UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
SEMIANNUAL REPORT PURSUANT TO REGULATION A
For the Fiscal Semiannual Period Ended June 30, 2019
Fundrise Growth eREIT III, LLC
(Exact name of registrant as specified in its charter)
Commission File Number:024-10926
| Delaware | 83-2162909 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
11 Dupont Circle NW, 9th Floor Washington, DC (Address of principal executive offices) | 20036 (Zip Code) |
(202) 584-0550
Registrant’s telephone number, including area code
Common Shares
(Title of each class of securities issued pursuant to Regulation A)
TABLE OF CONTENTS
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
| Other Information | 7 |
| Index to Financial Statements | 8 |
| Exhibits | 9 |
| 2 |
| 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. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Unless otherwise indicated, latest results discussed below are as of June 30, 2019. The financial statements included in this filing as of June 30, 2019 and for the six months ended June 30, 2019 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 statements of operations not misleading.
Business
Fundrise Growth eREIT III, LLC is a Delaware limited liability company formed on October 5, 2018 to originate, invest in and manage a diversified portfolio of real estate investments and other real estate-related assets. Operations substantially commenced on February 22, 2019. We use substantially all of the net proceeds raised from our initial and subsequent offerings (the “Offering(s)”) to invest in residential rental properties, real estate-related debt securities (including commercial mortgage-backed securities (“CMBS”), collateralized debt obligations (“CDOs”), and REIT senior unsecured debt), and other real estate-related assets. We may make our investments through majority-owned subsidiaries, some of which may have rights to receive preferred economic returns. The use of the terms “Fundrise Growth eREIT III,” the “Company,” “we,” “us” or “our” in this Semiannual Report refer to Fundrise Growth eREIT III, LLC unless the context indicates otherwise.
As a limited liability company, we have elected to be taxed as a C corporation. Commencing with the taxable year ending December 31, 2019, the Company operates in a manner intended to qualify for treatment as a REIT under the Internal Revenue Code of 1986.
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 Rise Companies Corp. (our “Sponsor”), the parent company of Fundrise, LLC, our affiliate. Fundrise, LLC owns and operates the Fundrise Platform, which allows investors to become equity or debt holders in real estate opportunities that may have been historically difficult to access for some investors.Our Manager has the authority to make all of the decisions regarding our investments, subject to the limitations in our operating agreement and the direction and oversight of our Manager’s investment committee. Our Sponsor also provides asset management, marketing, investor relations and other administrative services on our behalf. 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” contained in our Offering Circular filed February 13, 2019 (the “Offering Circular”), which may be accessedhere, as the same may be updated from time to time by our future filings under Regulation A. 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
We have offered, are offering, and may continue to offer up to $50.0 million in our common shares in any rolling twelve-month period. As of June 30, 2019 and December 31, 2018, we had raised total gross offering proceeds of approximately $43.6 million and $5,000, respectively, from settled subscriptions (the 2019 figure includes $100,000 received in private placements to our Sponsor, and Fundrise, L.P., an affiliate of our Sponsor), and had settled subscriptions in our Offering and private placements for an aggregate of approximately 4,357,000 and 500, respectively, of our common shares. Assuming the settlement for all subscriptions received as of June 30, 2019, approximately 653,000 of our common shares remained available for sale to the public under our Offering.
We expect to offer common shares in our Offering until we raise the maximum amount being offered, unless terminated by our Manager at an earlier time. Until December 31, 2019, the per share purchase price for our common shares will be $10.00 per share, an amount that was arbitrarily determined by our Manager. Thereafter, the per share purchase price is subject to adjustment semi-annually and, as of January 1st and July 1st of each year (or as soon as commercially reasonable and announced by us thereafter), will equal the greater of (i) $10.00 per share or (ii) the sum of our net asset value, or NAV, divided by the number of our common shares outstanding as of the end of the prior semi-annual period (NAV per share). 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 on a monthly basis, after observing a mandatory 60-day waiting period, for their investment in our shares.
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Distributions
To maintain our qualification as a REIT, we will be 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 expect in the future to declare and pay distributions monthly or 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.
As of June 30, 2019 we have not yet declared our first distribution to shareholders.
Any distributions that we make directly impact 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 your investment, your distributions plus the change in NAV per share (either positive or negative) will produce your 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 holder’s adjusted tax basis in the holder’s shares, and to the extent that it exceeds the holder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares.
Redemption Plan
We have adopted a redemption plan whereby, on a monthly basis, after observing a mandatory 60-day waiting period, a shareholder may obtain liquidity as described in detail in our Offering Circular. However, 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.
As of June 30, 2019, approximately 21,000 common shares had been submitted for redemption and 100% of such redemption requests have been honored.
Critical Accounting Policies
Our accounting policies have been established to conform with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The preparation of 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 our critical accounting policies govern the significant judgments and estimates used in the preparation of our consolidated financial statements. Please refer to Note 2,Summary of Significant Accounting Policies in our consolidated financial statements, for a more thorough discussion of our accounting policies and procedures.
| 4 |
Recent Accounting Pronouncements
The Financial Accounting Standards Board has released several Accounting Standards Updates (“ASU”) that may have an impact on our financial statements. SeeNote 2, Summary of Significant Accounting Policies – Recent Accounting Pronouncementsin our financial statements for discussion of the relevant ASUs. We are currently evaluating the impact of the various ASUs on our financial statements and determining our plan for adoption.
