Exhibit 99.(c)(2)
Fundrise MF JV 1, LLC
Delaware | 86-1581070 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
Consolidated Financial Statements
For the Period January 20, 2021 (Inception)
through December 31, 2021
For questions contact:
Telephone: (202) 584-0550
Email: investments@fundrise.com
11 Dupont Circle NW, 9th Floor
Washington, D.C. 20036
(202) 584-0550
Index to the CONSOLIDATED Financial Statements of
Fundrise MF JV 1, LLC
Independent Auditor’s Report | 3 |
Consolidated Balance Sheet | 4 |
Consolidated Statement of Operations | 5 |
Consolidated Statement of Members’ Equity | 6 |
Consolidated Statement of Cash Flows | 7 |
Notes to the Consolidated Financial Statements | 8 to 20 |
2 |
KPMG LLP Suite 900 8350 Broad Street McLean, VA 22102 |
To the Members
Fundrise MF JV 1, LLC:
Opinion
We have audited the consolidated financial statements of Fundrise MF JV 1, LLC and its subsidiaries (the Company), which comprise the consolidated balance sheet as of December 31, 2021, and the related consolidated statements of operations, members’ equity, and cash flows for the period from January 20, 2021 (Inception) to December 31, 2021, and the related notes to the consolidated financial statements.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the period from January 20, 2021 (Inception) to December 31, 2021, in accordance with U.S. generally accepted accounting principles.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the consolidated financial statements are available to be issued.
Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.
In performing an audit in accordance with GAAS, we:
• | Exercise professional judgment and maintain professional skepticism throughout the audit. |
• | Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. |
• | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. |
• | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements. |
• | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.
Other Supplementary Information
Management is responsible for the other supplementary information attached to the consolidated financial statements. The other supplementary information comprises balance sheets as of December 31, 2021 for each of the Company’s subsidiaries and related statements of operations for each of the Company’s subsidiaries for the period from January 20, 2021 (Inception) to December 31, 2021. Our opinion on the consolidated financial statements does not cover the other supplementary information, and we do not express an opinion or any form of assurance thereon. If, based on the work performed, we conclude that an uncorrected material misstatement of the other information exists, we are required to describe it in our report.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other supplementary information and consider whether a material inconsistency exists between the other supplementary information and the consolidated financial statements, or the other supplementary information otherwise appears to be materially misstated.
McLean, Virginia
February 25, 2022
KPMG LLP, a Delaware limited liability partnership and a member firm of
the KPMG global organization of independent member firms affiliated with
KPMG International Limited, a private English company limited by guarantee.
3 |
Fundrise MF JV 1, LLC
(Amounts in thousands)
December 31, 2021 | ||||
ASSETS | ||||
Cash | $ | 29,332 | ||
Restricted cash | 2,715 | |||
Other assets, net | 3,289 | |||
Derivative financial instruments | 111 | |||
Investments in real estate held for improvement | 5,152 | |||
Investments in rental real estate properties, net | 440,103 | |||
Total Assets | $ | 480,702 | ||
LIABILITIES AND MEMBERS’ EQUITY | ||||
Liabilities: | ||||
Accounts payable and accrued expenses | $ | 2,631 | ||
Due to related party | 147 | |||
Distributions payable | 1,116 | |||
Rental security deposits and other liabilities | 842 | |||
Mortgages payable, net | 263,181 | |||
Total Liabilities | 267,917 | |||
Total Members’ Equity | 212,785 | |||
Total Liabilities and Members’ Equity | $ | 480,702 |
The accompanying notes are an integral part of these consolidated financial statements.
4 |
Fundrise MF JV 1, LLC
Consolidated Statement of Operations
(Amounts in thousands)
For the Period January 20, 2021 (Inception) through | ||||
December 31, 2021 | ||||
Revenue | ||||
Rental revenue | $ | 17,221 | ||
Other property revenue | 1,598 | |||
Total revenue | 18,819 | |||
Expenses | ||||
Depreciation and amortization | 12,244 | |||
Property operating and maintenance | 8,025 | |||
General and administrative expenses | 386 | |||
Total expenses | 20,655 | |||
Other Expenses | ||||
Interest expense | (2,728 | ) | ||
Loss on derivative financial instrument | (29 | ) | ||
Total other expenses | (2,757 | ) | ||
Net loss | $ | (4,593 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
5 |
Fundrise MF JV 1, LLC
Consolidated Statement of Members’ Equity
(Amounts in thousands)
Operating Member | Investor Member | Total Members’ Equity | ||||||||||
January 20, 2021 (Inception) | $ | - | $ | - | $ | - | ||||||
Contributions | 22,204 | 199,840 | 222,044 | |||||||||
Distributions | (467 | ) | (4,199 | ) | (4,666 | ) | ||||||
Net loss | (459 | ) | (4,134 | ) | (4,593 | ) | ||||||
December 31, 2021 | $ | 21,278 | $ | 191,507 | $ | 212,785 |
The accompanying notes are an integral part of these consolidated financial statements.
