UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
SEMIANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933
For the Fiscal Semiannual Period ended June 30, 2023
Fundrise Midland Opportunistic REIT, LLC
(Exact name of issuer as specified in its charter)
| Delaware | 32-0479856 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 11 Dupont Circle NW, 9th Floor, Washington, DC (Full mailing address of principal executive offices) | 20036 (Zip Code) |
(202) 584-0550
Issuer’s telephone number, including area code
TABLE OF CONTENTS
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| Item 1. | 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 Semiannual Report on Form 1-SA (“Semiannual 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 Statements Regarding Forward-Looking Information beginning on page 65 in our latest offering circular (our “Offering Circular”) qualified by the Securities and Exchange Commission (“SEC”), which may be accessed here. Except as otherwise required by the U.S. federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Unless otherwise indicated, the latest results discussed below are as of June 30, 2023. The consolidated financial statements included in this filing as of June 30, 2023 and for the six months ended June 30, 2023 and 2022 are unaudited and have not been reviewed, and may not include year-end adjustments necessary to make those financial statements comparable to audited results, although in the opinion of management all necessary adjustments have been included to make interim consolidated statements of operations not misleading.
Business
Fundrise Midland Opportunistic REIT, LLC is a Delaware limited liability company formed on November 19, 2015 to originate, invest in and manage a diversified portfolio primarily consisting of investments in multifamily rental properties and development projects located in the Houston, TX, Dallas, TX, Austin, TX, Chicago, IL, and Denver, CO metropolitan statistical areas. We use substantially all of the net proceeds raised from our initial and subsequent offerings to invest in such properties, and may also invest in commercial real estate debt securities and other select real estate-related assets, where the underlying assets primarily consist of such properties. The Company may make its investments through majority-owned subsidiaries, some of which may have rights to receive preferred economic returns. Operations substantially commenced on October 25, 2016. The Company has one reportable segment consisting of investments in real estate. The use of the terms “Fundrise Midland Opportunistic REIT”, the “Company”, “we”, “us” or “our” in this Semiannual Report refer to Fundrise Midland Opportunistic REIT, LLC unless the context indicates otherwise.
As a limited liability company, we have elected to be taxed as a C corporation. Substantially commencing with the taxable year ending December 31, 2016, the Company operates in a manner intended to qualify for treatment as a REIT under the Internal Revenue Code of 1986, as amended.
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 Rise Companies Corp. (our “Sponsor”), the parent company of Fundrise, LLC, our affiliate. Fundrise, LLC owns and operates the online investment platform located at www.fundrise.com (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 investment management, marketing, investor relations and other administrative services on our behalf. Accordingly, we do not currently have any employees nor do we currently intend to hire any employees who will be compensated directly by us.
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” beginning on page 30 in our 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 of 1933, as amended (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.
Offering Results
During the third quarter of 2022, the Manager closed the Regulation A offering of common shares of the Company (which we refer to as the “Offering”). The Company may in the future file an offering statement to qualify additional common shares for sale pursuant to Regulation A, or offer its common shares pursuant to Regulation D, as determined by the Manager. As of June 30, 2023 and December 31, 2022, we had raised total gross offering proceeds of approximately $114.7 million and $114.5 million, respectively, from settled subscriptions (including the $100,000 received in the private placements to our Sponsor and Fundrise, L.P., an affiliate of our Sponsor, and approximately $1.8 million and $1.6 million, respectively, received in private placements to third parties), and had settled subscriptions in our Offering and private placements for an aggregate of approximately 11,199,000 and 11,177,000 of our common shares, respectively.
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Until December 31, 2017, the per share purchase price for our common shares was $10.00, an amount that was arbitrarily determined by our Manager. Thereafter, the per share purchase price has been and will continue to be adjusted every fiscal quarter (or as soon as commercially reasonable thereafter), and will equal the greater of (i) $10.00 per share or (ii) the sum of our net asset value (“NAV”) divided by the number of our common shares outstanding as of the end of the prior fiscal quarter (“NAV per share”).
Below is the NAV per share since December 31, 2021, as determined in accordance with our valuation policy. 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, 2021 | $ | 14.43 | Form 1-U | |||||
| March 31, 2022 | $ | 14.97 | Form 1-U | |||||
| June 30, 2022 | $ | 14.96 | Form 1-U | |||||
| September 30, 2022 | $ | 15.43 | Form 1-U | |||||
| December 31, 2022 | $ | 12.53 | Form 1-U | |||||
| March 31, 2023 | $ | 12.38 | Form 1-U | |||||
| June 30, 2023 | $ | 12.15 | Form 1-U | |||||
Distributions
To qualify as a REIT, and maintain our qualification as a REIT, we are required to make aggregate annual distributions to our shareholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain), and to avoid federal income and excise taxes on retained taxable income and gains we must distribute 100% of such income and gains annually. Our Manager may authorize distributions in excess of those required for us to maintain REIT status and/or avoid such taxes on retained taxable income and gains depending on our financial condition and such other factors as our Manager deems relevant. Provided we have sufficient available cash flow, we intend to authorize and declare distributions based on daily record dates and pay distributions on a quarterly or other periodic basis. We have not established a minimum distribution level.
While we are under no obligation to do so, we have in the past and expect in the future to declare and pay distributions quarterly in arrears; however, our Manager may declare other periodic distributions as circumstances dictate. In order that investors may generally begin receiving distributions immediately upon our acceptance of their subscription, we expect to authorize and declare distributions based on daily record dates. However, there may also be times when our Manager elects to reduce our rate of distributions in order to preserve or build up a higher level of liquidity at the Company level.
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Our Manager has declared daily distributions for shareholders of record as of the close of business on each day for the periods as shown in the table below:
| Distribution Period | Daily Distribution Amount/Common Share | Date of Declaration | Payment Date(1) | Annualized Yield(2) | Link | |||||||||
| 01/01/2022 - 01/31/2022 | 0.0013698630 | 12/29/2021 | 04/12/2022 | 5.00 | % | Form 1-U | ||||||||
| 02/01/2022 - 02/28/2022 | 0.0012328767 | 01/28/2022 | 04/12/2022 | 4.50 | % | Form 1-U | ||||||||
| 03/01/2022 - 03/31/2022 | 0.0015068493 | 02/25/2022 | 04/12/2022 | 5.50 | % | Form 1-U | ||||||||
| 04/01/2022 - 04/30/2022 | 0.0012328767 | 03/30/2022 | 07/12/2022 | 4.50 | % | Form 1-U | ||||||||
| 05/01/2022 - 05/31/2022 | 0.0010958904 | 04/27/2022 | 07/12/2022 | 4.00 | % | Form 1-U | ||||||||
| 06/01/2022 - 06/30/2022 | 0.0010958904 | 05/27/2022 | 07/12/2022 | 4.00 | % | Form 1-U | ||||||||
| 07/01/2022 - 07/31/2022 | 0.0010958904 | 06/28/2022 | 10/12/2022 | 4.00 | % | Form 1-U | ||||||||
| 08/01/2022 - 08/31/2022 | 0.0010958904 | 07/27/2022 | 10/12/2022 | 4.00 | % | Form 1-U | ||||||||
| 09/01/2022 - 10/01/2022 | 0.0009589041 | 08/29/2022 | 10/12/2022 | 3.50 | % | Form 1-U | ||||||||
| 10/02/2022 - 10/31/2022 | 0.0008219178 | 10/01/2022 | 01/11/2023 | 3.00 | % | Form 1-U | ||||||||
| 11/01/2022 - 11/30/2022 | 0.0005479452 | 10/28/2022 | 01/11/2023 | 2.00 | % | Form 1-U | ||||||||
| 12/01/2022 - 12/31/2022 | 0.0006849315 | 11/29/2022 | 01/11/2023 | 2.50 | % | Form 1-U | ||||||||
| 12/31/2022(5) | 3.0274538672 | 12/29/2022 | 01/11/2023 | N/A | (5) | Form 1-U | ||||||||
| 01/01/2023 - 01/31/2023 | 0.0006849315 | 12/29/2022 | 04/11/2023 | 2.50 | % | Form 1-U | ||||||||
| 02/01/2023 - 02/28/2023 | 0.0008219178 | 01/30/2023 | 04/11/2023 | 3.00 | % | Form 1-U | ||||||||
| 03/01/2023 - 03//31/2023 | 0.0006849315 | 02/27/2023 | 04/11/2023 | 2.50 | % | Form 1-U | ||||||||
| 04/01/2023 - 04/30/2023 | 0.0006849315 | 03/29/2023 | 07/12/2023 | 2.50 | % | Form 1-U | ||||||||
| 05/01/2023 – 5/31/2023 | 0.0006849315 | 04/27/2023 | 07/12/2023 | 2.50 | % | Form 1-U | ||||||||
| 06/01/2023 – 6/30/2023 | 0.0006849315 | 05/26/2023 | 07/12/2023 | 2.50 | % | Form 1-U | ||||||||
| 07/01/2023 – 7/31/2023 | 0.0006849315 | 06/28/2023 | 10/21/2023 | 2.50 | % | Form 1-U | ||||||||
| 08/01/2023 – 8/31/2023 | 0.0008219178 | 07/28/2023 | 10/21/2023 | 3.00 | % | Form 1-U | ||||||||
| 09/01/2023 – 10/01/2023 | 0.0006849315 | 08/28/2023 | 10/21/2023 | 2.50 | % | Form 1-U | ||||||||
| Weighted Average | $ | 0.0056495408 | (3) | 20.62 | %(4) | |||||||||