Extended Transition Period
Under Section 107 of the JOBS Act, 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.
Sources of Operating Revenues and Cash Flows
We expect to primarily generate revenues from rental income from our residential rental properties, as well as cash flow distributions from equity method investees, rent from real estate properties, and equity in earnings from our investments in unconsolidated joint ventures. We may also seek to acquire investments which generate attractive returns without any leverage. SeeNote 2, Summary of Significant Accounting Policies – Revenue Recognition, in our consolidated financial statements for further detail.
Results of Operations
On February 22, 2019, we substantially commenced operations. For the six months ended June 30, 2019, we had total net income (loss) of approximately $(638,000). As the Company was formed in October 2018, there were no operations during the six months ended June 30, 2018.
Revenue
Rental Income
For the six months ended June 30, 2019, we earned rental income of approximately $14,000 from the operations of rental real estate properties.
Equity in Earnings (Losses)
For the six months ended June 30, 2019, we had equity in earnings (losses) of approximately $(681,000) from our equity method investees, which was primarily due to origination costs recorded as a reduction to equity in earnings.
Other Income
For the six months ended June 30, 2019, we earned approximately $120,000 in dividends from our money market investments.
Expenses
General and Administrative
For the six months ended June 30, 2019, we incurred general and administrative expenses of approximately $80,000, which includes auditing and professional fees, bank fees, organizational costs and other costs associated with operating our business.
| 5 |
Our Investments
As of June 30, 2019, we entered into the following investments. See “Recent Developments” for a description of investments we have made since June 30, 2019.
| Real Property Controlled Subsidiaries | Location | Type of Property | Date of Acquisition | Purchase Price (1) | Overview (Form 1-U) | ||||||||
| NP 84 (2) | Mansfield, TX | Multifamily | 4/1/2019 | $ | 5,747,500 | Initial | Update | ||||||
| RSE SW4 Controlled Subsidiary | Dallas-Fort Worth MSA | Multifamily | 6/28/2019 | $ | 40,877,070 | Initial | N/A | ||||||
| (1) | Purchase Price refers to the total price paid by us for our pro rata share of the equity in the controlled subsidiary. |
| (2) | On June 20, 2019, our investment in NP 84, LLC was fully distributed to us. |
| Asset Name | Location | Type of Property | Approx. Acquisition | Date of Acquisition | Approx. Acquisition | Projected Renovation Cost | Projected Exit Price | Projected Hold Period | Overview (Form 1-U) | ||||||||||||
| RSE E353 Controlled Subsidiary | Los Angeles, CA | Multifamily | 1,800 | 3/28/2019 | $ | 775,000 | $ | 20,000 | $1,139,000 – $1,485,000 | 10 years | Initial | ||||||||||
Liquidity and Capital Resources
We require capital to fund our investment activities and operating expenses. Our capital sources may include net proceeds from our Offering, cash flow from operations, net proceeds from asset repayments and sales, borrowings under credit facilities, other term borrowings and securitization financing transactions.
We are dependent upon the net proceeds from our Offering to conduct our operations. We obtain the capital required to primarily originate,invest in and manage a diversified portfolio of real estate investments and conduct our operations from the proceeds of our Offering and from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations. As of June 30, 2019, we had deployed approximately $41.7 million for two investments and had approximately $3.0 million in cash and cash equivalents. We had no future funding commitments related to our investments as of June 30, 2019. As of June 30, 2019, we anticipate that proceeds from our Offering will provide sufficient liquidity to meet future funding commitments and costs of operations.
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 target 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. As we acquire our initial portfolio, we employ greater leverage on individual assets (that will also result in greater leverage of the interim portfolio) in order to quickly build a diversified portfolio of 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.
As of June 30, 2019 and December 31, 2018, we had no outstanding debt.
If we are unable to raise $50.0 million in common shares, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make. The Company 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.
| 6 |
Outlook and Recent Trends
We believe that the near and intermediate-term market for investment in select real estate properties, real estate equity investments, joint venture equity investments, and other real-estate related assets is compelling from a risk-return perspective. Given the prospect of the continued relatively cautious stance by Federal Reserve on monetary policy, we favor a strategy weighted toward targeting equity investments with significant potential value creation. In contrast, returns typically associated with core real estate properties in major gateway markets, and stabilized trophy assets have generally become expensive in the pursuit of safety over value. We believe that our investment strategy, combined with the experience and expertise of our Manager’s management team, will provide opportunities to originate investments with attractive long-term equity returns and strong structural features either through direct ownership or with local, joint venture real estate companies, thereby taking advantage of changing market conditions in order to seek the best risk-return dynamic for our shareholders.
Off-Balance Sheet Arrangements
As of June 30, 2019 and December 31, 2018, we had no off-balance sheet arrangements.
Related Party Arrangements
For further information regarding “Related Party Arrangements,” please seeNote 9, Related Party Arrangements in our consolidated financial statements.
Investments
There have been no other real estate investments acquired by or repaid to the Company since June 30, 2019 (through September 6, 2019).
