing costs, telephones, Internet and other telecommunications costs, all advertising and marketing expenses, charges of experts and fees, expenses and taxes related to the filing, registration and qualification of the sale of shares under federal and state laws, including taxes and fees, and accountants’ and attorneys’ fees. Pursuant to the Company’s amended and restated operating agreement (the “Operating Agreement”), the Company will be obligated to reimburse the Manager, or its affiliates, as applicable, for organizational and offering costs paid by them on behalf of the Company, subject to a minimum net asset value (“NAV”), as described below.
After the Company has reached a NAV greater than $10.00 per share (“Hurdle Rate”), it will start to reimburse the Manager, without interest, for these organizational and offering costs incurred, both, before and after the date that the Hurdle Rate was reached. The total amount payable to the Manager will be based on the dollar amount that the NAV exceeds the Hurdle Rate, multiplied by the number of shares outstanding. Reimbursement payments will be made in monthly installments, but the aggregate monthly amount reimbursed shall not exceed 0.50% of the aggregate gross offering proceeds from the Offering . No reimbursement shall be made if the reimbursement would cause the NAV to be less than the Hurdle Rate. If the sum of the total unreimbursed amount of such organizational and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.50% limit), calculated on an accumulated basis, until the Manager has been reimbursed in full.
The Company records a liability for organizational costs and offering costs payable to the Manager when it is probable and estimable that a liability has been incurred in accordance with ASC 450, Contingencies. As a result, there will be no liability recognized until the Company reaches the Hurdle Rate. Upon the Company’s NAV exceeding the Hurdle Rate, it will recognize a liability with a corresponding reduction to equity for offering costs, and expense for organizational costs.
As of both December 31, 2020 and 2019, the Manager had incurred cumulative organizational and offering costs of approximately $500,000, on behalf of the Company. The Hurdle Rate was met as of December 31, 2020 and 2019, so as a result, approximately $0 and $2,000 of offering costs were due to the Manager as of December 31, 2020 and 2019, respectively. Of the $2,000 due to the Manager as of December 31, 2019, all were related to offering costs. As of December 31, 2020 and 2019, no offering or organizational costs incurred by the Manger have been reimbursed to the Company.
During the years ended December 31, 2020 and 2019, the Company directly incurred offering costs of approximately $339,000 and $9,000, respectively. Of these amounts, approximately $41,000 and $0 were payable as of December 31, 2020 and 2019, respectively.
Earnings per Share
Basic earnings per share is calculated on the basis of weighted-average number of common shares outstanding during the year. Basic earnings per share is computed by dividing income available to members by the weighted-average common shares outstanding during the year. Diluted net income (loss) per common share equals basic net income (loss) per common share as there were no potentially dilutive securities outstanding during the years ended December 31, 2020 and 2019.
Real Estate Deposits
During the closing on an investment in residential rental property or real estate held for improvement, we may place a cash deposit on the property being acquired or fund amounts into escrow. These deposits are placed before the closing process of the property is complete. If subsequent to placing the deposit, we acquire the property (the deed is transferred to us), the deposit placed will be credited to the purchase price. If subsequent to placing the deposit, we do not acquire the property (deed is not transferred to us), the deposit will be returned to us. The Company may pay a deposit for a property that is ultimately acquired by a related party fund. Upon acquisition of the property, the related party fund would reimburse the Company for the full amount of the deposit.
F-8
Investments in Residential Rental Properties and Real Estate Held for Improvement
Our investments in rental real estate properties and real estate held for improvement may include the acquisition of unimproved land, homes, townhomes or condominiums, office space, or industrial properties that are i) held as rental properties or ii) held for redevelopment or are in the process of being renovated.
In accordance with ASC 805, Business Combinations, the Company first determines whether the acquisition of a property qualifies as a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the property acquired does not constitute a business, the Company accounts for the transaction as an asset acquisition. The guidance for business combinations states that when substantially all of the fair value of the gross assets to be acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the asset or set of assets is not a business. All property acquisitions to date have been accounted for as asset acquisitions.
Upon acquisition of a property, the Company assesses the fair value of acquired tangible and intangible assets (including land, buildings, site improvements, above- and below-market leases, acquired in-place leases, other identified intangible assets and assumed liabilities) and allocates the purchase price (including capitalized transaction costs) to the acquired assets and assumed liabilities on a relative fair value basis. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. During this process, we also evaluate each investment for purposes of determining whether a property can be immediately rented (presented on the consolidated balance sheets as “Investments in rental real estate properties, net”) or will need improvements or redevelopment (classified as “Investments in real estate held for improvement”).
The amortization of in-place leases is recorded to depreciation and amortization expense on the Company’s consolidated statements of operations. The amortization of above- or below-market leases is recorded as an adjustment to rental revenue on the Company’s consolidated statements of operations. We consider qualitative and quantitative factors in evaluating the likelihood of a tenant exercising a below-market renewal option and include such renewal options in the calculation of in-place lease value when we consider these to be bargain renewal options. If the value of below-market lease intangibles includes renewal option periods, we include such renewal periods in the amortization period utilized. If a tenant vacates its space prior to contractual termination of its lease, the unamortized balance of any in-place lease value is written off. In-place lease assets haven been reflected within other assets in our consolidated balance sheets.