| (1) | Dates presented are the dates on which the distributions were, or are, scheduled to be distributed; actual distribution dates may vary. | |
| (2) | Annualized yield numbers represent the annualized yield amount of each distribution calculated on an annualized basis at the then current rate, assuming a $10.00 per share purchase price. While the Manager is under no obligation to do so, each annualized basis return assumes that the Manager would declare distributions in the future similar to the distributions for each period presented, and there can be no assurance that the Manager will declare such distributions in the future or, if declared, that such distributions would be of a similar amount. | |
| (3) | Weighted average daily distribution amount per common share is calculated as the average of the daily declared distribution amounts from September 1, 2021 through October 1, 2023. | |
| (4) | Weighted average annualized yield is calculated as the annualized yield of the average daily distribution amount for the periods presented, using a $10.00 per share purchase price. | |
| (5) | On December 29, 2022, the Manager of the Company declared a distribution of $3.0274538672 per share (the “Additional December 31, 2022 Dividend”) for shareholders of record as of the close of business on December 31, 2022. The distribution was payable to shareholders of record as of the close of business on December 31, 2022 and the distribution was paid on January 11, 2023. As the Additional December 31, 2022 Dividend did not have daily declared distribution amounts over a period of time, its individual annualized yield is not presented; however, the Additional December 31, 2022 Dividend is included in the calculation for the weighted average annualized yield. |
Any distributions that we make directly impacts our NAV by reducing the amount of our assets. Our goal is to provide a reasonably predictable and stable level of current income, through quarterly or other periodic distributions, while at the same time maintaining a fair level of consistency in our NAV. Over the course of a shareholder’s investment, the shareholder’s distributions plus the change in NAV per share (either positive or negative) will produce the shareholder’s total return.
Our distributions will generally constitute a return of capital to the extent that they exceed our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a shareholder’s adjusted tax basis in the shareholder’s shares, and to the extent that it exceeds the shareholder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares.
Redemption Plan
Although we do not intend to list our common shares for trading on a stock exchange or other trading market, we have adopted a redemption plan designed to provide our shareholders with limited liquidity for their investment in our shares. The Company’s redemption plan provides that on a quarterly basis, subject to certain exceptions, a shareholder could obtain liquidity as described in detail in our Offering Circular. Effective October 1, 2022, we revised our redemption plan to reduce the redemption price per share by the aggregate sum of distributions that reduce our NAV per share each quarter, as determined by our Manager in its sole discretion. Previously, we revised our redemption plan to reflect the following changes, effective October 1, 2021: (1) update our policy for redemptions so that shares held less than 5 years will be subject to a flat 1% penalty to the NAV per share in effect at the time of the redemption request; and (2) effectuate redemption requests on a first in first out basis, meaning, those shares submitted by a shareholder for redemption in any given month or quarter that have been continuously held for the longest amount of time will be redeemed first. Our Manager may, in its sole discretion, amend, suspend, or terminate the redemption plan at any time, including to protect our operations and our non-redeemed shareholders, to prevent an undue burden on our liquidity, to preserve our status as a REIT, following any material decrease in our NAV, or for any other reason.
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As of June 30, 2023 and December 31, 2022, approximately 3,735,000 and 3,213,000 common shares, respectively, had been submitted for redemption since operations commenced, and 100% of such redemption requests have been honored. We believe the increase in redemptions during the six months ended June 30, 2023, is attributable to investor demand to restore and preserve personal liquidity given the changes in economic conditions across the broader financial markets.
Critical Accounting Policies
Our accounting policies have been established to conform with accounting principles generally accepted in the United States of America (“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. Indicators of impairment are based on current information and events including economic, industry, and geographical factors, as well as borrower creditworthiness. If indicators are present and an investment is deemed impaired, the impairment is measured based on the expected future cash flows discounted at the investment’s effective interest rate or the fair value of the real property collateralizing the impaired loan, less estimated costs to sell.
The fair value of the investment or the underlying collateral is determined using industry techniques, which include a discounted cash flow, comparable sales or other income approaches. These valuation techniques require assumptions regarding future occupancy, rental rates, capital requirements, capitalization rates and discount rates that could differ materially from actual results and involve a high degree of judgment. If the carrying value is in excess of the estimated fair value 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. 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.
Investments in Equity Method Investees Impairment
The Company evaluates its investments in equity method investees for impairment whenever events or changes in circumstances indicate that there may be an other-than-temporary decline in value. If it is determined that an impairment exists and is other-than-temporary, then the Company estimates the fair value of the investment using various valuation techniques including, but not limited to, discounted cash flow models, which consider inputs such as 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.
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Impairment of Rental Real Estate Properties
Long-lived assets are reviewed for impairment 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. Impairment is 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 other 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 in the consolidated financial statements for discussion of the relevant ASUs. We are currently evaluating the impact of the various ASUs on our consolidated 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, these 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 have primarily generated revenues from interest revenue on our real estate debt investments and rental revenue from our investments in rental real estate properties. Additionally, we expect to receive cash flow distributions from investments in equity method investees. We may also seek to acquire investments which generate attractive returns without any leverage. See Note 2, Summary of Significant Accounting Policies – Revenue Recognition, in our consolidated financial statements for further detail.
Results of Operations
We substantially commenced operations on October 25, 2016. For the six months ended June 30, 2023 and 2022, we had total consolidated net loss of approximately $1.3 million and $988,000, respectively.
Revenue
Rental Revenue
For the six months ended June 30, 2023 and 2022, we earned rental revenue of approximately $4.1 million and $3.8 million, respectively, from our investments in rental real estate properties. The increase in rental revenue is primarily attributable to higher market rent from increased demand, as well as a lower amount of bad debt expense recorded during the six months ended June 30, 2023.
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Other Revenue
For the six months ended June 30, 2023 and 2022, we earned other revenue of approximately $623,000 and $400,000, respectively, which is primarily related to dividends earned on our cash sweep account, as well as parking income, utility reimbursements, late fees, and other revenue earned from our investment in rental real estate properties. The increase in other revenue is primarily attributable to dividends earned on our money market account, as well as termination fees and damages charged to tenants.
Interest Revenue
For the six months ended June 30, 2023 and 2022, we earned interest revenue of approximately $0 and $477,000, respectively, from our real estate debt investments. The decrease in interest revenue is attributable to the repayment of all remaining real estate debt investments in the prior year.
Expenses
Rental Properties Operating and Maintenance
For the six months ended June 30, 2023 and 2022, we incurred rental properties operating and maintenance expense of approximately $1.9 million and $1.7 million, respectively, which includes taxes, insurance, utilities, repairs, and other property-related expenses. The increase in rental properties operating and maintenance is primarily attributable to an increase in exterior repairs and maintenance to properties during the six months ended June 30, 2023.
Investment Management and Other Fees – Related Party
For the six months ended June 30, 2023 and 2022, we incurred investment management fees of approximately $413,000 and $524,000, respectively. The decrease in investment management fees is directly related to a decrease in net assets, as the investment management fee is calculated as a percentage of net assets each quarter.