Other
| Event | Date | Description | ||
| Status of our Offering | 9/13/19 | As of September 13, 2019, we had raised total gross offering proceeds of approximately $46.1 million from settled subscriptions (including the $100,000 received in private placements to our Sponsor, Rise Companies Corp., and Fundrise, L.P., an affiliate of our Sponsor), and had settled subscriptions in our Offering and private placements for an aggregate of approximately 4,608,000 of our common shares. |
| Item 2. | Other Information |
None.
| 7 |
| Item 3. | Financial Statements |
Index to Consolidated Financial Statements of
Fundrise Growth ereit III, LLC
| 8 |
Fundrise Growth eREIT III, LLC
Consolidated Balance Sheets
(Amounts in thousands, except share data)
| As of | As of | |||||||
June 30, 2019 (unaudited) | December 31, 2018 (*) | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 3,006 | $ | 5 | ||||
| Other assets | 63 | - | ||||||
| Investments in equity method investees | 40,089 | - | ||||||
| Residential rental properties, net | 805 | - | ||||||
| Total Assets | $ | 43,963 | $ | 5 | ||||
| LIABILITIES AND MEMBERS’ EQUITY | ||||||||
| Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 102 | $ | - | ||||
| Due to related party | 1 | - | ||||||
| Settling subscriptions | 961 | - | ||||||
| Redemptions payable | 86 | - | ||||||
| Below-market leases, net | 43 | - | ||||||
| Total Liabilities | 1,193 | - | ||||||
| Commitments and Contingencies | ||||||||
| Members’ Equity: | ||||||||
| Common shares; unlimited shares authorized; 4,356,539 and 500 shares issued and 4,340,812 and 500 outstanding as of June 30, 2019 and December 31, 2018, respectively | 43,565 | 5 | ||||||
| Redemptions – common shares | (157 | ) | - | |||||
| Retained Earnings (Accumulated deficit) | (638 | ) | - | |||||
| Total Members’ Equity | 42,770 | 5 | ||||||
| Total Liabilities and Members’ Equity | $ | 43,963 | $ | 5 | ||||
* Derived from audited financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
| F-1 |
Fundrise Growth eREIT III, LLC
Consolidated Statement of Operations
(Amounts in thousands, except share and per share data)
For the Six Months Ended | ||||
June 30, 2019 (unaudited) | ||||
| Income | ||||
| Rental income | $ | 14 | ||
| Equity in earnings (losses) | (681 | ) | ||
| Other income | 120 | |||
| Total income | (547 | ) | ||
| Expenses | ||||
| Depreciation and amortization | 9 | |||
| Property operating and maintenance | 2 | |||
| General and administrative expenses | 80 | |||
| Total expenses | 91 | |||
| Net income (loss) | $ | (638 | ) | |
| Net income (loss) per basic and diluted common share | $ | (0.42 | ) | |
| Weighted average number of common shares outstanding, basic and diluted | 1,528,565 | |||
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 financial statements not misleading.
| F-2 |
Fundrise Growth eREIT III, LLC
Consolidated Statement of Members’ Equity
For the Six Months Ended June 30, 2019 (unaudited)
(Amounts in thousands, except share data)
| Common Shares | Retained Earnings (Accumulated | Total Members’ | ||||||||||||||
| Shares | Amount | deficit) | Equity | |||||||||||||
| December 31, 2018 | 500 | $ | 5 | $ | - | $ | 5 | |||||||||
| Proceeds from issuance of common shares | 4,356,039 | 43,560 | - | 43,560 | ||||||||||||
| Redemptions of common shares | (15,727 | ) | (157 | ) | - | (157 | ) | |||||||||
| Net income (loss) | - | - | (638 | ) | (638 | ) | ||||||||||
| June 30, 2019 | 4,340,812 | $ | 43,408 | $ | (638 | ) | $ | 42,770 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
Fundrise Growth eREIT III, LLC
Consolidated Statement of Cash Flows
(Amounts in thousands)
For the Six June 30, 2019 (unaudited) | ||||
| OPERATING ACTIVITIES: | ||||
| Net income (loss) | $ | (638 | ) | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||
| Depreciation and amortization | 9 | |||
| Amortization of below-market leases | (1 | ) | ||
| Equity in (earnings) losses | 681 | |||
| Net (increase) decrease in accounts receivable and other assets | (63 | ) | ||
| Net increase (decrease) in accounts payable and accrued expenses | 102 | |||
| Net increase (decrease) in due to related party | 1 | |||
| Net cash provided by (used in) operating activities | 91 | |||
| INVESTING ACTIVITIES: | ||||
| Investment in equity method investees | (46,627 | ) | ||
| Distributions from equity method investees | 5,857 | |||
| Investment in rental real estate properties | (770 | ) | ||
| Net cash provided by (used in) investing activities | (41,540 | ) | ||
| FINANCING ACTIVITIES: | ||||
| Proceeds from issuance of common shares | 43,560 | |||
| Cash paid for shares redeemed | (71 | ) | ||
| Proceeds from settling subscriptions | 961 | |||
| Net cash provided by (used in) financing activities | 44,450 | |||
| Net increase (decrease) in cash and cash equivalents | 3,001 | |||
| Cash and cash equivalents, beginning of period | 5 | |||
| Cash and cash equivalents, end of period | $ | 3,006 | ||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY: | ||||
| Redemptions payable | $ | 86 | ||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
Fundrise Growth eREIT III, LLC
Notes to Consolidated Financial Statements (unaudited)
| 1. | Formation and Organization |
Fundrise Growth eREIT III, LLC was formed on October 5, 2018, as a Delaware limited liability company and substantially commenced operations on February 22, 2019. As used herein, the “Company,” “we,” “our,” and “us” refer to Fundrise Growth eREIT III, LLC except where the context otherwise requires.