For rental real estate properties, significant improvements are capitalized. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. We capitalize expenditures above a pre-determined threshold that improve or extend the life of a property and for certain furniture and fixtures additions.
For real estate held for improvement, we capitalize the costs of improvement as a component of our investment in each property. These include renovation costs and other capitalized costs associated with activities that are directly related to preparing our properties for their intended use. Other costs may include interest, property taxes, property insurance, and utilities. The capitalization period associated with our improvement activities begins at such time that development activities commence and concludes at the time that a property is available to be rented or sold.
At the completion of the improvement plan, a property is classified as either a rental property or available for sale. Once a property is ready for its intended use, expenditures for ordinary maintenance and repairs are expensed to operations as incurred. We capitalize expenditures above a pre-determined threshold that improve or extend the life of a property and for certain furniture and fixtures additions.
Costs capitalized in connection with residential property acquisitions and improvement activities are depreciated over their estimated useful lives on a straight-line basis. The depreciation period commences upon the cessation of improvement related activities. For those costs capitalized in connection with rental real estate properties acquisitions and improvement activities and those capitalized on an ongoing basis, the useful lives range of the assets are as follows:
Description | Depreciable Life | |
Building and building improvements | 20 – 30 years | |
Site improvements | 5 – 10 years | |
Furniture, fixtures and equipment | 5 – 10 years | |
Lease intangibles | Over lease term |
We evaluate our real estate properties for impairment semiannually or when there is an event or change in circumstances that indicates an impaired value. If the carrying amount of the real estate investment is no longer recoverable and exceeds the fair value of such investment, an impairment loss is recognized. The impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. If the Company determines that an impairment has occurred, the affected assets must be reduced to their fair value. During the years ended December 31, 2020 and 2019, no such impairment occurred.
F-9
Investments in Real Estate Held For Sale
From time to time, we may identify residential properties to be sold. At the time that any such properties are identified, we perform an evaluation to determine whether or not such properties should be classified as held for sale or presented as discontinued operations in accordance with U.S. GAAP.
Factors considered as part of our held for sale evaluation process include whether the following conditions have been met: (i) we have committed to a plan to sell a property that is immediately available for sale in its present condition;(ii) an active program to locate a buyer and other actions required to complete the plan to sell a property have been initiated; (iii) the sale of a property is probable within one year (generally determined based upon listing for sale); (iv) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (v) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. To the extent that these factors are all present, we discontinue depreciating the property, measure the property at the lower of its carrying amount or its fair value less estimated costs to sell, and present the property separately within other assets, net on our consolidated balance sheets.
Investments in Real Estate Debt Investments
Our real estate debt investments may include first mortgage loans, subordinate mortgage and mezzanine loans and participations in such loans and preferred equity interests in unconsolidated joint ventures.
Our real estate debt investments are generally classified as held to maturity, as we have both the intent and ability to hold these investments until maturity. Accordingly, these assets are carried at cost, net of unamortized loan origination costs and fees, discounts, repayments and unfunded commitments, if applicable, unless such loans or investments are deemed to be impaired. The Company’s real estate debt investments are subject to quarterly analysis for potential impairment.
A debt related investment is impaired when, based on current information and events (including economic, industry and geographical factors), it is probable that we will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the agreement. When an investment is deemed impaired, the impairment is measured based on the expected future cash flows discounted at the investment’s effective interest rate. As a practical expedient, the Financial Accounting Standards Board (the “FASB”) issued ASC 310, Receivables, which permits a creditor to measure an observable market price for the impaired debt related investment as an alternative to discounting expected future cash flows. Regardless of the measurement method, a creditor should measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. A debt related investment is also considered impaired if its terms are modified in a troubled debt restructuring (“TDR”). A TDR occurs when we grant a concession to a borrower in financial difficulty by modifying the original terms of the loan. Impairments on TDR loans are generally measured based on the present value of expected future cash flows discounted at the effective interest rate of the original loan.
As of December 31, 2019, one of our real estate debt investments was deemed impaired and classified as non-accrual. The investment was determined to have sufficient underlying real estate collateral as of December 31, 2019. During the year ended December 31, 2020, both of our real estate debt investments were deemed impaired and on September 2, 2020, the Company executed deeds in lieu of foreclosure for the underlying property of the real estate debt investments. In full satisfaction of the loans, the transfers of title occurred on December 15, 2020. During the year ended December 31, 2020, we recognized a loss on troubled debt restructuring related to both property acquisitions.
Investments in Equity Method Investees
If it is determined that we do not have a controlling interest in a joint venture through our financial interest in a VIE or through our voting interest in a voting interest entity and we have the ability to provide significant influence, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliate as they occur, with losses limited to the extent of our investment in, advances to, and commitments to the investee.