6 |
Fundrise MF JV 1, LLC
Statement of Consolidated Cash Flows
(Amounts in thousands)
For the Period January 20, 2021 (Inception) through December 31, 2021 | ||||
OPERATING ACTIVITIES: | ||||
Net loss | $ | (4,593 | ) | |
Adjustments to reconcile net income to net cash provided by operating activities: | ||||
Depreciation and amortization | 12,244 | |||
Amortization of deferred financing fees | 525 | |||
Bad debt expense | 164 | |||
Loss on derivative financial instrument | 29 | |||
Changes in assets and liabilities: | ||||
Net increase in other assets, net | (2,287 | ) | ||
Net increase in accounts payable and accrued expenses | 2,631 | |||
Net increase in due to related party | 147 | |||
Net increase in rental security deposits and other liabilities | 842 | |||
Net cash provided by operating activities | 9,702 | |||
INVESTING ACTIVITIES: | ||||
Investment in rental real estate properties | (385,856 | ) | ||
Investment in real estate held for improvement | (5,152 | ) | ||
Net cash used in investing activities | (391,008 | ) | ||
FINANCING ACTIVITIES: | ||||
Capital contributions from Members | 154,387 | |||
Repayment of mortgage payable | (47,850 | ) | ||
Proceeds from mortgages payable | 312,188 | |||
Purchase of derivative financial instrument | (140 | ) | ||
Distributions paid to Members | (3,550 | ) | ||
Payment of deferred financing fees | (1,682 | ) | ||
Net cash provided by financing activities | 413,353 | |||
Net increase in cash and restricted cash | 32,047 | |||
Cash and restricted cash, beginning of period | - | |||
Cash and restricted cash, end of period | $ | 32,047 | ||
SUPPLEMENTAL CASH FLOW DISCLOSURES: | ||||
Cash paid for interest | $ | 1,884 | ||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||
Distributions payable to Members | $ | 1,116 | ||
Real estate investments contributed by Members | $ | 67,657 |
The accompanying notes are an integral part of these consolidated financial statements.
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Fundrise MF JV 1, LLC
Notes to the Consolidated Financial Statements
For the Period January 20, 2021 (Inception) through December 31, 2021
1. | Formation and Organization |
Fundrise MF JV 1, LLC was formed on January 20, 2021, as a Delaware limited liability company and is governed by a limited liability company operating agreement (the “Operating Agreement”). The “Company”, “we”, “us”, and “our” collectively refer to Fundrise MF JV 1, LLC and its subsidiaries except where the context otherwise requires. The Company is owned 10% by Fundrise Balanced eREIT II, LLC (the “Operating Member”) and 90% by Fundrise Real Estate Interval Fund, LLC (the “Investor Member”), collectively referred to as the Members. The Operating Member serves as the manager of the Company and has responsibility for day to day management and operation in accordance with the approved plans and budgets.
Our Members are externally managed by Fundrise Advisors, LLC (the “Manager”), which is an investment adviser registered with the Securities and Exchange Commission (“SEC”), and a wholly-owned subsidiary of Rise Companies Corp. (the “Sponsor”).
The Company was organized primarily to originate, invest in and manage a diversified portfolio of residential real estate properties. The Company substantially commenced operations on March 5, 2021 with the acquisition of FRMF-GTOWN-OPS, LLC, a stabilized garden style multifamily property totaling 270 units in Georgetown, TX. The Company acquired an additional six residential properties and one parcel of entitled land through December 31, 2021.
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting and in conformity with United States generally accepted accounting principles (“U.S. GAAP”).
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 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. There were no VIEs as of December 31, 2021.
All intercompany accounts and transactions have been eliminated in consolidation.
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
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.
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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.
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 generally be returned to us. The Company may pay a deposit for a property that is ultimately acquired by another fund affiliated with the Manager of our Members. Upon acquisition of the property, the related party fund would reimburse the Company for the full amount of the deposit. There were no instances of these deposit reimbursement transactions in the current year.
Rental Real Estate Properties and Real Estate Held for Improvement
Our investments in rental real estate properties and real estate held for improvement may include the acquisition of unimproved land, townhomes, or multifamily properties that are (i) held as rental properties or (ii) held for redevelopment or are in the process of being renovated.
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.
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, and other identified intangible assets and assumed liabilities) and allocates the purchase price (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. During this process, we also evaluate each investment for purposes of determining whether a property can be immediately rented (presented on the consolidated balance sheet as “Investments in rental real estate properties, net”) or will need improvements or redevelopment (presented on the consolidated balance sheet as “Investments in real estate held for improvement”).