The Company was organized primarily to originate, invest in and manage a diversified portfolio of real estate properties. We may also invest in real estate loans, real estate-related debt securities and other real estate-related assets.
Each residential real estate property investment of the Company is acquired by a limited liability company that is a subsidiary of ours. These subsidiaries are wholly owned by the Company and consolidated in these financial statements.
The Company’s business is externally managed by Fundrise Advisors, LLC (the “Manager”), a Delaware limited liability company and an investment adviser registered with the Securities and Exchange Commission (the “SEC”). Subject to certain restrictions and limitations, the Manager is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company.
The Company intends to qualify as a real estate investment trust (“REIT”) for the taxable year ended December 31, 2019. We hold substantially all of our assets directly, and as of June 30, 2019 have not established an operating partnership or any taxable REIT subsidiary (“TRS”) or qualified REIT subsidiary (“QRS”), 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 offering of our common shares (the “Offering”) is being conducted as a continuous offering pursuant to Rule 251(d)(3) of Regulation A, meaning that while the offering of securities is continuous, active sales of securities may happen sporadically over the term of the Offering. A maximum of $50.0 million of the Company’s common shares may be sold to the public in its Offering in any given twelve-month period. However, each Offering is subject to qualification by the SEC. The Manager has the authority to issue an unlimited number of common shares. The Company qualified its initial $50.0 million of common shares on December 21, 2018.
As of June 30, 2019 and December 31, 2018, after redemptions, the Company has net common shares outstanding of approximately 4,341,000 and 500, respectively, including common shares held by Rise Companies Corp. (the “Sponsor”), the owner of the Manager. As of June 30, 2019 and December 31, 2018, the Sponsor owned 500 common shares. In addition, as of June 30, 2019, Fundrise, L.P., an affiliate of the Sponsor, had purchased an aggregate of 9,500 common shares common shares at $10.00 per share in a private placement for an aggregate purchase price of approximately $95,000.At December 31, 2018, Fundrise, L.P. had committed to purchase 9,500 common shares at $10.00, but had not yet purchased any common shares.As of June 30, 2019 and December 31, 2018, the Company’s total amount of equity outstanding on a gross basis was approximately $43.4 million and $5,000, respectively, and the total amount of settling subscriptions was approximately $961,000 and $0, respectively. Both of these amounts were based on a $10.00 per share price.
| 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”) for interim financial reporting and the instructions to Form 1-SA and Rule 8-03(b) of Regulation S-X of the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in the financial statements prepared under U.S. GAAP have been condensed or omitted.
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, 2018 balance sheet and certain related disclosures are derived from the Company’s December 31, 2018 audited financial statements. These consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the special financial report filed with the SEC. The consolidated financial statements as of June 30, 2019 and for the six months ended June 30, 2019, 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.
| F-5 |
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 Accounting Standards Codification (“ASC”) 810, Consolidation, if we are the primary beneficiary of the VIE as determined by our power to direct the VIE’s activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
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.
Earnings per Share
Basic earnings per share is calculated on the basis of weighted-average number of common shares outstanding during the six-month period. Basic earnings per share is computed by dividing income available to common members by the weighted-average common shares outstanding during the six-month period.
Organizational and Offering Costs
Organizational and offering costs of the Company are initially paid by the Manager on behalf of the Company. Organizational costs may 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 distribution of common shares. Costs included in the distribution of common shares may include, without limitation, expenses for printing, amending offering statements or supplementing offering circulars, mailing and distributing costs, telephones, internet and other telecommunications costs, charges of experts and fees, expenses and taxes related to the filing, registration and qualification of the sale of shares under federal and state laws, including taxes and fees, and accountants’ and attorneys’ fees. Pursuant to the Company’s amended and restated operating agreement (the “Operating Agreement”), the Company will be obligated to reimburse the Manager, or its affiliates, as applicable, for organizational and offering costs paid by them on behalf of the Company. The Company shall only reimburse the Manager for the organizational and offering costs subject to a minimum net asset value (“NAV”), as described below.
After the Company has reached a NAV greater than $10.00 per share (“Hurdle Rate”), the Company is obligated to start reimbursing the Manager, without interest, for organizational and offering costs incurred, both before and after the date that the Hurdle Rate was reached. The total amount payable to the Manager will be based on the dollar amount that the NAV exceeds the Hurdle Rate, multiplied by the number of shares outstanding. Reimbursement payments will be made in monthly installments, but the aggregate monthly amount reimbursed shall not exceed 0.50% of the aggregate gross offering proceeds from the Offering. No reimbursement shall be made if the reimbursement would cause the NAV to be less than the Hurdle Rate. If the sum of the total unreimbursed amount of such organizational and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.50% limit), calculated on an accumulated basis, until the Manager has been reimbursed in full.
| F-6 |
The Company recognizes a liability for organizational costs and offering costs payable to the Manager when it is probable and estimable that a liability has been incurred in accordance with ASC 450, Contingencies. As a result, there will be no liability recognized until the Company reaches the Hurdle Rate. Upon the Company’s NAV exceeding the Hurdle Rate, it will recognize a liability with a corresponding reduction to equity for offering costs, and a liability with a corresponding expense for organizational costs.