The Company evaluates its investment in equity method investees for impairment semi-annually or whenever events or changes in circumstances indicate that there may be an other-than-temporary decline in value. To do so, the Company would calculate the estimated fair value of the investment using various valuation techniques, including, but not limited to, discounted cash flow models, the Company’s intent and ability to retain its investment in the entity, the financial condition and long-term prospects of the entity, and the expected term of the investment. If the Company determined any decline in value is other-than-temporary, the Company would recognize an impairment charge to reduce the carrying value of its investment to fair value. No impairment losses were recorded related to equity method investees for years ended December 31, 2020 and 2019, respectively.
F-10
Share Redemptions
Share repurchases are recorded as a reduction of common share par value under our redemption plan, pursuant to which we may elect to redeem shares at the request of our members, subject to certain exceptions, conditions, and limitations. The maximum number of shares purchasable by us in any period depends on a number of factors and is at the discretion of our Manager.
The Company has adopted a redemption plan whereby, on a monthly basis, an investor has the opportunity to obtain liquidity monthly, following a minimum sixty (60) day waiting period after submitting their redemption request. Pursuant to the Company’s redemption plan, a member may only (a) have one outstanding redemption request at any given time and (b) request that we redeem up to the lesser of 5,000 shares or $50,000 worth of shares per each redemption request. In addition, the redemption plan is subject to certain liquidity limitations, which may fluctuate depending on the liquidity of the real estate assets held by the Company. Redemptions are also subject to declining discounts on the redemption price over the course of the time the member has held the shares being redeemed.
In light of the SEC’s current guidance on redemption plans, we generally intend to limit redemptions in any calendar month to shares whose aggregate value (based on the repurchase price per share in effect as of the redemption date) is less than or equal to 0.5% of the NAV of all of our outstanding shares as of the first day of such calendar month, and generally intend to limit the amount redeemed in any calendar quarter to shares whose aggregate value (based on the repurchase price per share in effect as of the redemption date) is 1.25% of the NAV of all of our outstanding shares as of first day of the last month of such calendar quarter (e.g., March 1, June 1, September 1, or December 1), with excess capacity carried over to later calendar quarters in that calendar year. However, as we intend to make a number of real estate investments of varying terms and maturities, our Manager may elect to increase or decrease the number of common shares available for redemption in any given month or quarter, as these real estate assets are paid off or sold, but we do not intend to redeem more than 5.00% of the common shares outstanding during any calendar year. Notwithstanding the foregoing, we are not obligated to redeem common shares under the redemption plan.
In addition, our Manager may, in its sole discretion, amend, suspend, or terminate the redemption plan at any time without prior notice, including to protect our operations and our non-redeemed members, to prevent an undue burden on our liquidity, following any material decrease in our NAV, to comply with the publicly traded partnership Safe Harbor, or for any other reason. Therefore, you may not have the opportunity to make a redemption request prior to any potential termination of our redemption plan. However, in the event that we amend, suspend or terminate our redemption plan, we will file an offering circular supplement and/or Form 1-U, as appropriate, and post such information on the Fundrise Platform to disclose such amendment.
Therefore, a member may not have the opportunity to make a redemption request prior to any potential termination of the Company’s redemption plan.
Income Taxes
The Company is treated as a pass-through entity for federal income tax purposes and, as such, is not subject to income taxes at the entity level. Rather, the distributive share of all items of income, gain, loss, deduction, or credit are passed through to the members and reported on their respective tax returns. The Company’s federal tax status as a pass-through entity is based on its default classification as a limited liability company with more than one member, that is treated as a partnership. As of the date of these consolidated financial statements, the Company does not have any subsidiaries that pay tax at the entity level. Accordingly, these consolidated financial statements do not reflect a provision for income taxes and the Company has not taken any other tax positions which require disclosure.
The Company is required to file, has filed, and will continue to file income tax returns with the Internal Revenue Service and other taxing authorities. Income tax returns filed by the Company are subject to examination by the Internal Revenue Service for a period of three years. All tax periods since inception remain open to examination at this time.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the term of the lease. We will periodically review the collectability of our resident receivables and record an allowance for doubtful accounts for any estimated probable losses. Bad debt expenses will be recorded within property operating and maintenance expenses in these consolidated financial statements.
Interest revenue is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. Interest revenue is recognized on real estate debt investments classified as held to maturity securities.
Gains on sale of real estate are recognized net of costs and selling expenses at the time each single-family property is delivered and title and possession are transferred to the buyer.
F-11
Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update 2020-04 (“ASU 2020-04”), Reference Rate Reform (Topic 848), which eases the potential burden in accounting for reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update 2016-02 (“ASU 2016-02”), Leases, which changes the accounting for leases for both lessors and lessees. The guidance requires lessees to recognize right-of-use assets and lease liabilities for virtually all of their leases, including leases embedded in other contractual arrangements, among other changes. In June 2020, the FASB voted to delay the fiscal year effective date of this standard by one year, and the interim period effective date by one year. The standard will now be effective for annual reporting periods beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. We are currently assessing the impact of this update on the presentation of our consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2020. In November 2019, the FASB voted to delay the effective date of this standard by two years. The standard will now be effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2022, with early adoption permitted. We are currently in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.