Other Income (Expense)
Equity in Earnings (Losses)
For the six months ended June 30, 2023 and 2022, we had equity in earnings of approximately $327,000 and $489,000 from our equity method investees, respectively. The decrease in equity in earnings is attributable to the sale of two properties held by one of our equity method investees in the second half of the prior year, which resulted in less earnings recorded.
Interest Expense
For the six months ended June 30, 2023 and 2022, we incurred interest expense of approximately $1.3 million and $1.2 million, respectively, on the mortgage payable for our rental real estate property. See Note 5, Mortgage Payable, net, in our consolidated financial statements for more information.
Our Investments
As of June 30, 2023, we had entered into the following investments. See “Recent Developments” for a description of any investments we have made since June 30, 2023. Note that 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.
| Bridge Loans | Location | Type of Property | Date of Acquisition | Interest Rate(1) | Maturity Date(2) | Total Commitment(3) | LTV(4) | LTC(5) | Overview (Form 1-U) | |||||||||||||
| Sterling Town Center Bridge Loan/RSE Aspect Promenade Controlled Subsidiary(6) | Raleigh, NC | Multifamily | 08/28/2018 | (6) | (6) | $ | 9,702,000 | - | 68.0 | % | Initial | |||||||||||
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| (1) | Interest Rate refers to the projected annual interest rate on each loan. 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 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 in acquiring the asset, 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. For performance evaluation, 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. For performance evaluation, 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) | The Sterling Town Center Bridge Loan converted into additional ownership of a “majority-owned subsidiary,” Aspect Promenade JV LP (the “RSE Aspect Promenade Controlled Subsidiary”) upon receiving approval from the United States Department of Housing and Urban Development (“HUD”), for an initial purchase price of approximately $9,702,000, which is the initial stated value of our additional equity interest in the RSE Aspect Promenade Controlled Subsidiary. The Sterling Town Center Bridge Loan conversion was approved by HUD and the bridge loan converted to common equity on March 29, 2019. Consequently, no interest accrued on the Sterling Town Center Bridge Loan. | |
| Real Property and Controlled Subsidiaries (Preferred Equity Investments) | Location | Type of Property | Date of Acquisition | Annual Return (1) | Redemption Date(2) | Total Commitment (3) | LTV(4) | Overview (Form 1-U) | |||||||||||||
| Englewood Square Controlled Subsidiary(8) | Chicago, IL | Retail | 11/02/2017 | 10.0 | %(5) | 03/23/2023 | $ | 500,000 | 37.0 – 41.0 | % | Initial | Update | |||||||||
| RSE Lennox Controlled Subsidiary(6) | Las Vegas, NV | Multifamily | 05/24/2019 | 9.0 | % | 05/24/2029 | $ | 3,400,000 | 77.7 | % | Initial | Update | |||||||||
| Audelia Controlled Subsidiary(7) | Dallas, TX | Multifamily | 08/15/2019 | 10.0 | % | 08/31/2029 | $ | 7,530,000 | 90.0 | % | Initial | Update | |||||||||
| (1) | Annual Return refers to the projected annual preferred economic return that we are entitled to receive with priority payment over the other equity invested in the property. The annual return presented does not distinguish between returns that are paid current and those that accrue to the redemption date, nor does it include any increases in annual return that may occur in the future. | |
| (2) | Redemption Date refers to the initial redemption date of each asset, and does not take into account any extensions that may be available. |
| (3) | Total Commitment refers to the total commitment made by the Company in acquiring the asset, not all of which may have been funded on the acquisition date. | |
| (4) | LTV 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 reasonably 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. For performance evaluation, we generally use LTV for properties that are generating cash flow. |
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| (5) | The Englewood Square Investment earns a 10% annual return. In addition, the Englewood Square Investment may earn 50% of any percentage rent paid by the property’s anchor tenant up to $18,000 in any calendar year. | |
| (6) | On January 19, 2022, the RSE Lennox Controlled Subsidiary was redeemed in full and is no longer outstanding. | |
| (7) | On October 19, 2022, the Audelia Controlled Subsidiary was redeemed in full and is no longer outstanding. | |
| (8) | On December 23, 2022, the Englewood Square Controlled Subsidiary was redeemed in full and is no longer outstanding. |
Real Property Controlled Subsidiaries (Joint Venture Investments) | Location | Type of Property | Date of Acquisition | Purchase Price(1) | Overview (Form 1-U) | ||||||||||
| RSE Orion Controlled Subsidiary (S. Akron St) | Denver, CO | Multifamily | 09/28/2017 | $ | 5,386,054 | Initial | Update | ||||||||
| RSE Orion Controlled Subsidiary (E. Asbury Ave) | Denver, CO | Multifamily | 11/30/2017 | $ | 5,034,285 | Initial | Update | ||||||||
| RSE Aspect Promenade Controlled Subsidiary(2)(3)(4) | Raleigh, NC | Multifamily | 08/28/2018 | $ | 9,701,987 | Initial | |||||||||
| EVO Controlled Subsidiary(5) | Las Vegas, NV | Multifamily | 12/20/2019 | $ | 37,800,000 | 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. The Purchase Prices are presented as of the date of acquisition, and have not been subsequently updated. | |
| (2) | Owned by Aspect Promenade JV, LP. All assets were acquired prior to the debt-to-equity conversion on 3/29/2019. | |
| (3) | On August 12, 2022, the Aspect Promenade Controlled Subsidiary sold The EnV Property for a sales price of approximately $110,000,000. | |
| (4) | On September 14, 2022, the Aspect Promenade Controlled Subsidiary sold The Aspect Property for a sales price of approximately $127,500,000. | |
| (5) | On May 31, 2023, Northmarq Capital LLC/Freddie Mac provided a $9,090,000 supplemental loan to EVO Controlled Subsidiary. |
As of June 30, 2023, the Company’s investments in companies that are accounted for under the equity method of accounting also included the contributions to National Lending, LLC (“National Lending”) in exchange for ownership interests. See Note 8, Related Party Arrangements for further information regarding National Lending.
Liquidity and Capital Resources
We obtain the capital to fund our investment activities and operating expenses from secured or unsecured financings from banks, our Offering, cash flow from operations, net proceeds from asset repayments and sales, and other financing transactions. We use our capital to originate, invest in and manage a diversified portfolio of real estate investments and fund our operations. As of June 30, 2023, we had deployed approximately $64.5 million for five investments and had approximately $14.6 million in cash and cash equivalents. The Company has a continuous funding commitment to maintain a total contribution amount of up to 5% of its assets under management to National Lending. As of June 30, 2023, we had approximately $69.3 million of outstanding third-party debt secured by real property of our consolidated joint ventures. As of June 30, 2023, we anticipate that cash on hand and proceeds from potential future Offerings will provide sufficient liquidity to meet funding commitments and costs of operations for the next 12 months.
We have no outstanding unsecured, Company level debt as of September 26, 2023 and June 30, 2023. This amount does not include any debt secured by the real property of our consolidated or unconsolidated joint ventures.
10
We may 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 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 initial portfolio) in order to quickly build a diversified portfolio of multifamily rental properties and development project assets. We 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.
We face additional 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
We seek to identify and make our investments according to large macroeconomic trends precisely because we believe those trends are likely to drive outsized growth, which in turn can deliver better than average performance. We believe that a very real and potentially significant downturn still lies ahead, which has been a foundation for all our decisions across the Fundrise Portfolio over the past six months. We have, therefore, focused our efforts on taking advantage of the growing number of opportunities created by further distress in the markets while also focusing our efforts on defensive preparation to protect investors in the event of additional downside. It is our belief that the current macroeconomic market possesses potential risk on the downside that may outweigh any near term missed upside resulting from a surprisingly soft landing.
Looking ahead, we expect the short-term to continue to be challenging for the broader economy. Individuals, businesses, and investors alike will need to survive what is likely to be a period where asset values continue to be depressed and borrowing costs remain higher (at least when compared to recent history). However, we believe our management team will continue to simultaneously protect against a more severe downside while putting investors in a position to take advantage of current and future buying opportunities as the downturn continues to unfold.
Off-Balance Sheet Arrangements
As of June 30, 2023 and December 31, 2022, we had no off-balance sheet arrangements.
Related Party Arrangements
For further information regarding “Related Party Arrangements,” please see Note 8, Related Party Arrangements in our consolidated financial statements.
Investments
There were no real estate investments acquired by or repaid to the Company since June 30, 2023 through September 26, 2023.