As of June 30, 2019 and December 31, 2018, the Manager had incurred cumulative organizational and offering costs of approximately $277,000 and $211,000, respectively, on behalf of the Company. However, because the Hurdle Rate was not met, no costs were eligible to be reimbursed to the Manager.
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 variable interest entity (“VIE”) or through our voting interest in a voting interest entity (“VOE”) and we have the ability to provide significant influence, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliate as they occur, with losses limited to the extent of our investment in, advances to, and commitments to the investee.
The Company evaluates its investment in equity method investees for impairment semi-annually or whenever events or changes in circumstances indicate that there may be an other-than-temporary decline in value. To do so, the Company would calculate the estimated fair value of the investment using various valuation techniques, including, but not limited to, discounted cash flow models, the Company’s intent and ability to retain its investment in the entity, the financial condition and long-term prospects of the entity, and the expected term of the investment. If the Company determined any decline in value is other-than-temporary, the Company would recognize an impairment charge to reduce the carrying value of its investment to fair value. No impairment losses were recorded related to equity method investees for the six months ended June 30, 2019.
Residential Rental Properties
Our investments in residential rental properties may include the acquisition of homes, townhomes, office space, and condominiums held as rental properties.
Since inception, our investment transactions have been asset acquisitions recorded at their purchase price (plus transaction costs), and the purchase price is allocated between land, building, and improvements based upon their relative fair values at the date of acquisition.
Upon the acquisition of operating residential rental properties, we assess the fair value of acquired tangible and intangible assets, (including land, buildings, tenant improvements, “above-” and “below-market” leases, leasing and acquired in-place leases, other identified intangible assets and assumed liabilities) and allocate the purchase price to the acquired assets and assumed liabilities, including land and buildings as if vacant.
The value allocated to in-place leases is amortized over the related lease term. We consider qualitative and quantitative factors in evaluating the likelihood of a tenant exercising a below market renewal option and include such renewal options in the calculation of in-place lease value when we consider these to be bargain renewal options. If the value of below market lease intangibles includes renewal option periods, we include such renewal periods in the amortization period utilized. If a tenant vacates its space prior to contractual termination of its lease, the unamortized balance of any in-place lease value is written off. In-place lease assets have been reflected within other assets in our consolidated balance sheets.
The amortization of in-place leases is recorded as an adjustment to depreciation and amortization expense on the Company’s consolidated statement of operations. The amortization of above or below-market leases is recorded as an adjustment to rental income on the Company’s consolidated statement of operations.
| F-7 |
Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. We capitalize expenditures above a pre-determined threshold (five hundred dollars) 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 are depreciated over their estimated useful lives on a straight-line basis. For those costs capitalized in connection with residential property acquisitions and those capitalized on an ongoing basis, the useful lives range from 5 years to 27.5 years.
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.
Share Redemptions
Share repurchases are recorded as a reduction of common share par value under our redemption plan, pursuant to which we may elect to redeem shares at the request of our members, subject to certain exceptions, conditions, and limitations. The maximum number of shares purchasable by us in any period depends on a number of factors and is at the discretion of our Manager.
The Company has adopted a redemption plan whereby an investor has the opportunity to obtain liquidity monthly, following a minimum 60-day waiting period after submitting their redemption request. Pursuant to the Company’s redemption plan, a member may only (a) have one outstanding redemption request at any given time and (b) request that we redeem up to the lesser of 5,000 shares or $50,000 per each redemption request. In addition, the redemption plan is subject to certain liquidity limitations, which may fluctuate depending on the liquidity of the real estate assets held by the Company. Redemptions are also subject to declining discounts on the redemption price over the course of the time the member has held the shares being redeemed.
In light of the SEC’s current guidance on redemption plans, we generally intend to limit redemptions in any calendar month to shares whose aggregate value (based on the repurchase price per share in effect as of the redemption date) is less than or equal to 0.50% of the NAV of all of our outstanding shares as of the first day of such calendar month, and generally intend to limit the amount redeemed in any calendar quarter to shares whose aggregate value (based on the repurchase price per share in effect as of the redemption date) is 1.25% of the NAV of all of our outstanding shares as of first day of the last month of such calendar quarter (e.g., March 1, June 1, September 1, or December 1), with excess capacity carried over to later calendar quarters in that calendar year. However, as we intend to make a number of real estate investments of varying terms and maturities, our Manager may elect to increase or decrease the number of common shares available for redemption in any given month or quarter, as these real estate assets are paid off or sold, but we do not intend to redeem more than 5.00% of the common shares outstanding during any calendar year. Notwithstanding the foregoing, we are not obligated to redeem common shares under the redemption plan.