The amortization of in-place leases is recorded to depreciation and amortization expense on the Company’s consolidated statement 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 lease intangibles is written off.
For rental real estate properties, significant improvements 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.
For real estate held for improvement, we capitalize the costs of improvement as a component of our investment in each property. These include renovation costs and other capitalized costs associated with activities that are directly related to preparing our properties for their intended use. Other costs may include interest, property taxes, property insurance, and utilities. The capitalization period associated with our improvement activities begins at such time that development activities commence and concludes at the time that a property is available to be rented or sold.
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 | |
Building | 25 – 35 years | |
Building improvements | 15 – 30 years | |
Site improvements | 10 – 20 years | |
Furniture and fixtures | 5 – 9 years | |
Lease intangibles | Over lease term |
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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 period January 20, 2021 (inception) through December 31, 2021, no such impairment occurred.
Deferred Financing Costs
Deferred financing costs are loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using a method which approximates the effective interest method. Deferred financing costs related to mortgage notes payable are recorded as reduction of the related debt on the accompanying consolidated balance sheet. The amortization of deferred financing costs is recorded within “Interest expense” on the accompanying consolidated statement of operations.
Income Taxes
The Company is treated as a pass-through entity for federal income tax purposes and, as such, is not subject to income taxes at the entity level. Rather, the distributive share of all items of income, gain, loss, deduction, or credit are passed through to the Members and reported on their respective tax returns. The Company’s federal tax status as a pass-through entity is based on its default classification as a limited liability company with more than one member, that is treated as a partnership. As of the date of these consolidated financial statements, the Company does not have any subsidiaries that pay tax at the entity level. Accordingly, these consolidated financial statements do not reflect a provision for income taxes and the Company has not taken any other tax positions which require disclosure.
The Company files various federal, state, and local tax returns within the United States. No returns are currently under examination; however, the statute of limitations of the Company’s federal tax returns generally remains open three years after the date of filing (state and local tax returns may remain open for an additional year depending upon the jurisdiction).
Revenue Recognition
Rental and other property revenues are recorded when due from tenants and recognized monthly as earned. Other property revenue consists primarily of administrative, application, and other transactional fees charged to tenants. Advance receipts of rental revenue are deferred until earned and presented as “Rental security deposits and other liabilities” on the consolidated balance sheet. We will periodically review the collectability of our tenant receivables and record an allowance for doubtful accounts for any estimated probable losses. Leases entered into for the rental of an apartment unit or townhome are generally year-to-year, renewable upon consent of both parties on an annual or monthly basis.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which eases the potential burden in accounting for reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company has not adopted any of the optional expedients or exceptions as of December 31, 2021. We will continue evaluating the impact of the adoption of this standard on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which changes the accounting for leases for both lessors and lessees. The guidance requires lessees to recognize right-of-use assets and lease liabilities for virtually all of their leases, including leases embedded in other contractual arrangements, among other changes. In June 2020, the FASB voted to delay the fiscal year effective date of this standard by one year, and the interim period effective date by one year. The standard will now be effective for annual reporting periods beginning after December 15, 2021. We are currently assessing the impact of this update on the presentation of our consolidated financial statements.
Due to the business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic, many lessors may provide rent deferrals and other lease concessions to lessees. While the lease modification guidance in ASC 840, Leases, addresses routine changes to lease terms resulting from negotiations between the lessee and the lessor, this guidance did not contemplate an exceptionally high volume of concessions being so rapidly executed to address the sudden liquidity constraints of certain lessees caused by the COVID-19 pandemic. In April 2020, the FASB issued a question and answer document that allows lessors to elect not to evaluate whether lease-related relief provided to mitigate the economic effects of COVID-19 is a lease modification under ASC 840. This election would allow lessors to bypass a lease-by-lease analysis, and instead choose to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. Lessors making this election would continue to recognize property rental revenue on a straight-line basis. Rent abatements would be recognized as reductions to property rental revenue during the period for which they relate. Rent deferrals would not impact the recognition of property rental revenue, but would result in an increase to tenant receivables during the deferral period.
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We did not grant any lease-related relief as a result of COVID-19 for the period ended December 31, 2021. In the future, we may be in discussions with tenants to grant concessions and additional lease-related relief, such as the deferral of lease payments, for a period of time. We have elected to account for possible COVID-19 related concessions provided to our tenants as a deferred payment in which we will continue to recognize revenue on the existing straight-line basis over the remaining applicable lease term. Any changes in payment will be recognized through rent receivables, which is recorded in “Other assets, net” in our consolidated balance sheet. Any identified uncollectible amounts related to the deferred payments will be recognized as an adjustment to rental revenue.