Due to the business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic, many lessors may provide rent deferrals and other lease concessions to lessees. While the lease modification guidance in ASC 840, Leases (“ASC 840”) addresses routine changes to lease terms resulting from negotiations between the lessee and the lessor, this guidance did not contemplate an exceptionally high volume of concessions being so rapidly executed to address the sudden liquidity constraints of certain lessees caused by the COVID-19 pandemic. In April 2020, the FASB issued a question and answer document ("Q&A") that allows lessors to elect not to evaluate whether lease-related relief provided to mitigate the economic effects of COVID-19 is a lease modification under ASC 840. This election would allow lessors to bypass a lease-by-lease analysis, and instead choose to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. Lessors making this election would continue to recognize property rental revenue on a straight-line basis. Rent abatements would be recognized as reductions to property rental revenue during the period for which they relate. Rent deferrals would not impact the recognition of property rental revenue, but would result in an increase to tenant receivables during the deferral period.
We are evaluating this policy election and have not determined if we will treat any lease-related relief we provide to mitigate the economic effects of COVID-19 as a lease modification under ASC 840. While we did not grant any lease-related relief as a result of COVID-19 during the year-ended December 31, 2020, we may be in discussions with tenants and may grant concessions and additional lease-related relief, such as the deferral of lease payments, for a period of time. The nature and financial impact of such rent relief is currently unknown as negotiations are in progress.
Extended Transition Period
Under Section 107 of the Jumpstart Our Business Startups Act of 2012, we are permitted to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. This permits us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B). By electing to extend the transition period for complying with new or revised accounting standards, these consolidated financial statements may not be comparable to companies that adopt accounting standard updates upon the public business entity effective dates.
3. | Investments in Residential Rental Properties and Real Estate Held for Improvement |
Our residential rental properties consisted of fifty-one single-family residential rentals and one quadplex as of December 31, 2020. Our residential rental properties consisted of seventeen single-family residential rentals and one quadplex as of December 31, 2019.
F-12
The following table presents the Company’s investments in residential rental properties (amounts in thousands):
As of December 31, 2020 (1) | As of December 31, 2019 (2) | |||||||
Land- acquisition allocation | $ | 18,768 | $ | 7,336 | ||||
Building and building improvements | 12,404 | 4,647 | ||||||
Furniture, fixtures, and equipment | 52 | 4 | ||||||
Total gross investment in residential rental properties | $ | 31,224 | $ | 11,987 | ||||
Less: accumulated depreciation | (431 | ) | (222 | ) | ||||
Total investment in residential rental properties, net | $ | 30,793 | $ | 11,765 |
(1) | During the year ended December 31, 2020, one real estate investment was determined to need improvements or redevelopment and was reclassified from “Investments in rental real estate properties, net” to “Investments in real estate held for improvement” on the consolidated balance sheets. | |
(2) | Certain amounts in the prior year’s consolidated financial statements have been presented to conform to current period presentation. Post-acquisition capitalized improvement amounts have been included in with “Building and building improvements” and “Furniture, fixtures, and equipment”. |
As of December 31, 2020 and 2019, the carrying amount of the residential rental properties above included cumulative capitalized transaction costs of approximately $260,000 and $270,000, respectively, which includes cumulative acquisition fees paid to the Sponsor of $219,000 and $227,000, respectively.
For the years ended December 31, 2020 and 2019, the Company recognized approximately $210,000 and $154,000 of depreciation expense on residential rental properties.
As of December 31, 2020 and 2019, we had twenty-one and twelve single-family residential properties held for improvement, respectively.
The following table presents our real estate held for improvement (amounts in thousands):
As of December 31, 2020 (1) | As of December 31, 2019 | |||||||
Land- acquisition allocation | $ | 17,455 | $ | 8,554 | ||||
Building and building improvements | 5,225 | 3,742 | ||||||
Work in progress | 2,970 | 1,868 | ||||||
Total investment in real estate held for improvement | $ | 25,650 | $ | 14,164 |
(1) | During the year ended December 31, 2020, one real estate investment was determined to need improvements or redevelopment and was reclassified from “Investments in rental real estate properties, net” to “Investments in real estate held for improvement” on the consolidated balance sheets. |
As of December 31, 2020 and 2019, real estate held for improvement included capitalized transaction costs of approximately $595,000 and $545,000, respectively, which includes cumulative acquisition fees paid to the Sponsor of approximately $269,000 and $237,000, respectively.
4. | Investments in Real Estate Held for Sale |
As of December 31, 2020 and 2019, we had six and two single family residential properties held for sale, respectively.
The following table presents the Company’s investments in residential properties held for sale (amounts in thousands):
As of December 31, 2020 | As of December 31, 2019 | |||||||
Land- acquisition allocation | $ | 5,563 | $ | 825 | ||||
Building and building improvements | 1,602 | 374 | ||||||
Total investment in real estate held for sale | $ | 7,165 | $ | 1,199 |
As of December 31, 2020 and 2019, residential property held for sale included capitalized transaction costs of approximately $25,000 and $29,000, respectively, which includes cumulative acquisition fees paid to the Sponsor of approximately $0 and $23,000, respectively.