11
Other
| Event | Date | Description | ||
| Share Purchase Price Update | 07/01/2023 | Beginning on July 1, 2023, the per share purchase price of our common shares was updated to $12.15 due to a quarterly change in NAV. More information can be found here. | ||
| Declaration of August 2023 Distributions | 07/28/2023 | On July 28, 2023, our Manager declared a daily distribution of $0.0008219178 per share for shareholders of record as of the close of business on each day of the period commencing on August 1, 2023 and ending on August 31, 2023. More information can be found here. | ||
| Declaration of September 2023 Distributions | 08/28/2023 | On August 28, 2023, our Manager declared a daily distribution of $0.0006849315 per share for shareholders of record as of the close of business on each day of the period commencing on September 1, 2023 and ending on October 1, 2023. More information can be found here. |
| Item 2. | Other Information |
None.
12
| Item 3. | Financial Statements |
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF
Fundrise Midland Opportunistic REIT, LLC
13
Fundrise Midland Opportunistic REIT, LLC
(Amounts in thousands, except share data)
As of 2023 (unaudited) | As of (*) | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 14,608 | $ | 39,003 | ||||
| Restricted cash | 251 | 209 | ||||||
| Other assets, net | 179 | 519 | ||||||
| Investments in equity method investees | 13,998 | 14,188 | ||||||
| Investments in rental real estate properties, net | 89,996 | 92,496 | ||||||
| Total Assets | $ | 119,032 | $ | 146,415 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 447 | $ | 356 | ||||
| Due to related party | 203 | 282 | ||||||
| Distributions payable | 652 | 25,736 | ||||||
| Redemptions payable | 3,075 | 3,600 | ||||||
| Rental security deposits and other liabilities | 186 | 144 | ||||||
| Mortgage payable, net | 71,095 | 62,477 | ||||||
| Total Liabilities | 75,658 | 92,595 | ||||||
| Commitments and Contingencies | ||||||||
| Members’ Equity: | ||||||||
| Common shares, net of redemptions; unlimited shares authorized; 11,198,707 and 11,177,253 shares issued and 7,463,570 and 7,964,727 shares outstanding as of June 30, 2023 and December 31, 2022, respectively | 72,096 | 78,289 | ||||||
| Retained earnings (Accumulated deficit) | (32,364 | ) | (30,346 | ) | ||||
| Total Members’ Equity | 39,732 | 47,943 | ||||||
| Non-controlling interest | 3,642 | 5,877 | ||||||
| Total Equity | 43,374 | 53,820 | ||||||
| Total Liabilities and Equity | $ | 119,032 | $ | 146,415 | ||||
*Derived from audited financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-1
Fundrise Midland Opportunistic REIT, LLC
Consolidated Statements of Operations
(Amounts in thousands, except share and per share data)
For the Six Months June 30, | For the Six Months June 30, | |||||||
| Revenue | ||||||||
| Rental revenue | $ | 4,083 | $ | 3,755 | ||||
| Other revenue | 623 | 400 | ||||||
| Interest revenue | - | 477 | ||||||
| Total revenue | 4,706 | 4,632 | ||||||
| Expenses | ||||||||
| Depreciation and amortization | 2,589 | 2,588 | ||||||
| Rental properties operating and maintenance | 1,906 | 1,650 | ||||||
| Investment management and other fees - related party | 413 | 524 | ||||||
| General and administrative expenses | 175 | 133 | ||||||
| Total expenses | 5,083 | 4,895 | ||||||
| Other (Expense) Income | ||||||||
| Interest expense | (1,270 | ) | (1,214 | ) | ||||
| Equity in earnings (losses) | 327 | 489 | ||||||
| Total other (expense) income | (943 | ) | (725 | ) | ||||
| Net loss | $ | (1,320 | ) | $ | (988 | ) | ||
| Less: Net loss attributable to non-controlling interests | (248 | ) | (248 | ) | ||||
| Net loss attributable to controlling interests | $ | (1,072 | ) | $ | (740 | ) | ||
| Net loss per basic and diluted common share | $ | (0.14 | ) | $ | (0.09 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 7,834,826 | 8,446,861 | ||||||
The accompanying notes are an integral part of these consolidated financial statements. In the opinion of management, all necessary adjustments have been included in order to make the interim consolidated financial statements not misleading.
F-2
Fundrise Midland Opportunistic REIT, LLC
Consolidated Statements of Equity
(Amounts in thousands, except share data)
| Common Shares | Retained Earnings (Accumulated |
Total Members’ | Non- Controlling | Total | ||||||||||||||||||||
| Shares | Amount | Deficit) | Equity | Interests | Equity | |||||||||||||||||||
| December 31, 2022 (*) | 7,964,727 | $ | 78,289 | $ | (30,346 | ) | $ | 47,943 | $ | 5,877 | $ | 53,820 | ||||||||||||
| Proceeds from issuance of common shares | 21,453 | 267 | - | 267 | - | 267 | ||||||||||||||||||
| Distributions declared on common shares | - | - | (946 | ) | (946 | ) | - | (946 | ) | |||||||||||||||
| Redemptions of common shares | (522,610 | ) | (6,460 | ) | - | (6,460 | ) | - | (6,460 | ) | ||||||||||||||
| Non-controlling interest | - | - | - | - | (1,987 | ) | (1,987 | ) | ||||||||||||||||
| Net income (loss) | - | - | (1,072 | ) | (1,072 | ) | (248 | ) | (1,320 | ) | ||||||||||||||
| June 30, 2023 (unaudited) | 7,463,570 | $ | 72,096 | $ | (32,364 | ) | $ | 39,732 | $ | 3,642 | $ | 43,374 | ||||||||||||
| Common Shares | Retained Earnings (Accumulated |
Total Members’ | Non- Controlling | Total | ||||||||||||||||||||
| Shares | Amount | Deficit) | Equity | Interests | Equity | |||||||||||||||||||
| December 31, 2021 (*) | 8,303,821 | $ | 82,642 | $ | (12,039 | ) | $ | 70,603 | $ | 6,837 | $ | 77,440 | ||||||||||||
| Proceeds from issuance of common shares | 333,299 | 4,829 | - | 4,829 | - | 4,829 | ||||||||||||||||||
| Offering costs | - | (5 | ) | - | (5 | ) | - | (5 | ) | |||||||||||||||
| Distributions declared on common shares | - | - | (1,853 | ) | (1,853 | ) | - | (1,853 | ) | |||||||||||||||
| Redemptions of common shares | (281,827 | ) | (4,122 | ) | - | (4,122 | ) | - | (4,122 | ) | ||||||||||||||
| Non-controlling interest | - | - | - | - | (259 | ) | (259 | ) | ||||||||||||||||
| Net income (loss) | - | - | (740 | ) | (740 | ) | (248 | ) | (988 | ) | ||||||||||||||
| June 30, 2022 (unaudited) | 8,355,293 | $ | 83,344 | $ | (14,632 | ) | $ | 68,712 | $ | 6,330 | $ | 75,042 | ||||||||||||
*Derived from audited financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Fundrise Midland Opportunistic REIT, LLC
Consolidated Statements of Cash Flows
(Amounts in thousands)
For the Six Months (unaudited) | For the Six Months (unaudited) | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (1,320 | ) | $ | (988 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 2,589 | 2,588 | ||||||
| Above-market debt amortization | (210 | ) | (210 | ) | ||||
| Amortization of deferred financing costs | 27 | 23 | ||||||
| Equity in (earnings) losses | (327 | ) | (489 | ) | ||||
| Bad debt expense | 18 | 123 | ||||||
| Return on investment from equity method investees | 382 | 765 | ||||||
| Interest revenue received in kind, net | - | 141 | ||||||
| Changes in assets and liabilities: | ||||||||
| Net (increase) decrease in interest receivable | - | 19 | ||||||
| Net (increase) decrease in other assets | 322 | 104 | ||||||
| Net increase (decrease) in accounts payable and accrued expenses | 92 | 26 | ||||||
| Net increase (decrease) in due to related party | (79 | ) | 28 | |||||
| Net increase (decrease) in rental security deposits and other liabilities | 42 | (139 | ) | |||||
| Net cash provided by (used in) operating activities | 1,536 | 1,991 | ||||||
| INVESTING ACTIVITIES: | ||||||||
| Repayments of real estate debt investments | - | 3,400 | ||||||
| Investment in equity method investees | - | (1,175 | ) | |||||
| Return of investment from equity method investees | 135 | 208 | ||||||
| Capital expenditures related to residential rental properties | (90 | ) | - | |||||
| Distributions paid to non-controlling interests from rental real estate properties | (1,987 | ) | (259 | ) | ||||
| Release of deposits | - | 2,000 | ||||||
| Net cash provided by (used in) investing activities | (1,942 | ) | 4,174 | |||||
| FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common shares | 267 | 4,790 | ||||||
| Proceeds from mortgage principal | 9,090 | - | ||||||
| Repayment of mortgage principal | (44 | ) | (42 | ) | ||||
| Payment of deferred financing fees | (245 | ) | - | |||||
| Redemptions paid | (6,985 | ) | (3,259 | ) | ||||
| Distributions paid | (26,030 | ) | (2,071 | ) | ||||
| Proceeds from settling subscriptions | - | 45 | ||||||
| Net cash provided by (used in) financing activities | (23,947 | ) | (537 | ) | ||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | (24,353 | ) | 5,628 | |||||
| Cash and cash equivalents and restricted cash, beginning of period | 39,212 | 11,172 | ||||||
| Cash and cash equivalents and restricted cash, end of period | $ | 14,859 | $ | 16,800 | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY: | ||||||||
| Settlement of settling subscriptions | $ | - | $ | 39 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Interest paid – mortgage payable | $ | 1,406 | $ | 1,409 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Fundrise Midland Opportunistic REIT, LLC
Notes to Consolidated Financial Statements
| 1. | Formation and Organization |
Fundrise Midland Opportunistic REIT, LLC was formed on November 19, 2015, as a Delaware limited liability company and substantially commenced operations on October 25, 2016. As used herein, the “Company,” “we,” “our,” and “us” refer to Fundrise Midland Opportunistic REIT, LLC except where the context otherwise requires.