3. Investments in Rental Real Estate Properties and Real Estate Held for Improvement
Rental Real Estate Properties
For the period January 20, 2021 (inception) through December 31, 2021, the Company acquired seven rental real estate properties. The following table summarizes the asset acquisition allocation for our investments in rental real estate properties acquired in 2021 (amounts in thousands):
For the Period January 20, 2021 (inception) to December 31, 2021 | ||||
Land and land improvements | $ | 52,898 | ||
Building and building improvements | 382,429 | |||
Furniture, fixtures and equipment | 12,212 | |||
In-place leases | 5,660 | |||
Total acquisition cost (1) | $ | 453,199 |
(1) | Rental real estate properties acquired were funded with cash, contributions paid directly by Members, and mortgages payable. Total acquisition cost excludes approximately $314,000 of subsequent improvements in rental real estate properties. |
The following table presents the Company’s investments in rental real estate properties as of December 31, 2021 (amounts in thousands):
As of December 31, 2021 | ||||
Land and land improvements | $ | 53,108 | ||
Building and building improvements | 382,523 | |||
Furniture, fixtures and equipment | 12,222 | |||
Total gross investment in rental real estate properties | $ | 447,853 | ||
Less: Accumulated depreciation | (7,750 | ) | ||
Total investment in rental real estate properties, net | $ | 440,103 |
As of December 31, 2021, the carrying amount of the rental real estate properties above included cumulative capitalized transaction costs of approximately $7.3 million, which includes cumulative acquisition fees paid to an affiliate of the Members of approximately $4.5 million.
For the period January 20, 2021 (inception) through December 31, 2021, the Company recognized approximately $7.8 million of depreciation expense on rental real estate properties.
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Real Estate Held for Improvement
For the period January 20, 2021 (inception) through December 31, 2021, the Company acquired one real estate property held for improvement. The following table presents the Company’s investments in real estate held for improvement (amounts in thousands):
As of December 31, 2021 | ||||
Land | $ | 5,128 | ||
Work in progress | 24 | |||
Total investment in real estate held for improvement | $ | 5,152 |
As of December 31, 2021, real estate held for improvement included capitalized transaction costs of approximately $67,000, which includes cumulative acquisition fees paid to an affiliate of the Members of approximately $51,000.
4. Other Assets, net
The balance in other assets, net consists of the following (amounts in thousands):
As of December 31, 2021 | ||||
Tenant receivables, net | $ | 623 | ||
Prepaid insurance | 243 | |||
In-place lease assets, net | 1,166 | |||
Other prepaid expenses | 1,257 | |||
Total other assets, net | $ | 3,289 |
As of December 31, 2021 tenant receivables were recorded net of an allowance for credit losses of approximately $83,000. For the period January 20, 2021 (inception) through December 31, 2021, the Company recorded approximately $164,000 in bad debt expense.
For the period January 20, 2021 (inception) through December 31, 2021, amortization of in-place lease assets was approximately $4.5 million and is included in “Depreciation and amortization” in the consolidated statement of operations. The remaining in-place lease assets will be fully amortized in 2022.
5. Mortgage Payable
The following is a summary of the mortgage notes secured by the Company’s properties as of December 31, 2021 (amounts in thousands):
Borrower (3) | Amount of Loan | Interest Rate as of December 31, 2021 | Maturity Date(6) | Balance as of December 31, 2021 | ||||||||||
FRMF-GTOWN-OPS, LLC (1)(5) | $ | 27,500 | SOFR (.25% floor) + 1.50% margin | 03/04/2022 | $ | 27,500 | ||||||||
FRMF-ODESSA, LLC (1)(4) | $ | 64,501 | SOFR (0% floor) + 2.31% margin | 12/30/2031 | $ | 64,501 | ||||||||
FRMF-MAITLAND, LLC (2) | $ | 45,719 | LIBOR + 1.65% spread (with a 1.65% total floor) | 06/02/2022 | $ | 45,719 | ||||||||
FRMF-CHARLESTON, LLC (1) | $ | 31,405 | LIBOR Rate x Statutory Reserve Rate (0% floor) + 1.65% margin | 07/29/2023 | $ | 31,405 | ||||||||
FRMF-HUMBLE, LP (2) | $ | 27,913 | LIBOR + 1.65% spread (with a 1.65% total floor) | 08/25/2022 | $ | 27,913 | ||||||||
FRMF-PINELLAS, LLC (2) | $ | 37,000 | LIBOR + 1.65% spread (with a 1.65% total floor) | 10/14/2022 | $ | 37,000 | ||||||||
FRMF-WOODLANDS, LP (1) | $ | 30,300 | SOFR (0% floor) + 1.50% margin | 10/28/2022 | $ | 30,300 |
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(1) | The loan calls for interest-only payments for the entire term of the loan and a principal balloon payment at maturity, with no options to extend. |
(2) | The loan calls for interest-only payments for the entire term of the loan and a principal balloon payment at maturity, with one option to extend, for an additional one-year period with the extension option at our discretion subject to meeting certain requirements. |