F-13
5. | Investments in Real Estate Debt Investments |
The following table describes our real estate debt investments activity (amounts in thousands):
Real Estate Debt Investments | For the Year ended December 31, 2020 | For the Year ended December 31, 2019 | ||||||
Beginning balance | $ | 5,243 | $ | 4,800 | ||||
Investments (1) | - | 443 | ||||||
Principal repayments (2) | (5,243 | ) | - | |||||
Ending balance | $ | - | $ | 5,243 |
(1) | This only includes the stated amount of funds disbursed to date and interest that was contractually converted to principal. | |
(2) | On September 2, 2020, the Company executed a deed in lieu for each of the two underlying properties of the real estate debt investments. In full satisfaction of the loans, the transfers of title both occurred on December 15, 2020. As of December 31, 2020, the underlying property of the SGGP 1300 Douglas, LLC investment is in agreement of sale and is classified as real estate held for sale on the balance sheet. The property was subsequently sold on March 18, 2021. See Note 12, Subsequent Events, for further information. As of December 31, 2020, the underlying property of the SC Group 6845 Figueroa, LLC investment is classified as real estate held for improvement on the balance sheet. |
As of December 31, 2020, the Company held no real estate debt investments.
The following table describes our real estate debt investments as of December 31, 2019 (amounts in thousands):
Asset Type | Number | Principal Amount or Cost (1) | Future Funding Commitments | Carrying Value | ||||||||||||
Senior Debt | 2 | $ | 5,243 | $ | - | $ | 5,243 | |||||||||
Balance as of December 31, 2019 | $ | 5,243 | $ | - | $ | 5,243 |
(1) | This only includes the stated amount of funds disbursed to date and interest that was contractually converted to principal. |
The following table presents certain information about the Company’s real estate debt investments, as of December 31, 2019, by contractual maturity grouping (amounts in thousands):
Asset Type | Amounts Maturing Within One Year | Amounts Maturing After One Year Through Five Years | Amounts Maturing After Five Years Through Ten Years | Amounts Maturing After Ten Years | ||||||||||||
Senior Debt | $ | 5,243 | $ | - | $ | - | $ | - | ||||||||
Balance as of December 31, 2019 | $ | 5,243 | $ | - | $ | - | $ | - |
Credit Quality Monitoring
The Company’s real estate debt investments are typically secured by senior liens on real estate properties, mortgage payments, mortgage loans, or interests in entities that have interests in real estate similar to the interests just described. The Company evaluates its debt investments at least semiannually and differentiates the relative credit quality principally based on: (i) whether the borrower is currently paying contractual debt service or guaranteed preferred equity payments in accordance with its contractual terms; and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity. The Company considered investments for which it expects to receive full payment of contractual principal and interest payments as “performing.” We note that both of the Company’s real estate debt investments were non-performing and in default, one with an approximate recorded investment and unpaid principal balance of $2.8 million and one with an approximate recorded investment and unpaid principal balance of $2.4 million. Both were deemed impaired and non-accrual. During the year ended December 31, 2020, we executed deeds in lieu of foreclosure for the underlying properties of the real estate debt investments. In satisfaction of the loans, the transfers of title occurred on December 15, 2020. During the year ended December 31, 2020, we recognized a loss on troubled debt restructuring of approximately $185,000 related to both property acquisitions.
F-14
6. | Other Assets |
The balance in other assets is as follows (amounts in thousands):
As of December 31, 2020 | As of December 31, 2019 | |||||||
In-place lease asset, net of amortization | $ | 158 | $ | - | ||||
Accounts receivable, net | 329 | 118 | ||||||
Prepaid expenses | 280 | 174 | ||||||
Retainers and prepaid improvement costs | 10 | - | ||||||
Total other assets | $ | 777 | $ | 292 |
For the years ended December 31, 2020 and 2019, the Company recognized approximately $69,000 and $2,000, respectively, of amortization expenses on in-place lease assets.
As of December 31, 2020 and 2019, accounts receivable were recorded net of an allowance for credit losses of approximately $53,000 and $0, respectively. For the years ended December 31, 2020 and 2019, the Company recorded approximately $97,000 and $0, respectively, in bad debt expense, which was recorded within property operating and maintenance expense on the consolidated statements of operations.