In addition, our Manager may, in its sole discretion, amend, suspend, or terminate the redemption plan at any time without prior notice, including to protect our operations and our nonredeemed 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 the Fundrise Platform 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
The Company intends to elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and intends to operate as such, commencing with the taxable year ending December 31, 2019. The Company expects to have little or no taxable income prior to electing REIT status. 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 dividends 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 dividends 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.
| F-8 |
Rental income is recognized on a straight-line basis over the term of the lease. We will periodically review the collectability of our resident receivables and record an allowance for doubtful accounts for any estimated probable losses. Bad debt expenses will be recorded within property operating and maintenance expenses in the consolidated financial statements.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 for one year, which would make the guidance effective for the Company’s first fiscal year beginning after December 15, 2018. The Company has elected to adopt this standard under the modified retrospective approach, effective January 1, 2019.The adoption of this standard did not have a material impact on our consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update 2016-01 (“ASU 2016-01”),Financial Instruments – Overall, which changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The FASB also clarifies the guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018. The guidance should be applied prospectively from that date. The adoption of this standard did not have a significant impact on the presentation of these consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (“ASU 2016-02”). The core principle of the standard is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in its statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this new standard will have 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, and interim periods within those years beginning after December 15, 2020. We are currently in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update 2016-15 (“ASU 2016-15”),Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the presentation and classification in the statement of cash flows for specific cash receipt and payment transactions, including debt prepayment or extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance policies, and distributions received from equity method investees. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The adoption of this standard did not have a significant impact on the presentation of these consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18 (“ASU 2016-18”)Statement of Cash Flows: Restricted Cash, which clarifies the presentation requirements of restricted cash within the statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents, restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period.The adoption of this standard did not have a material impact on our consolidated financial statements.
| F-9 |
In January 2017, the FASB issued Accounting Standards Update 2017-01 (“ASU 2017-01”),Business Combinations, which clarifies the definition of a business, particularly when evaluating whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. The first part of the guidance provides a screen to determine when a set is not a business; the second part of the guidance provides a framework to evaluate whether both an input and a substantive process are present. The guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018. The adoption of this standard did not have a significant impact on the presentation of these consolidated financial statements.
Extended Transition Period
Under Section 107 of the Jumpstart Our Business Startups (“JOBS”) Act of 2012, we are permitted to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. This permits us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B). By electing to extend the transition period for complying with new or revised accounting standards, these consolidated financial statements may not be comparable to companies that adopt accounting standard updates upon the public business entity effective dates.
| 3. | Investments in Equity Method Investees |
The table below presents the activity of the Company’s investments in equity method investees as of and for the period presented(amounts in thousands):
| Investments in Equity Method Investees: | For the Six Months June 30, 2019 | |||
| Beginning balance | $ | - | ||
| New investments in equity method investees | 46,627 | |||
| Distributions received from equity method investees | (5,857 | ) | ||
| Equity in earnings (losses) of equity method investees | (681 | ) | ||
| Ending balance | $ | 40,089 | ||
As of June 30, 2019, the Company’s investments in companies that are accounted for under the equity method of accounting consist of the following:
| (1) | Acquired in 2019, a 51.0% member interest in SW4 JV LP, whose activities are carried out through the following wholly-owned assets: The Logan, Laurel Heights at Cityview, Ranch at Three0Five, and The Regent, which are all multifamily developments in the Dallas, TX area. |
In 2019, the Company acquired an equity method investment in NP 84, LLC, which issued a loan to the borrower to acquire Mansfield on the Green, a multifamily property in Mansfield, TX. During the six months ended June 30, 2019, the borrower refinanced the underlying property and repaid the related loan in full with interest. Consequently, the proceeds from NP 84, LLC were distributed to the members such that the remaining equity interest at June 30, 2019 was $0. Accordingly, there was no gain on sale of the investment.
| F-10 |
As of and for the six months ended June 30, 2019, the condensed financial position and results of operations of the Company’s equity method investments are summarized below(amounts in thousands):
| NP 84, LLC | SW4 JV LP | |||||||
| Condensed balance sheet information: | As of June 30, 2019 | As of June 30, 2019 | ||||||
| Real estate assets, net | $ | - | $ | 193,944 | ||||
| Other assets | - | 22,640 | ||||||
| Total assets | $ | - | $ | 216,584 | ||||
| Mortgage notes payable | $ | - | $ | 135,543 | ||||
| Other liabilities | - | 2,163 | ||||||
| Equity | - | 78,878 | ||||||
| Total liabilities and equity | $ | - | $ | 216,584 | ||||
| Company’s equity investment | $ | - | $ | 40,089 | ||||
| NP 84, LLC | SW4 JV LP | |||||||
| Condensed income statement information: | For the Period from April 1, 2019 (Acquisition) to June 20, 2019 (Liquidation) | For the Period from June 30, 2019 | ||||||
| Total revenue | $ | 871 | $ | 110 | ||||
| Total expenses | - | 55 | ||||||
| Net income (loss) | $ | 871 | $ | 55 | ||||
| Company’s equity in net income (loss) of investee | $ | 109 | $ | 28 | ||||
| Company’s share of origination costs within equity | $ | - | $ | (818 | ) | |||
As of December 31, 2018, we had no investments in equity method investees.
| 4. | Residential Rental Properties |
As of June 30, 2019 and December 31, 2018, we had one and zero residential rental properties, respectively.