(3) | Each loan above was entered into or assumed by a wholly owned subsidiary (each a Borrower) of the Company. Each Borrower is a separate legal entity from its affiliates and therefore the assets and credit of each Borrower are not available to satisfy the debts and other obligations of any affiliates or any other entity. The Operating Member is the guarantor, under certain circumstances outlined in the loan agreements, of each of the loans above. |
(4) | On March 9, 2021, FRMF-Odessa, LLC entered into a loan of approximately $47.9 million in connection with the acquisition of the FRMF – Odessa, LLC real estate rental property ("Acquisition Loan"). On December 30, 2021 FRMF-Odessa, LLC refinanced the Acquisition Loan for longer-term debt in the amount of approximately $64.5 million maturing in 2031. In connection with this refinancing, the Acquisition Loan was repaid in full on December 30, 2021. As of December 31, 2021 no interest or principal was outstanding related to the Acquisition Loan. |
(5)
(6) | The Operating Member and National Lending, LLC, an affiliate of the Operating Member, are the guarantors, under certain circumstances outlined in the loan agreement, of the FRMF-GTOWN-OPS, LLC mortgage loan. The Company intends to obtain alternative financing or exercise available extension options in advance of certain of the forthcoming mortgage loan maturity dates. |
For the period January 20, 2021 (inception) through December 31, 2021, we incurred interest expense of approximately $2.7 million, of which $314,000 remained payable as of December 31, 2021.
The mortgage notes contain various financial and non-financial covenants. Included in these covenants are general liquidity, net worth, and contingent liability requirements for the Company and its Members. As of December 31, 2021, the Company and Members were in compliance with all financial covenants per the mortgage notes.
As of December 31, 2021, total financing costs incurred were approximately $1.6 million, including $625,000 related to the refinance of the FRMF-Odessa, LLC loan on December 30, 2021. Unamortized financing costs are reflected on the consolidated balance sheet as a reduction to the related mortgage payable. For the period January 20, 2021 (inception) through December 31, 2021, amortization of financing costs was approximately $525,000 and is included within “Interest expense” in the consolidated statement of operations.
The following table presents the future principal payments due under the Company’s mortgage notes as of December 31, 2021 (dollar amounts in thousands):
Year | Amount | |||
2022 | $ | 168,432 | ||
2023 | 31,405 | |||
2024 | - | |||
2025 | - | |||
2026 | - | |||
Thereafter | 64,501 | |||
Total | $ | 264,338 |
6. Derivative Financial Instrument
Effective December 29, 2021, we entered into an interest rate cap agreement for $140,000 with a notional amount of approximately $64.5 million and a strike rate of 3.69% to manage our exposure to interest rate risk on the FRMF-ODESSA, LLC variable rate debt (see Note 5). The interest rate cap is not for trading or other speculative purposes.
The interest rate cap agreement matures on January 1, 2025. We have not designated the interest rate cap as a cash flow hedge, therefore the derivative does not qualify for hedge accounting. Accordingly, changes in the fair value of the interest rate cap are recognized immediately through earnings. For the period January 20, 2021 (inception) through December 31, 2021, we recognized a loss on the interest rate cap of approximately $29,000, recorded as “Loss on derivative financial instrument” in our consolidated statement of operations.
The fair value of our derivative is estimated based on observable market inputs, such as interest rate, term to maturity and volatility, as well as unobservable inputs, such as estimates of current credit spreads. The fair value of our derivative instrument as of December 31, 2021 is shown below (dollar amounts in thousands):
Derivative Instrument | Notional Amount | Effective Date | Maturity Date | Fair Value as of December 31, 2021 | ||||||||
Interest Rate Cap | $ | 64,501 | 12/29/2021 | 1/1/2025 | $ | 111 |
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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. The fair value of a financial instrument is the price that would be received to sell an asset or would be paid 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 market participants.
We determine the fair value of certain investments in accordance with the fair value hierarchy that requires an entity to maximize the use of observable inputs. The fair value hierarchy includes the following three levels based on the objectivity of the inputs, which were used for categorizing the assets or liabilities for which fair value is being measured and reported:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs).
Level 3 – Valuation generated from model-based techniques that use inputs that are significant and unobservable in the market. These unobservable assumptions reflect estimates of inputs that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow methodologies or similar techniques, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
As of December 31, 2021, the Company’s significant financial instruments consist of cash and cash equivalents, restricted cash, the derivative financial instrument, and mortgage payables.