7. | Investments in Equity Method Investees |
The table below presents the activity of the Company's investments in equity method investees as of and for the periods presented (amounts in thousands):
Investments in Equity Method Investees: | For the year ended December 31, 2020 | For the year ended December 31, 2019 | ||||||
Beginning balance | $ | 4,611 | $ | 3,479 | ||||
Investments in equity method investees | 194 | 1,174 | ||||||
Distributions received | (2,652 | ) | - | |||||
Equity in earnings (losses) of equity method investees | 414 | (42 | ) | |||||
Ending balance | $ | 2,567 | $ | 4,611 |
As of December 31, 2020, the Company's investments in companies that are accounted for under the equity method of accounting consist of the following:
1) | Acquired in 2018, a 99.1% non-controlling member interest in RRE F1, LLC, whose activities are carried out through the following wholly-owned asset: Square One 867 10th Street, a small lot townhome entitlement project |
2) | Acquired in 2018, a 4.7% non-controlling member interest in Marathon 12, LLC, whose activities are carried out through the following wholly-owned asset: P Joseph Marathon 12, a twelve townhome construction project. On August 24, 2020, we received our final cash flow distribution from the Marathon 12 Controlled Subsidiary. This completed the sale of the Marathon 12 Property and hence, the liquidation of the Marathon 12 Investment. |
As of and for the year ending December 31, 2020, the condensed financial position and results of operations of the Company’s equity method investments are summarized below (amounts in thousands):
RRE F1 LLC | Marathon 12 LLC | |||||||
Condensed balance sheet information: | As of December 31, 2020 | As of December 31, 2020 | ||||||
Real estate assets, net | $ | 2,598 | $ | - | ||||
Other assets | 8 | 2 | ||||||
Total assets | $ | 2,606 | $ | 2 | ||||
Mortgage notes payable | $ | - | $ | - | ||||
Other liabilities | 10 | - | ||||||
Equity | 2,596 | 2 | ||||||
Total liabilities and equity | $ | 2,606 | $ | 2 | ||||
Company’s equity investment | $ | 2,567 | $ | - |
F-15
RRE F1 LLC | Marathon 12 LLC | |||||||
Condensed income statement information: | For the Year Ended December 31, 2020 | For the Year Ended December 31, 2020 | ||||||
Total revenue | $ | - | $ | 12,860 | ||||
Total expenses | 57 | 13,008 | ||||||
Net income (loss) | $ | (57 | ) | $ | (148 | ) | ||
Company’s equity in net income (loss) of investee | $ | (56 | ) | $ | (139 | ) |
As of and for the year ending December 31, 2019, the condensed financial position and results of operations of the Company’s equity method investments are summarized below (amounts in thousands):
RRE F1, LLC | Marathon 12, LLC | |||||||
Condensed balance sheet information: | As of December 31, 2019 | As of December 31, 2019 | ||||||
Real estate assets, net | $ | 2,461 | $ | 10,924 | ||||
Other assets | 8 | 15 | ||||||
Total assets | $ | 2,469 | $ | 10,939 | ||||
Mortgage notes payable | $ | - | $ | 8,011 | ||||
Other liabilities | 15 | 477 | ||||||
Equity | 2,454 | 2,451 | ||||||
Total liabilities and equity | $ | 2,469 | $ | 10,939 | ||||
Company’s equity investment | $ | 2,430 | $ | 2,181 |
RRE F1, LLC | Marathon 12, LLC | |||||||
Condensed income statement information: | For the Year Ended December 31, 2019 | For the Year Ended December 31, 2019 | ||||||
Total revenue | $ | - | $ | - | ||||
Total expenses | 42 | 1 | ||||||
Net income (loss) | $ | (42 | ) | $ | (1 | ) | ||
Company’s equity in net income (loss) of investee | $ | (41 | ) | $ | (1 | ) |
8. | Fair Value of Financial Instruments |
We are required to disclose an estimate of fair value of our financial instruments for which it is practicable to estimate the value. The fair value of a financial instrument is the amount at which such financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. For certain of our financial instruments, fair values are not readily available since there are no active trading markets as characterized by current exchanges by willing parties.
We determine the fair value of certain investments in accordance with the fair value hierarchy that requires an entity to maximize the use of observable inputs. The fair value hierarchy includes the following three levels based on the objectivity of the inputs, which were used for categorizing the assets or liabilities for which fair value is being measured and reported:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs).
Level 3 – Valuation generated from model-based techniques that use inputs that are significant and unobservable in the market. These unobservable assumptions reflect estimates of inputs that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow methodologies or similar techniques, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
As of December 31, 2020, the Company’s significant financial instruments consist of cash and cash equivalents. As of December 31, 2019, the Company’s significant financial instruments consist of cash and cash equivalents and real estate debt investments. With the exception of real estate debt investments, the carrying amount of the Company’s financial instruments approximate their fair values due to their short-term nature.
F-16
As of December 31, 2020 and 2019, the aggregate carrying value of our real estate debt investments, inclusive of PIK interest, was approximately $0 and $5.3 million, respectively, and the aggregate fair values approximated their carrying values. The aggregate fair value of our real estate debt investment is based on unobservable Level 3 inputs which management has determined to be its best estimate of current market values. The methods utilized generally included a discounted cash flow method (an income approach) and recent investment method (a market approach). Significant inputs and assumptions include the market-based interest or preferred return rate, loan to value ratios, and expected repayment and prepayment dates. Where inputs are not observable, we review the appropriateness of the proposed valuation methodology to ensure it is consistent with how a market participant would arrive at the unobservable input. The valuation methodologies utilized in the absence of observable inputs may include extrapolation techniques and the use of comparable observable inputs.
Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value could result in a different estimate of fair value at the reporting date.