The Company has one reportable segment consisting of investments in real estate. The Company was organized primarily to originate, invest in and manage a diversified portfolio primarily consisting of investments in multifamily rental properties and development projects located in the Houston, TX, Dallas, TX, Austin, TX, Chicago, IL, and Denver, CO metropolitan statistical areas. . The Company may also invest in real estate-related debt securities and other real estate-related assets where the underlying assets primarily consist of such properties. The Company may make its investments through majority-owned subsidiaries, some of which may have rights to receive preferred economic returns.
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.
We believe we have operated in such a manner as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes beginning with the year ended December 31, 2016. As of June 30, 2023 and December 31, 2022, we held substantially all of our assets directly and had no active operating partnerships or any taxable REIT subsidiaries or qualified REIT subsidiaries, though we may form such entities as required in the future to facilitate certain transactions that might otherwise have an adverse impact on our status as a REIT.
The Company’s initial and subsequent offering of its common shares (the “Offering(s)”) has been conducted as a continuous offering pursuant to Rule 251(d)(3) of Regulation A (“Regulation A”) of the Securities Act of 1933, as amended (the “Securities Act”), meaning that while the offering of securities is continuous, active sales of securities may happen sporadically over the term of an Offering. A maximum of $75.0 million of the Company’s common shares may be sold to the public in its Offering in any given twelve-month period. 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 $75.0 million of shares on July 30, 2021 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 $75.0 million.
During the third quarter of 2022, the Manager closed the Regulation A offering of common shares of the Company. The Company may in the future file an offering statement to qualify additional common shares for sale pursuant to Regulation A, or offer its common shares pursuant to Regulation D of the Securities Act (“Regulation D”), as determined by our Manager.
As of June 30, 2023 and December 31, 2022, after redemptions, the Company had net common shares outstanding of approximately 7,464,000 and 7,965,000, respectively, including common shares issued to Rise Companies Corp. (the “Sponsor”), the owner of the Manager. As of June 30, 2023 and December 31, 2022, the Sponsor owned 600 common shares. In addition, as of June 30, 2023 and December 31, 2022, Fundrise, L.P., an affiliate of the Sponsor, 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 June 30, 2023 and December 31, 2022, third parties had purchased approximately 134,000 and 112,000 common shares, respectively, in private placements for an aggregate purchase price of approximately $1.8 million and $1.6 million, respectively. As of June 30, 2023 and December 31, 2022, the total amount of equity issued by the Company on a gross basis was approximately $114.7 million and $114.5 million, respectively. These amounts were offered at a $12.38 and $15.43 per share price, respectively.
F-5
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying consolidated financial statements have been 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. The Company has no items of other comprehensive income or loss in any period presented.
In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. Interim results are not necessarily indicative of operating results for any other interim period or for the entire year. The December 31, 2022 balance sheet and certain related disclosures are derived from the Company’s December 31, 2022 audited financial statements. These interim financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s annual report, which was filed with the SEC. The financial statements as of June 30, 2023 and for the six months ended June 30, 2023 and 2022, and certain related notes, are unaudited, have not been reviewed, and may not include year-end adjustments to make those financial statements comparable to audited results.
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 (“VIEs”) in accordance with the Financial Accounting Standards Board (“FASB”) 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.
The Company reports non-controlling interest in subsidiaries as equity in the consolidated financial statements and accounts for all transactions between the Company and non-controlling owners as equity transactions.
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.
Cash and Cash Equivalents
Cash and cash equivalents may 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. Cash equivalents consists of money market funds as of June 30, 2023 and December 31, 2022.
Restricted Cash
Restricted cash consists of cash balances restricted in use by contractual obligations with third parties. This may include funds escrowed for tenant security deposits, real estate taxes, property insurance, and mortgage escrows required by lenders on certain of our properties to be used for future building renovations or tenant improvements.
F-6
Earnings per Share
Basic earnings per share is calculated on the basis of weighted-average number of common shares outstanding during the period. Basic earnings per share is computed by dividing income available to common members by the weighted-average common shares outstanding during the period. 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 six months ended June 30, 2023 and 2022.
Organizational and Offering Costs
Organizational costs include all expenses incurred by the Company in connection with its formation. Offering costs represent costs incurred by the Company in the qualification of the Offering and the marketing and distribution of common shares, include, without limitation, expenses for printing, and 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.
During the six months ended June 30, 2023 and 2022, the Company directly incurred offering costs of approximately $0 and $4,000, respectively. No directly incurred offering costs were payable as of June 30, 2023 and December 31, 2022.
Settling Subscriptions
Settling subscriptions presented on the consolidated balance sheets represent equity subscriptions for which funds have been received but common shares have not yet been issued. Under the terms of the Offering Circular for our common shares, subscriptions will be accepted or rejected within thirty days of receipt by us. Once a subscription agreement is accepted, settlement of the shares may occur up to fifteen days later, depending on the volume of subscriptions received; however, we generally issue shares the later of five business days from the date that an investor’s subscription is approved by our Manager or when funds settle in our bank account. We rely on our Automated Clearing House (ACH) provider to notify us that funds have settled for this purpose, which may differ from the time that cash is posted to our bank statement.
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 is originally recorded at cost and adjusted for contributions, distributions, basis difference, and 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 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, which consider inputs such as 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 the six months ended June 30, 2023 and 2022.
With regard to distributions from equity method investees, we utilize the cumulative earnings approach to determine whether distributions from equity method investments are returns on investment (cash inflow from operating activities) or returns of investment (cash inflow from investing activities). Using the cumulative earnings approach, the Company compares cumulative distributions received for each investment, less distributions received in prior periods that were determined to be returns of investment, with the Company’s cumulative equity in earnings. Generally, cumulative distributions received that do not exceed cumulative equity in earnings represent returns on investment and cumulative distributions received in excess of the cumulative equity in earnings represent returns of investment.
Investment in Rental Real Estate Properties
In accordance with FASB 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.
F-7
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 on a relative fair value basis (including capitalized transaction costs) to the acquired assets and assumed liabilities. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
The amortization of in-place leases is recorded as an adjustment 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.
Significant improvements to rental real estate properties are capitalized. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. We capitalize expenditures that improve or extend the life of a property and for certain furniture and fixtures additions.
Costs capitalized in connection with rental real estate 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 | |
| Buildings and building improvements | 20 – 30 years | |
| Site improvements | 10 – 20 years | |
| Furniture, fixtures and equipment | 5 – 10 years | |
| Lease intangibles | Over lease term |
We evaluate our real estate properties for impairment 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 six months ended June 30, 2023 and 2022, no such impairment occurred.