The carrying amount of the Company’s cash and cash equivalents and restricted cash as of December 31, 2021 approximates fair value due to its short-term nature.
The only asset or liability as of December 31, 2021 that is recorded at fair value on a recurring basis is the derivative financial instrument. As of December 31, 2021, management estimated the fair value of our derivative financial instrument to be approximately $111,000. We classify these fair value measurements as Level 2 as we use significant other observable inputs such as interest rate, term to maturity and volatility.
As of December 31, 2021, the mortgages payable outstanding principal carrying value was approximately $264.3 million, and the aggregate fair value approximated its carrying value. We classify the mortgage payable fair value measurements as Level 3 as we use significant unobservable inputs and management judgement. The methods utilized generally included a discounted cash flow method (an income approach) and recent investment method (a market approach). Significant inputs and assumptions include the market-based interest or preferred return rate, loan to value ratios, and expected repayment and prepayment dates.
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. Members’ Equity
Capital contributions are required from the Members on a pro rata basis as defined in the Operating Agreement. For the period January 20, 2021 (inception) through December 31, 2021, capital contributions totaled approximately $222.0 million.
Distributions shall be made to the Operating Member and the Investor Member pro rata in proportion to their respective ownership percentages. For the period January 20, 2021 (inception) through December 31, 2021, the Company’s total distributions declared to Members was approximately $4.7 million. Approximately $1.1 million of distributions were payable as of December 31, 2021.
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The Company’s net income or loss are allocated to Operating Member and the Investor Member pro rata in proportion to their respective ownership percentages.
9. Property Management Agreements
In connection with the acquisitions described in Note 3, the Company entered into seven property management agreements with third parties for a one year period. Four of the agreements shall automatically be extended for successive periods of one year. These agreements may be terminated by either party after the end of the initial term if one party gives the other party at least 30 days advanced written notice of its intent not to renew the agreement. Property management fees for these agreements range from 2.50% to 2.75% of gross receipts with a minimum management fee ranging from $5,000 to $5,750, as defined in the property management agreements. The remaining three agreements shall automatically continue on a month-to-month basis unless one party gives the other party written notice of its intent not to renew the agreement at least 60 days prior to the expiration date of the agreement. Property management fees for these agreements are equal to 2.5% of gross collections with a minimum management fee of $8,500, as defined in the property management agreements.
For the period January 20, 2021 (inception) through December 31, 2021, the Company incurred property management fees of approximately $483,000, which are included in property operating and maintenance expense on the accompanying consolidated statement of operations.
10. Related Party Transactions
Operating Expenses
Under the terms of the Operating Agreement, the Company shall pay or reimburse the Operating Member for expenses incurred directly related to the operation, maintenance, and administration of the Company. For the period January 20, 2021 (inception) through December 31, 2021, the Operating Member incurred approximately $122,000 of reimbursable operating costs on our behalf. Approximately $107,000 of reimbursable operating costs were payable as of December 31, 2021.
Acquisition Fees
During 2021, we paid an affiliate of the Members a one-time acquisition fee equal to 1.0% of the purchase price of each real estate property acquired. Acquisition fees are capitalized in rental real estate properties and real estate held for improvement in the consolidated balance sheet. For the period January 20, 2021 (inception) through December 31, 2021, total acquisition fees paid to the affiliate were approximately $4.5 million.
Guaranty of Mortgage Payable
As discussed in Note 5, National Lending, LLC, an affiliate of the Operating Member, is a guarantor, under certain circumstances outlined in the loan agreement, of the FRMF-GTOWN-OPS, LLC mortgage loan.
11. Commitments and Contingencies
Litigation
In the ordinary course of business, we may become subject to litigation or claims. As of December 31, 2021, there were no material pending legal proceedings to which the Company is a party.
Although there can be no assurance, we are not aware of any material environmental liabilities that could have a material adverse effect on our financial position or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of property in the vicinity of the Company’s real estate investment, the activities of tenants and other environmental conditions of which we are unaware with respect to our real estate investment could result in future environmental liabilities.
12. Subsequent Events
In connection with the preparation of the accompanying consolidated financial statements, we have evaluated events and transactions occurring through February 25, 2022, for potential recognition or disclosure.
Contributions
As of February 25, 2022, the Company has received an additional $25.0 million in capital contributed by its Members.
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Affiliated Services Agreement
Effective January 1, 2022, the Company entered into a real estate services agreement (the “Service Agreement”) with Fundrise Real Estate, LLC, a subsidiary of the Sponsor. The Service Agreement outlines various services Fundrise Real Estate, LLC agrees to perform as an independent contractor on a non-exclusive basis, including but not limited to real estate asset management, origination and acquisition services, loan servicing, and development and entitlement services. Compensation for such services will be paid to Fundrise Real Estate, LLC as described in the Service Agreement beginning on January 1, 2022. As of February 25, 2022, approximately $249,000 in fees are payable to Fundrise Real Estate, LLC.