9. | Related Party Arrangements |
Fundrise Advisors, LLC, Manager
The Manager and certain affiliates of the Manager receive fees, reimbursements, and compensation in connection with the Company’s offering, and the acquisition, management and sale of the Company’s real estate investments.
The Manager is reimbursed for organizational and offering expenses incurred in conjunction with the Offering upon meeting the Hurdle Rate. See Note 2 – Summary of Significant Accounting Policies – Organizational and Offering Cost for amount of organizational and offering costs incurred and payable for the years ended December 31, 2020 and 2019.
The Company will also reimburse the Manager for actual expenses incurred on behalf of the Company in connection with the selection, acquisition or origination of an investment, to the extent not reimbursed by the borrower, whether or not the Company ultimately acquires or originates the investment. The Company will reimburse the Manager for out-of-pocket expenses paid to third parties in connection with providing services to the Company. This does not include the Manager’s overhead, employee costs borne by the Manager, utilities or technology costs. Expense reimbursements payable to the Manager also may include expenses incurred by the Sponsor in the performance of services pursuant to a shared services agreement between the Manager and the Sponsor, including any increases in insurance attributable to the management or operation of the Company. For the years ended December 31, 2020 and 2019, the Manager incurred $404,000 and $69,000 of costs on our behalf, respectively. Approximately $26,000 and $0 of these costs were due and payable to the Manager as of each of the years ended December 31, 2020 and 2019, respectively.
An asset management fee of one-fourth of 0.85% is owed quarterly to the Manager. The Manager may in its sole discretion waive its asset management fee, in whole or in part. The Manager will forfeit any portion of the asset management fee that is waived. Beginning January 1, 2019, this fee has been based on our NAV at the end of the prior semiannual period.
The Manager waived the asset management fee from January 1, 2019 through December 31, 2020. Therefore, for the years ended December 31, 2020 and 2019, we have incurred no asset management fees.
The Company may be charged by the Manager, a quarterly development fee of 5% of total development costs, excluding land. However, such development fee is only intended to be charged if it is net of a fee being charged by the developer of the Single Family housing project or if there is no outside developer of the Single Family housing project. Our Manager may, in its sole discretion, waive its development management fee, in whole or in part. The Manager will forfeit any portion of the development management fee that is waived. No quarterly development fee has been charged for the year ended December 31, 2020 and 2019, respectively. The Manager has waived all development fees from inception through December 31, 2020.
The Company will reimburse our Manager for actual expenses incurred on our behalf in connection with the special servicing of non-performing assets. The Manager will determine, in its sole discretion, whether an asset is non-performing. As of December 31, 2020 and 2019, no special servicing fees are payable to the Manager. For the year ended December 31, 2020 and December 31, 2019, no special servicing fees have been incurred.
The Company will also pay the Manager a disposition fee in the event that a Single Family housing project is sold to a homebuyer investor or if our Manager is acting as the real estate developer. The fee may be up to 1.5% of the gross proceeds. As of December 31, 2020 and 2019, no disposition fees are payable to the Manager. For the year ended December 31, 2020 and 2019, no disposition fees have been incurred.
F-17
Fundrise Lending, LLC
As an alternative means of acquiring investments for which we do not yet have sufficient funds, and in order to comply with certain state lending requirements, Fundrise Lending, LLC, a wholly-owned subsidiary of our Sponsor or its affiliates may close and fund a loan or other investment prior to it being acquired by the Company. Fundrise Lending, LLC allows the Company the flexibility to deploy its offering proceeds as funds are raised. The Company then will acquire such investment at a price equal to the fair market value of the loan or other investment (including reimbursements for servicing fees and accrued interest, if any), so there is no mark-up (or mark-down) at the time of its acquisition. For the years ended December 31, 2020 and 2019, the Company purchased no investments that were warehoused or owned by Fundrise Lending, LLC, respectively.
For situations where the Company’s Sponsor, Manager, or their affiliates have a conflict of interest with the Company that is not otherwise covered by an existing policy we have adopted or a transaction is deemed to be a “principal transaction,” the Manager has appointed an independent representative (the “Independent Representative”) to protect the interests of the members and review and approve such transactions. Any compensation payable to the Independent Representative for serving in such capacity on the Company’s behalf will be payable by the Company. Principal transactions are defined as transactions between the Company’s Sponsor, Manager or their affiliates, on the one hand, and the Company or one of its subsidiaries, on the other hand. The Company’s manager is only authorized to execute principal transactions with the prior approval of the Independent Representative and in accordance with applicable law. Such prior approval may include but not be limited to pricing methodology for the acquisition of assets and/or liabilities for which there are no readily observable market prices. During the years ended December 31, 2020 and 2019, fees of approximately $14,000 and $18,000, respectively, were paid to the Independent Representative as compensation for those services and included as general and administrative expense in the consolidated statements of operations.
Fundrise, L.P.
Fundrise, L.P. is a member of the Company and holds 26,872 and 9,500 shares, as of December 31, 2020 and 2019, respectively. One of our Sponsor’s wholly-owned subsidiaries is the general partner of Fundrise, L.P.