Real Estate Deposits
During the closing on an investment in rental real estate 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.
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’s redemption plan provides that on a quarterly basis, subject to certain exceptions, a member could obtain liquidity as described in detail in our Offering Circular.
F-8
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 for shares held less than 5 years are also subject to a flat 1% penalty to the NAV per share in effect at the time of the redemption request. Redemptions are processed on a first-in, first-out basis, meaning those shares submitted by a shareholder for redemption in any given month or quarter that have been continuously held for the longest amount of time will be redeemed first. Furthermore, the redemption price per share is reduced by the aggregate sum of distributions that reduce our NAV per share each quarter.
In light of the SEC’s current guidance on redemption plans, we generally intend to limit redemptions in any calendar quarter to shares whose aggregate value (based on the repurchase price per share in effect as of the first day of the last month of such calendar quarter) is 5.00% 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 make a number of commercial real estate investments of varying terms and maturities, our Manager may elect to increase or decrease the amount of common shares available for redemption in any given quarter, as these commercial real estate assets are paid off or sold, but we do not intend to redeem more than 20.00% 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, to preserve our status as a REIT, following any material decrease in our NAV, or for any other reason. 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 our website to disclose such amendment. Our Manager may also, in its sole discretion, decline any particular redemption request if it believes such action is necessary to preserve our status as a REIT. 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
As a limited liability company, we have elected to be taxed as a C corporation. Commencing with the taxable year ending December 31, 2016, the Company operates in a manner intended to qualify for treatment as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to its members (which is computed without regard to the distributions paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with U.S. GAAP). As a REIT, the Company generally will not be subject to U.S. federal income tax to the extent it distributes qualifying distributions to its members. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income. No material provisions have been made for federal income taxes in the accompanying consolidated financial statements during the six months ended June 30, 2023 and 2022. No gross deferred tax assets or liabilities have been recorded as of June 30, 2023 and December 31, 2022.
As of June 30, 2023, the tax period for the taxable year ending December 31, 2020 and all tax periods following remain open to examination by the major taxing authorities in all jurisdictions where we are subject to taxation.
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 tenant receivables and record an allowance for doubtful accounts for any estimated probable losses. Rental revenue is recorded net of bad debt expense in the consolidated financial statements.
Other revenue consists of utility reimbursements, damages, termination fees, administrative and late fees, parking fees, and money market dividend revenue. Money market dividend revenue is recognized on an accrual basis and is related to dividends earned through our cash sweep bank account.
F-9
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.
Recent Accounting Pronouncements
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. The standard was effective for annual reporting periods beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. The Company adopted the new standard as of January 1, 2022. The adoption of the new standard did not have a material impact on 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 (including interim periods within those periods) beginning after December 15, 2022, with early adoption permitted. The Company adopted the new standard as of January 1, 2023, which did not have a material impact on our consolidated financial statements.
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, these financial statements may not be comparable to companies that adopt accounting standard updates upon the public business entity effective dates.
| 3. | 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 Six Months Ended June 30, 2023 | For the Year Ended December 31, 2022 | ||||||
| Beginning balance | $ | 14,188 | $ | 20,210 | ||||
| Additional investments in equity method investees | - | 1,551 | ||||||
| Distributions received | (517 | ) | (19,489 | ) | ||||
| Equity in earnings (losses) of equity method investees | 327 | 11,916 | ||||||
| Ending balance | $ | 13,998 | $ | 14,188 | ||||
As of June 30, 2023 and December 31, 2022, the Company’s investments in companies that are accounted for under the equity method of accounting consist of the following:
| (1) | Acquired in 2017, a 90.0% non-controlling member interest in CWP Forest Cove JV, LLC, whose activities are carried out through the following wholly-owned assets: Asbury Plaza Apartments, a garden-style multifamily property in Denver, CO and Forest Cove Apartments, a garden-style multifamily property in Denver, CO. |
F-10
| (2) | Acquired in 2018, a 14.0% non-controlling member interest in Aspect Promenade JV, LP, whose activities are carried out through the following wholly-owned assets: The Aspect Apartments, an apartment complex in Kissimmee, FL; The EnV Apartments, an apartment complex in Hollywood, FL; and The Sterling Town Center, an apartment complex in Raleigh, NC. On August 12, 2022, the Aspect Promenade JV, LP sold The EnV Property for a sales price of approximately $110.0 million. Proceeds from the sale totaled approximately $70.6 million, net of repayment of approximately $37.6 million of outstanding senior loans and closing costs of approximately $2.2 million. Our distribution received from the sale totaled approximately $9.9 million. On September 14, 2022, the Aspect Promenade JV, LP sold The Aspect Property for a sales price of approximately $127.5 million. Proceeds from the sale totaled approximately $74.7 million, net of repayment of $50.7 million of outstanding senior loans, and closing costs of approximately $2.0 million. Our distribution received from the sale totaled approximately $7.8 million. The Aspect Promenade JV, LP continues to own and operate Sterling Town Center. |
| (3) | Acquired in 2019, the contributions to National Lending, LLC (“National Lending”) in exchange for ownership interests. See Note 8, Related Party Arrangements for further information regarding National Lending. |
As of and for the six months ended June 30, 2023, the condensed financial position and results of operations of the Company’s equity method investments are summarized below (amounts in thousands):
| Condensed balance sheet information: | Forest Cove As of June | Aspect As of June | National As of June | |||||||||
| Real estate assets, net | $ | 28,781 | $ | 49,297 | $ | - | ||||||
| Other assets | 727 | 6,584 | 68,637 | (1) | ||||||||
| Total assets | $ | 29,508 | $ | 55,881 | $ | 68,637 | ||||||
| Mortgage notes payable | $ | 22,777 | $ | 34,400 | $ | - | ||||||
| Other liabilities | 405 | 476 | 3 | |||||||||
| Equity | 6,326 | 21,005 | 68,634 | |||||||||
| Total liabilities and equity | $ | 29,508 | $ | 55,881 | $ | 68,637 | ||||||
| Company’s equity investment | $ | 5,695 | $ | 1,458 | $ | 6,845 | ||||||
| (1) | Approximately $45.6 million of “Other assets” are promissory notes receivable from other eREITs. See Note 8, Related Party Arrangements for further information regarding National Lending. |
| Condensed income statement information: | Forest Cove Months | Aspect Months | National Months | |||||||||
| Total revenue | $ | 2,017 | $ | 3,147 | $ | 1,793 | ||||||
| Total expenses | 1,933 | 2,599 | 27 | |||||||||
| Net income | $ | 84 | $ | 548 | $ | 1,766 | ||||||
| Company’s equity in earnings of investee | $ | 75 | $ | 77 | $ | 175 | ||||||
F-11
As of December 31, 2022 and for the six months ended June 30, 2022, the condensed financial position and results of operations of the Company’s equity method investments are summarized below (amounts in thousands):
| Condensed balance sheet information: | Forest Cove JV LLC As of December 31, 2022 | Aspect Promenade JV LP As of December 31, 2022 | National Lending LLC As of December 31, 2022 | |||||||||
| Real estate assets, net | $ | 29,256 | $ | 49,823 | $ | - | ||||||
| Other assets | 799 | 3,551 | 66,577 | (1) | ||||||||
| Total assets | $ | 30,055 | $ | 53,374 | $ | 66,577 | ||||||
| Mortgage notes payable | $ | 23,000 | $ | 34,745 | $ | - | ||||||
| Other liabilities | 463 | 421 | - | |||||||||
| Equity | 6,592 | 18,208 | 66,577 | |||||||||
| Total liabilities and equity | $ | 30,055 | $ | 53,374 | $ | 66,577 | ||||||
| Company’s equity investment | $ | 5,935 | $ | 1,583 | $ | 6,670 | ||||||
| (1) | Approximately $41.0 million of “Other assets” are promissory notes receivable from other eREITs. See Note 8, Related Party Arrangements for further information regarding National Lending. |
| Condensed income statement information: | Forest Cove Months | Aspect Months | National Months | |||||||||
| Total revenue | $ | 1,913 | $ | 11,814 | $ | 741 | ||||||
| Total expenses | 1,773 | 9,694 | 39 | |||||||||
| Net income | $ | 140 | $ | 2,120 | $ | 702 | ||||||
| Company’s equity in earnings of investee | $ | 126 | $ | 298 | $ | 65 | ||||||
| 4. | Investments in Rental Real Estate Properties, net |
The following table presents the Company’s investments in rental real estate properties (amounts in thousands):
| As of June 30, 2023 | As of December 31, 2022 | |||||||
| Land | $ | 16,117 | $ | 16,117 | ||||
| Building and building improvements | 86,577 | 86,577 | ||||||
| Site improvements | 3,951 | 3,871 | ||||||
| Furniture, fixtures and equipment | 1,638 | 1,629 | ||||||
| Total gross investment in rental real estate properties | $ | 108,283 | $ | 108,194 | ||||
| Less: Accumulated depreciation | (18,287 | ) | (15,698 | ) | ||||
| Total investment in rental real estate properties, net | $ | 89,996 | $ | 92,496 | ||||
As of June 30, 2023 and December 31, 2022, we had invested in one rental real estate property, which consists of the following:
| (1) | Acquired in December 2019, an 81% controlling interest in FR-ICG EVO Parent LLC (“FR Interwest EVO”) for an initial purchase price of $37.8 million. FR Interwest EVO used the proceeds to acquire a single mid-rise multifamily property in Las Vegas, Nevada for a total purchase price of approximately $106.5 million. |
For the six months ended June 30, 2023 and 2022 the Company recognized approximately $2.6 million of depreciation expense on rental real estate properties.