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Supplementary Information
Consolidating Balance Sheet
(Amounts in thousands)
Fundrise MF JV 1, LLC | Fundrise MF PORTFOLIO, LLC | FRMF-GTOWN-OPS, LLC | FRMF-ODESSA, LLC | FRMF-MAITLAND, LLC | FRMF-CHARLESTON, LLC | |||||||||||||||||||
rounded | rounded | rounded | rounded | rounded | rounded | |||||||||||||||||||
As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 3,725 | $ | - | $ | 1,794 | $ | 18,138 | $ | 1,347 | $ | 567 | ||||||||||||
Restricted cash | - | - | 198 | 696 | 121 | 593 | ||||||||||||||||||
Other assets, net | 1,320 | 1 | 81 | 97 | 102 | 351 | ||||||||||||||||||
Derivative financial instruments | - | - | - | 111 | - | - | ||||||||||||||||||
Investments in subsidiaries | 145,797 | 145,797 | - | - | - | - | ||||||||||||||||||
Investments in real estate held for improvement | - | - | - | - | - | - | ||||||||||||||||||
Investments in rental real estate properties, net | - | - | 49,202 | 85,317 | 81,577 | 54,623 | ||||||||||||||||||
Total Assets | $ | 150,842 | $ | 145,798 | $ | 51,275 | $ | 104,359 | $ | 83,147 | $ | 56,134 | ||||||||||||
LIABILITIES AND MEMBERS' EQUITY | ||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
Accounts payable and accrued expenses | $ | 100 | $ | 3 | $ | 135 | $ | 101 | $ | 67 | $ | 164 | ||||||||||||
Due to related party | 133 | 14 | - | - | - | - | ||||||||||||||||||
Distributions payable to Owner | - | - | 150 | 400 | 300 | 150 | ||||||||||||||||||
Distributions payable | 1,116 | - | - | - | - | - | ||||||||||||||||||
Rental security deposits and other liabilities | - | - | 109 | 153 | 159 | 126 | ||||||||||||||||||
Mortgages payable, net | - | - | 27,494 | 63,862 | 45,451 | 31,286 | ||||||||||||||||||
Total Liabilities | 1,349 | 17 | 27,888 | 64,516 | 45,977 | 31,726 | ||||||||||||||||||
Total Members' Equity | 149,493 | 145,781 | 23,387 | 39,843 | 37,170 | 24,408 | ||||||||||||||||||
Total Liabilities and Members' Equity | $ | 150,842 | $ | 145,798 | $ | 51,275 | $ | 104,359 | $ | 83,147 | $ | 56,134 |
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FRMF-HUMBLE, LP | FRMF-PINELLAS, LLC | FR HERON BAY, LLC | FRMF-WOODLANDS, LP | Eliminations | Fundrise MF JV 1, LLC Consolidated | |||||||||||||||||||
rounded | rounded | rounded | rounded | rounded | total | |||||||||||||||||||
As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 1,445 | $ | 859 | $ | - | $ | 1,457 | $ | - | $ | 29,332 | ||||||||||||
Restricted cash | 188 | 150 | - | 769 | - | 2,715 | ||||||||||||||||||
Other assets, net | 620 | 430 | 1,202 | 405 | (1,320 | ) | 3,289 | |||||||||||||||||
Derivative financial instruments | - | - | - | - | - | 111 | ||||||||||||||||||
Investments in subsidiaries | - | - | - | - | (291,594 | ) | - | |||||||||||||||||
Investments in real estate held for improvement | - | - | 5,152 | - | - | 5,152 | ||||||||||||||||||
Investments in rental real estate properties, net | 49,029 | 65,356 | - | 54,999 | - | 440,103 | ||||||||||||||||||
Total Assets | 51,282 | 66,795 | $ | 6,354 | $ | 57,630 | $ | (292,914 | ) | $ | 480,702 | |||||||||||||
LIABILITIES AND MEMBERS' EQUITY | ||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
Accounts payable and accrued expenses | 1,087 | 165 | $ | - | $ | 809 | $ | - | $ | 2,631 | ||||||||||||||
Due to related party | - | - | - | - | - | 147 | ||||||||||||||||||
Distributions payable to Owner | 100 | 110 | - | 110 | (1,320 | ) | - | |||||||||||||||||
Distributions payable | - | - | - | - | - | 1,116 | ||||||||||||||||||
Rental security deposits and other liabilities | 90 | 105 | - | 100 | - | 842 | ||||||||||||||||||
Mortgages payable, net | 27,883 | 36,934 | - | 30,271 | - | 263,181 | ||||||||||||||||||
Total Liabilities | 29,160 | 37,314 | - | 31,290 | (1,320 | ) | 267,917 | |||||||||||||||||