The following table presents the Company’s investments in residential rental properties (amounts in thousands):
As of June 30, 2019 | As of December 31, 2018 | |||||||
| Land- acquisition allocation | $ | 509 | $ | - | ||||
| Building - acquisition allocation | 300 | - | ||||||
| Post-acquisition capitalized improvements | - | - | ||||||
| Total gross investment in residential rental properties | $ | 809 | $ | - | ||||
| Less: accumulated depreciation | (4 | ) | - | |||||
| Total residential rental properties, net | $ | 805 | $ | - | ||||
As of June 30, 2019, the carrying amount of the rental real estate properties above included capitalized transaction costs of approximately $17,000, which includes acquisition fees paid to the Sponsor of $15,000.
For the six months ended June 30, 2019, the Company recognized approximately $4,000 of depreciation expense on rental real estate properties.
| 5. | Above- and Below-Market Leases |
The Company recognizes acquired in-place “above-” and “below-market” leases as rental revenue over the original term of the respective leases. The impact of the acquired below-market leases increased revenue by approximately $2,000 for the six months ended June 30, 2019. The following table summarizes the scheduled amortization of the Company’s acquired below-market lease intangibles for each of the five succeeding years(amounts in thousands):
Acquired Below-Market Lease Intangibles | ||||
| Remainder of 2019 | $ | 2 | ||
| 2020 | 4 | |||
| 2021 | 4 | |||
| 2022 | 4 | |||
| 2023 | 4 | |||
| Thereafter | 25 | |||
| Total acquired below-market lease intangibles | $ | 43 | ||
| F-11 |
| 6. | Other Assets |
The balance in other assets is as follows (amounts in thousands):
As of June 30, 2019 | As of December 31, 2018 | |||||||
| Accounts receivable | $ | 50 | $ | - | ||||
| Due from related parties | 13 | - | ||||||
| Total other assets | $ | 63 | $ | - | ||||
| 7. | Distributions |
Distributions will be calculated based on members of record each day during the distribution period.
There have been no distributions declared to members or to the Sponsor and its affiliates during the six months ended June 30, 2019.
| 8. | Fair Value of Financial Instruments |
We are required to disclose an estimate of fair value of our financial instruments for which it is practicable to estimate the value. The fair value of a financial instrument is the amount at which such financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. For certain of our financial instruments, fair values are not readily available since there are no active trading markets as characterized by current exchanges by willing parties.
We determine the fair value of certain investments in accordance with the fair value hierarchy that requires an entity to maximize the use of observable inputs. The fair value hierarchy includes the following three levels based on the objectivity of the inputs, which were used for categorizing the assets or liabilities for which fair value is being measured and reported:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs).
Level 3 – Valuation generated from model-based techniques that use inputs that are significant and unobservable in the market. These unobservable assumptions reflect estimates of inputs that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow methodologies or similar techniques, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
As of June 30, 2019 and December 31, 2018, the Company’s significant financial instruments consist of cash and cash equivalents. The carrying amount of the Company’s financial instruments approximates their fair values due to their short-term nature.
| 9. | 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.
The Manager will be reimbursed for organizational and offering expenses incurred in conjunction with the Offering subject to meeting the Hurdle Rate. SeeNote 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, 2019.
| F-12 |
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, whether or not the Company ultimately acquires or originates the investment. The Company will reimburse the Manager for out-of-pocket expenses paid to third parties in connection with providing services to the Company. This does not include the Manager’s overhead, employee costs borne by the Manager, utilities or technology costs. Expense reimbursements payable to the Manager also may include expenses incurred by the Sponsor in the performance of services pursuant to a shared services agreement between the Manager and the Sponsor, including any increases in insurance attributable to the management or operation of the Company. For the six months ended June 30, 2019, the Manager incurred approximately $4,000 of costs on our behalf. Of these amounts, approximately $0 were due and payable as of June 30, 2019.
The Company will pay the Manager a quarterly asset management fee of one-fourth of 0.85% of our NAV, which, until December 31, 2019, will be based on our net offering proceeds as of the end of each quarter, and thereafter will be based on our NAV at the end of each prior semi-annual period.
The Manager has agreed, for a period from inception until June 30, 2019 (the “Fee Waiver Period”), to waive its asset management fee. Following the conclusion of the Fee Waiver Period, the Manager may, in its sole discretion, continue to waive its asset management fee, in whole or in part. The Manager will forfeit any portion of the asset management fee that is waived.
Accordingly, during the six months ended June 30, 2019, we did not incur any asset management fees, and as of June 30, 2019 and December 31, 2018, no asset management fees were payable to the Manager.
The Company may be charged by the Manager a development management fee of 5.00% of total development costs, excluding property. However, such development fee is only intended to be charged if it is net of a fee being charged by the developer of the direct equity investment project or if there is no outside developer of the direct equity investment project. Our Manager may, in its sole discretion, waive its development management fee, in whole or in part. The Manager will forfeit any portion of the development management fee that is waived. As of June 30, 2019 and December 31, 2018, no development management fees have been incurred or paid 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, 2019 and December 31, 2018, the Manager has not designated any asset as non-performing and no special servicing expenses have been incurred or paid to the Manager.