F-12
| 5. | Mortgage Payable, net |
The following is a summary of the mortgage notes secured by the Company’s properties as of June 30, 2023 and the year ended December 31, 2022 (dollar amounts in thousands):
| Borrower(s) | Loan Amount | Effective Date | Maturity Date | Interest Rate | Balance as of June 30, 2023 | Balance as of | ||||||||||||||
| FR-ICG EVO Owner LLC(1) | $ | 55,092 | 11/01/18 | 11/01/28 | 4.58 | % | $ | 57,331 | (3) | $ | 57,541 | (4) | ||||||||
| FR-ICG EVO Owner LLC(2) | $ | 5,437 | 12/20/19 | 11/01/28 | 4.99 | % | $ | 5,159 | $ | 5,203 | ||||||||||
| FR-ICG EVO Owner LLC(5) | $ | 9,090 | 05/31/23 | 11/01/28 | 6.98 | % | $ | 9,090 | $ | - | ||||||||||
| (1) | The $55.1 million senior mortgage loan requires monthly, interest-only payments until maturity, at which time the entire outstanding principal balance becomes due. | |
| (2) | The $5.4 million supplemental mortgage loan requires monthly, interest and principal payments until maturity, at which time the entire outstanding principal balance becomes due. | |
| (3) | This balance represents the principal balance of $55.1 million, net of unamortized above-market debt value of $2.2 million as of June 30, 2023. | |
| (4) | This balance represents the principal balance of $55.1 million, net of unamortized above-market debt value of $2.4 million as of December 31, 2022. | |
| (5) | The $9.1 million supplemental loan requires monthly, interest-only payments until maturity, at which time the entire outstanding principal balance becomes due. |
For the six months ended June 30, 2023 and 2022, we incurred interest expense of approximately $1.5 million and $1.2 million, respectively, related to mortgage notes payable. Approximately $285,000 and $240,000 of current interest was payable to the lenders as of June 30, 2023 and December 31, 2022, respectively, which is included within “Accounts payable and accrued expenses” on the consolidated balance sheets.
Loan costs are being amortized over the loan term on the straight-line method, which approximates the effective interest method. As of June 30, 2023 and, December 31, 2022, total loan costs incurred were approximately $649,000 and $405,000, respectively. Unamortized loan costs totaled approximately $485,000 and $267,000 as of June 30, 2023 and December 31, 2022, respectively, and are reflected on the consolidated balance sheets as a reduction to the related mortgage notes payable. For the six months ended June 30, 2023 and 2022, amortization of loan costs was approximately $27,000 and $23,000, respectively, and is included within interest expense in the consolidated statements of operations.
The following table presents the future principal payments due under the Company’s mortgage notes as of June 30, 2023 (amounts in thousands):
| Year | Amount | |||
| Remainder of 2023 | $ | 45 | ||
| 2024 | 93 | |||
| 2025 | 98 | |||
| 2026 | 103 | |||
| 2027 | 108 | |||
| Thereafter | 68,894 | |||
| Total | $ | 69,341 | ||
As of June 30, 2023 and December 31, 2022, approximately $2.2 million and $2.4 million of above-market debt value, net, is included within Mortgage payable, net on the consolidated balance sheets. Above-market debt value is amortized as an adjustment to interest expense over the term of the mortgage note. For the six months ended June 30, 2023 and 2022, amortization of above-market debt value was approximately $210,000, and is included in interest expense in the consolidated statements of operations.
F-13
| 6. | Distributions |
Distributions are calculated based on members of record each day during the distribution period.
The table below outlines the Company’s total distributions declared to members, the Sponsor and its affiliates, for the six months ended June 30, 2023 and the year ended December 31, 2022 (all tabular amounts are in thousands except per share data):
| Members | ||||||||||||||||||
| Distributions for the Period: | Daily Distribution Per-Share Amount | Total Declared | Date of Declaration | Total Paid/Reinvested as of June 30, 2022 | Payment Date | |||||||||||||
| February 1, 2023 through February 28, 2023 | 0.0008219178 | $ | 132 | 01/30/2023 | $ | 132 | 04/11/2023 | |||||||||||
| March 1, 2023 through March 31, 2023 | 0.0006849315 | 162 | 02/27/2023 | 162 | 04/11/2023 | |||||||||||||
| April 1, 2023 through April 30, 2023 | 0.0006849315 | 160 | 03/29/2023 | - | 07/12/2023 | |||||||||||||
| May 1, 2023 through May 31, 2023 | 0.0006849315 | 166 | 04/27/2023 | - | 07/12/2023 | |||||||||||||
| June 1, 2023 through June 30, 2023 | 0.0006849315 | 160 | 05/26/2023 | - | 07/12/2023 | |||||||||||||
| July 1, 2023 through July 31, 2023 | 0.0006849315 | 166 | (2) | 06/28/2023 | - | 10/21/2023 | ||||||||||||
| Total | $ | 946 | (1) | $ | 294 | |||||||||||||
| Members | ||||||||||||||||||
| Distributions for the Period: | Daily Distribution Per-Share Amount | Total Declared | Date of Declaration | Total Paid/Reinvested as of December 31, 2022 | Payment Date | |||||||||||||
| February 1, 2022 through February 28, 2022 | 0.0012328767 | $ | 293 | 01/28/2022 | $ | 293 | 04/12/2022 | |||||||||||
| March 1, 2022 through March 31, 2022 | 0.0015068493 | 398 | 02/25/2022 | 398 | 04/12/2022 | |||||||||||||
| April 1, 2022 through April 30, 2022 | 0.0012328767 | 311 | 03/30/2022 | 311 | 07/12/2022 | |||||||||||||
| May 1, 2022 through May 31, 2022 | 0.0010958904 | 287 | 04/27/2022 | 287 | 07/12/2022 | |||||||||||||
| June 1, 2022 through June 30, 2022 | 0.0010958904 | 277 | 05/27/2022 | 277 | 07/12/2022 | |||||||||||||
| July 1, 2022 through July 31, 2022 | 0.0010958904 | 287 | 06/28/2022 | 287 | 10/12/2022 | |||||||||||||
| August 1, 2022 through August 31, 2022 | 0.0010958904 | 284 | 07/27/22 | 284 | 10/12/2022 | |||||||||||||
| September 1, 2022 through October 1, 2022 | 0.0009589041 | 242 | 08/29/22 | 242 | 10/12/2022 | |||||||||||||
| October 2, 2022 through October 31, 2022 | 0.0008219178 | 209 | 10/01/22 | - | 01/11/2023 | |||||||||||||
| November 1, 2022 through November 30, 2022 | 0.0005479452 | 135 | 10/28/22 | - | 01/11/2023 | |||||||||||||
| December 1, 2022 through December 31, 2022 | 0.0006849315 | 218 | 11/29/22 | - | 01/11/2023 | |||||||||||||
| December 31, 2022(4) | 3.0274538672 | 25,000 | 12/29/22 | - | 01/11/2023 | |||||||||||||
| January 1, 2023 through January 31, 2023 | 0.0006849315 | 174 | (3) | 12/29/22 | - | 04/12/2023 | ||||||||||||
| Total | $ | 28,115 | (1) | $ | 2,379 | |||||||||||||
| (1) | Total distributions declared to related parties are included in total distributions declared to all members. For the six months ended June 30, 2023 and the year ended December 31, 2022, total distributions declared to related parties were approximately $2,000 and $34,000, respectively. | |
| (2) | The liability for the July 2023 distribution was estimated based on the daily distribution per-share amount multiplied by the number of members as of the date of the preparation of the June 30, 2023 consolidated financial statements, and is scheduled to be paid three weeks after the end of September 2023. | |
| (3) | The liability for the January 2023 distribution was estimated based on the daily distribution per-share amount multiplied by the number of members as of the date of the preparation of the December 31, 2022 consolidated financial statements. This amount was subsequently determined to be approximately $169,000. |
F-14
| (4) | On December 29, 2022, the Manager of the Company declared a distribution of $3.0274538672 per share (the “Additional December 31, 2022 Dividend”) for shareholders of record as of the close of business on December 31, 2022. The distribution was payable to shareholders of record as of the close of business on December 31, 2022 and the distribution was paid on January 11, 2023. This amount was subsequently determined to be approximately $25.0 million. |
| 7. | 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. U.S. GAAP defines the fair value as the price that the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. 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 June 30, 2023 and December 31, 2022, the Company’s significant financial instruments consist of cash and cash equivalents, restricted cash, and mortgage payable. With the exception of mortgage payable, the carrying amount of the Company’s financial instruments approximates their fair values due to their short-term nature.