Total Members' Equity | 22,122 | 29,481 | 6,354 | 26,340 | (291,594 | ) | 212,785 | |||||||||||||||||
Total Liabilities and Members' Equity | 51,282 | 66,795 | $ | 6,354 | $ | 57,630 | $ | (292,914 | ) | $ | 480,702 |
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Supplementary Information
Consolidating Statement of Operations
(Amounts in thousands)
Fundrise MF JV 1, LLC | Fundrise MF PORTFOLIO, LLC | FRMF- GTOWN-OPS, LLC | FRMF- ODESSA, LLC | FRMF- MAITLAND, LLC | FRMF- CHARLESTON, LLC | |||||||||||||||||||
rounded | rounded | rounded | rounded | rounded | rounded | |||||||||||||||||||
For the Period January 20, 2021 (Inception) to December 31, 2021 | For the Period January 20, 2021 (Inception) to December 31, 2021 | For the Period January 20, 2021 (Inception) to December 31, 2021 | For the Period January 20, 2021 (Inception) to December 31, 2021 | For the Period January 20, 2021 (Inception) to December 31, 2021 | For the Period January 20, 2021 (Inception) to December 31, 2021 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Rental revenue | $ | - | $ | - | $ | 3,457 | $ | 5,613 | $ | 3,445 | $ | 1,671 | ||||||||||||
Other property revenue | - | - | 318 | 524 | 198 | 173 | ||||||||||||||||||
Total Revenue | - | - | 3,775 | 6,137 | 3,643 | 1,844 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Depreciation and amortization | - | - | 2,117 | 3,680 | 2,594 | 1,233 | ||||||||||||||||||
Property operating and maintenance | - | - | 1,851 | 2,189 | 1,485 | 975 | ||||||||||||||||||
General and administrative expenses | 225 | 16 | 57 | 88 | - | - | ||||||||||||||||||
Total Expenses | 225 | 16 | 4,025 | 5,957 | 4,079 | 2,208 | ||||||||||||||||||
Other Expenses | ||||||||||||||||||||||||
Interest expense | - | - | (434 | ) | (747 | ) | (846 | ) | (272 | ) | ||||||||||||||
Loss on derivative financial instrument | - | - | - | (29 | ) | - | - | |||||||||||||||||
Total Other Expenses | - | - | (434 | ) | (776 | ) | (846 | ) | (272 | ) | ||||||||||||||
Net Loss | $ | (225 | ) | $ | (16 | ) | $ | (684 | ) | $ | (596 | ) | $ | (1,282 | ) | $ | (636 | ) |
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FRMF-HUMBLE, LP | FRMF-PINELLAS, LLC | FR HERON BAY, LLC | FRMF-WOODLANDS, LP | Eliminations | Fundrise MF JV 1, LLC Consolidated | |||||||||||||||||||
rounded | rounded | rounded | rounded | rounded | total | |||||||||||||||||||
For the Period January 20, 2021 (Inception) to December 31, 2021 | For the Period January 20, 2021 (Inception) to December 31, 2021 | For the Period January 20, 2021 (Inception) to December 31, 2021 | For the Period January 20, 2021 (Inception) to December 31, 2021 | For the Period January 20, 2021 (Inception) to December 31, 2021 | For the Period January 20, 2021 (Inception) to December 31, 2021 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Rental revenue | $ | 1,436 | $ | 943 | $ | - | $ | 656 | $ | - | $ | 17,221 | ||||||||||||
Other property revenue | 225 | 79 | - | 81 | - | 1,598 | ||||||||||||||||||
Total Revenue | 1,661 | 1,022 | - | 737 | - | $ | 18,819 | |||||||||||||||||
Expenses | ||||||||||||||||||||||||
Depreciation and amortization | 1,018 | 1,034 | - | 568 | - | 12,244 | ||||||||||||||||||
Property operating and maintenance | 864 | 331 | - | 330 | - | 8,025 | ||||||||||||||||||
General and administrative expenses | - | - | - | - | - | 386 | ||||||||||||||||||
Total Expenses | 1,882 | 1,365 | - | 898 | - | 20,655 | ||||||||||||||||||
Other Expenses | ||||||||||||||||||||||||
Interest expense | (194 | ) | (146 | ) | - | (89 | ) | - | (2,728 | ) | ||||||||||||||
Loss on derivative financial instrument | - | - | - | - | - | (29 | ) | |||||||||||||||||
Total Other Expenses | (194 | ) | (146 | ) | - | (89 | ) | - | (2,757 | ) | ||||||||||||||
Net Loss | (415 | ) | $ | (489 | ) | $ | - | $ | (250 | ) | $ | - | $ | (4,593 | ) |
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