The Company will reimburse our Manager for actual expenses incurred on our behalf in connection with the liquidation of equity investments in real estate, and we will also pay the Manager an equity disposition fee of up to 1.50% of the gross proceeds from such sale if our Manager is acting as the real estate developer or is engaged by the developer to sell the project. Asof June 30, 2019 and December 31, 2018, no disposition expenses were incurred or payable 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 or its affiliates may close and fund a loan or other investment prior to it being acquired by us. The ability to warehouse investments 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, 2019, the Company did not make any investments that were warehoused or owned by 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, 2019, approximately $4,000 in fees were paid to the Independent Representative as compensation for those services.
Fundrise, L.P., Member
Fundrise, L.P. is a member of the Company and held 9,500 shares as of June 30, 2019.At December 31, 2018, Fundrise, L.P. had committed to purchase 9,500 common shares at $10.00, but had not yet purchased any common shares.One of our Sponsor’s wholly-owned subsidiaries is the general partner of Fundrise, L.P.
| F-13 |
As an alternative means of acquiring loans or other investments for which we do not yet have sufficient funds, Fundrise L.P. may provide capital to Fundrise Lending, LLC for the purposes of acquiring investments where there would otherwise be insufficient capital. During the six months ended June 30, 2019, Fundrise, L.P. did not provide capital to Fundrise Lending, LLC for the purposes of acquiring investments on behalf of the Company.
Rise Companies Corp, Member and Sponsor
Rise Companies Corp. is a member of the Company and held 500 common shares as of June 30, 2019 and December 31, 2018.
For the six months ended June 30, 2019, the Sponsor incurred approximately $2,000 of costs on our behalf. Of this amount, approximately $2,000 was due and payable as of June 30, 2019.
The following table presents the Company’s acquisition fees related to investments in residential real estate properties paid to the Sponsor (amounts in thousands):
For the Six Months Ended June 30, 2019 | ||||
| Acquisition fees incurred and paid to the Sponsor | $ | 15 | ||
| Total | $ | 15 | ||
| 10. | Economic Dependency |
Under various agreements, the Company has engaged or will engage Fundrise Advisors, LLC and its affiliates to provide certain services that are essential to the Company, including asset management services, asset acquisition and disposition decisions, the sale of the Company’s common shares available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations. As a result of these relationships, the Company is dependent upon Fundrise Advisors, LLC and its affiliates. In the event that these companies were unable to provide the Company with the respective services, the Company would be required to find alternative providers of these services.
| 11. | Commitments and Contingencies |
Reimbursable Organizational and Offering Costs
The Company has a contingent liability related to potential future reimbursements to the Manager for organizational and offering costs that were paid by the Manager on the Company’s behalf. As of June 30, 2019 and December 31, 2018, approximately $277,000 and $211,000 of organizational and offering costs incurred by the Manager may be subject to reimbursement by the Company in future periods, based on achieving specific performance hurdles as described inNote 2,Summary of Significant Accounting Policies – Organizational and Offering Costs.
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.
| 12. | Subsequent Events |
In connection with the preparation of the accompanying consolidated financial statements, we have evaluated events and transactions occurring through September 16, 2019 for potential recognition or disclosure.
| F-14 |
Investment in National Lending, LLC
In July 2019, our Manager formed a self-sustaining lending entity, National Lending, LLC (“National Lending”), which is financed by each of the eREITs affiliated with our Sponsor. National Lending is managed by an independent manager through a management agreement at a market rate that is customary for the industry. Each eREIT contributes an amount, generally not to exceed 3% of its assets under management (“AUM”). National Lending may generally provide short-term bridge financing through promissory notes to its contributors, allowing them to draw upon available cash in order to maintain greater liquidity and better finance their individual real estate investment strategies. The promissory notes will bear a market rate of interest and will be repaid via the capital raised by each of the borrowing eREITs’ offerings. All transactions between National Lending and the borrowers are reviewed by the Independent Representative. As of September 16, 2019, we have contributed $1,373,000 to National Lending and have not entered into any promissory notes with National Lending.
| F-15 |
| Item 4. | Exhibits |
INDEX OF EXHIBITS
| 9 |
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this Semiannual Report on Form 1-SA to be signed on its behalf by the undersigned, thereunto duly authorized, in Washington, D.C. on September 16, 2019.
| Fundrise Growth eREIT III, LLC | ||||
| By: | Fundrise Advisors, LLC, a Delaware limited liability company, its Manager | |||
| By: | /s/ Benjamin S. Miller | |||
| Name: | Benjamin S. Miller | |||
| Title: | Chief Executive Officer | |||
Pursuant to the requirements of Regulation A, this Annual Report has been signed below by the following persons on behalf of the issuer in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Benjamin S. Miller | Chief Executive Officer of | Monday, September 16, 2019 | ||
| Benjamin S. Miller | Fundrise Advisors, LLC | |||
| (Principal Executive Officer) | ||||
| /s/ Benjamin S. Miller | Interim Chief Financial Officer and Treasurer of | Monday, September 16, 2019 | ||
| Benjamin S. Miller | Fundrise Advisors, LLC | |||
(Principal Financial Officer and Principal Accounting Officer) |