As of June 30, 2023 and December 31, 2022, the mortgage payable principal balance was approximately $71.1 million and $62.5 million, respectively, and the aggregate fair value was approximately $66.9 million and $57.8 million, respectively.
The aggregate fair value of our mortgage payable is based on unobservable Level 3 inputs which management has determined to be its best estimate of current fair 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 market-based interest or preferred return rate, loan to value ratios, and expected repayment and prepayment dates. The discount rate utilized was approximately 5%.
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.
| 8. | Related Party Arrangements |
Fundrise Advisors, LLC, Manager
The Manager and certain affiliates of the Manager will receive fees and compensation in connection with the Company’s Offering, and the acquisition, management and sale of the Company’s real estate investments.
F-15
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 Costs for the amount of organizational and offering costs incurred and payable for the six months ended June 30, 2023 and 2022.
The Company will 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 in connection with our debt investments, 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 certain 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 six months ended June 30, 2023 and 2022, the Manager incurred approximately $0 and $2,000 of operational costs on our behalf. As of June 30, 2023 and December 31, 2022, approximately $0 and $1,000, respectively, was due and payable.
The Company will pay the Manager a quarterly investment management fee of one-fourth of 0.85% based on our NAV at the end of each prior quarter. This rate is determined by our Manager in its sole discretion, but cannot exceed an annualized rate of 1.00%. In addition, the Manager may in its sole discretion waive its investment management fee, in whole or in part. The Manager will forfeit any portion of the investment management fee that is waived.
During the six months ended June 30, 2023 and 2022, we have incurred investment management fees of approximately $413,000 and $524,000, respectively. As of June 30, 2023 and December 31, 2022, approximately $203,000 and $272,000, respectively, of investment management fees were payable to the Manager.
Additionally, the Company is required to pay the Manager for servicing any non-performing asset. The Company is required to reimburse the 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 June 30, 2023 and December 31, 2022, the Manager has not designated any asset as non-performing and no special servicing fees were incurred or paid to the Manager.
The Company will also reimburse the Manager for actual expenses incurred on our behalf in connection with the liquidation of any of our equity investments in real estate. As of June 30, 2023 and December 31, 2022, no disposition fees were incurred or paid to the Manager.
Fundrise Lending, LLC
As an alternative means of acquiring loans or other 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 us. This allows us the flexibility to deploy our offering proceeds as funds are raised. We 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 our acquisition. During the six months ended June 30, 2023 and 2022, the Company did not purchase any investments from Fundrise Lending, LLC.
For situations where our Sponsor, Manager or their affiliates have a conflict of interest with us 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 our behalf will be payable by us. Principal transactions are defined as transactions between our Sponsor, Manager or their affiliates, on the one hand, and us or one of our subsidiaries, on the other hand. Our 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 six months ended June 30, 2023 and 2022, fees of approximately $6,000 and $5,000, respectively, were paid to the Independent Representative as compensation for those services and are included as general and administrative expense in the consolidated statements of operations.
F-16
Fundrise, L.P., Member
Fundrise, L.P. is a member of the Company and held 9,500 shares as of June 30, 2023 and December 31, 2022. One of our Sponsor’s wholly-owned subsidiaries is the general partner of Fundrise, L.P.
Rise Companies Corp., Member and Sponsor
Rise Companies Corp. is a member of the Company and held 600 common shares as of June 30, 2023 and December 31, 2022.
For the six months ended June 30, 2023 and 2022, the Sponsor incurred approximately $34,000 of operational costs on our behalf. As of June 30, 2023 and December 31, 2022, approximately $0 and $9,000 of operational costs were due and payable, respectively.
Investment in National Lending, LLC
In July 2019, our Manager formed a self-sustaining lending entity, National Lending, which is financed by each of the real estate investment trusts managed by our Manager and affiliated with our Sponsor (“eREITs”). National Lending is managed by an independent manager (the “Independent Manager”) through a management agreement at a market rate. Each eREIT contributes an amount to National Lending in exchange for ownership interests, originally not to exceed 3% of its assets under management to National Lending. On March 23, 2020, the Company entered into an Amended and Restated Operating Agreement with National Lending, which increased the maximum contribution for partnership interest from 3% to approximately 5% of a partner’s assets under management. Accordingly, the Company has a continuous funding commitment to maintain a total contribution amount of up to 5% of its assets under management to National Lending. As of both June 30, 2023 and December 31, 2022, the Company has contributed approximately $6.4 million for a 9.91% and 9.96% ownership in National Lending, respectively.
National Lending may provide short-term bridge financing through promissory notes to any of the eREITs, including us, who have contributed to it in order to maintain greater liquidity and better finance such eREIT’s individual real estate investment strategies. The promissory notes bear a market rate of interest and are generally repaid via the capital raised by each of the borrowing eREITs’ offerings. All transactions between National Lending and the borrowing eREIT are reviewed by the Independent Manager.
During the six months ended June 30, 2023 and 2022, the Company did not enter into any promissory notes with National Lending. As of June 30, 2023, no principal or interest were payable to National Lending.
As of June 30, 2023 and December 31, 2022, we had no outstanding promissory notes with National Lending.
For the six months ended June 30, 2023 and 2022, the Company did not incur any interest expense on notes with National Lending. As of June 30, 2023 and December 31, 2022, we had no outstanding accrued interest due to National Lending.
| 9. | 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 investment 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.
| 10. | Commitments and Contingencies |
Legal Proceedings
As of the date of the 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.
F-17
| 11. | Subsequent Events |
In connection with the preparation of the accompanying consolidated financial statements, we have evaluated events and transactions occurring through September 26, 2023, for potential recognition or disclosure.
Offering
As of September 26, 2023, we had raised total gross offering proceeds of approximately $114.9 million from settled subscriptions (including the $100,000 received in the private placements to our Sponsor and Fundrise, L.P., an affiliate of our Sponsor, and approximately $2.0 million received in private placements to third parties), and had settled subscriptions in our Offering and private placements for a gross aggregate of approximately 11,212,000 of our common shares.
Joint Venture Distributions
On September 5, 2023, one of our joint venture investments refinanced on a senior loan supplement and we received a cash distribution of approximately $6.4 million.
F-18
| Item 4. | Exhibits |
INDEX OF EXHIBITS
| * | Previously filed |
14
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this Semiannual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Washington, DC on September 26, 2023.
| Fundrise Midland Opportunistic REIT, 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 Semiannual 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 | September 26, 2023 | ||
| Benjamin S. Miller | Fundrise Advisors, LLC | |||
| (Principal Executive Officer) | ||||
| /s/ Alison A. Staloch | Chief Financial Officer of | September 26, 2023 | ||
| Alison A. Staloch | Fundrise Advisors, LLC | |||
| (Principal Financial Officer and | ||||
| Principal Accounting Officer) |