Additionally, as an alternative means of acquiring loans or other investments for which we do not yet have sufficient funds, Fundrise, L.P. may provide capital to Fundrise Lending, LLC for the purposes of acquiring investments where there would otherwise be insufficient capital. For the years ended December 31, 2020 and 2019, Fundrise, L.P. did not provide capital to Fundrise Lending, LLC for the purposes of acquiring investments on behalf of the Company.
Rise Companies Corp, Member and Sponsor
Rise Companies Corp. is a member of the Company and holds 1,414 common shares and 500 common shares as of December 31, 2020 and 2019, respectively.
As a means to provide liquidity to fund redemption requests in anticipation of an increase in redemptions related to the Merger, on June 25, 2020, Rise Companies Corp. issued a promissory note to the Company at a 1.0% interest rate. The total principal amount of the note was approximately $2.0 million and matured on September 30, 2020. During the year ended December 31, 2020, the Company incurred interest of approximately $5,000. The Company paid off the entire balance of the promissory note and related interest on September 25, 2020. Therefore, $0 of interest remained payable as of December 31, 2020.
Also as a means to provide liquidity to fund redemption requests, on November 6, 2020, Rise Companies Corp. issued a promissory note to the Company at a 2.5% interest rate. The total principal amount of the note was approximately $5.0 million and matured on December 31, 2020. During the year ended December 31, 2020, the Company incurred interest of approximately $12,000. The Company paid off the entire balance of the promissory note and related interest on December 10, 2020. Therefore, $0 of interest remained payable as of December 31, 2020.
For the years ended December 31, 2020 and 2019, the Sponsor incurred $51,000 and $24,000 of costs on our behalf, respectively. Of these amounts, $16,000 and $1,000 were due and payable as of December 31, 2020 and 2019, respectively.
The following table presents the Company’s acquisition fees incurred and paid to the Sponsor (amounts in thousands):
For the Year Ended December 31, 2020 | For the Year Ended December 31, 2019 | |||||||
Acquisition fees incurred and paid to the Sponsor | $ | - | $ | 99 | ||||
Total acquisition fees incurred and paid to the Sponsor | $ | - | $ | 99 |
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10. | Economic Dependency |
Under various agreements, the Company has engaged or will engage our Manager and its affiliates to provide certain services that are essential to the Company, including asset management services, asset acquisition and disposition decisions, the sale of the Company’s common shares available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations. As a result of these relationships, the Company is dependent upon our Manager and its affiliates. In the event that these companies were unable to provide the Company with the respective services, the Company would be required to find alternative providers of these services.
11. | Commitments and Contingencies |
Legal Proceedings
As of the date of these consolidated financial statements we are not currently named as a defendant in any active or pending litigation. However, it is possible that the Company could become involved in various litigation matters arising in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, management is not aware of any litigation likely to occur that we currently assess as being significant to us.
12. | Subsequent Events |
In connection with the preparation of the accompanying consolidated financial statements, we have evaluated events and transactions occurring through April 19, 2021 for potential recognition or disclosure.
Offering
As of April 19, 2021, we had raised total gross offering proceeds of approximately $86.9 million from settled subscriptions (including the $309,000 and $100,000, respectively, received in the private placements to our Sponsor, Rise Companies Corp., and Fundrise, L.P., an affiliate of our Sponsor), and had settled subscriptions in our offering and private placements for a gross aggregate of approximately 8.1 million of our common shares.
The SEC adopted an amendment to increase the maximum offering amount under Tier 2 of Regulation A from $50.0 million to $75.0 million. This amendment is effective March 15, 2021, and the Company may utilize this increased offering amount in the future.
As of April 8, 2021 the Company is offering up to $100.0 million in our common shares to accredited investors in a private placement pursuant to Section 506 (c) of Regulation D under the Securities Act.
Investments
As of April 19, 2021, the Company sold four real estate investments, one single family residential property that was classified as held for sale, two single family residential properties that were classified as held for improvement, and one restructured debt investment that was classified as held for sale as of December 31, 2020. Sale proceeds totaled approximately $6.9 million.
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Item 8. | Exhibits |
INDEX OF EXHIBITS
* | Filed herewith. |
** | Filed previously. |
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SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Washington, D.C. on April 19, 2021.
Fundrise eFund, LLC | ||||
By: | Fundrise Advisors, LLC, a Delaware limited liability company, its Manager | |||
By: | /s/ Benjamin S. Miller | |||
Name: | Benjamin S. Miller | |||
Title: | Chief Executive Officer |
Pursuant to the requirements of Regulation A, this Annual Report has been signed below by the following persons on behalf of the issuer in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Benjamin S. Miller | Chief Executive Officer of | April 19, 2021 | ||
Benjamin S. Miller | Fundrise Advisors, LLC | |||
(Principal Executive Officer) | ||||
/s/ Benjamin S. Miller | Interim Chief Financial Officer and Treasurer of | April 19, 2021 | ||
Benjamin S. Miller | Fundrise Advisors, LLC | |||
(Principal Financial Officer and Principal Accounting Officer) |
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