UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
SPECIAL FINANCIAL REPORT
SPECIAL FINANCIAL REPORT PURSUANT TO
REGULATION A OF THE SECURITIES ACT OF 1933
For the Semiannual Period Ended June 30, 2018
Fundrise Income eREIT II, LLC
(Exact name of registrant as specified in its charter)
Commission File Number: 024-10844
| Delaware | 61-1775114 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 1601 Connecticut Ave. NW, Suite 300 Washington, DC (Address of principal executive offices) |
20009 (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)
Item 3. Financial Statements
Index to Financial Statements of Fundrise Income eREIT II, LLC
| Balance Sheets | F-2 |
| Statements of Operations | F-3 |
| Statement of Member’s Equity | F-4 |
| Statements of Cash Flows | F-5 |
| Notes to Financial Statements | F-6 to F-11 |
| F-1 |
Balance Sheets
| As of June 30, 2018 (unaudited) | As of December 31, 2017 (*) | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 5,000 | $ | 5,000 | ||||
| Total Assets | $ | 5,000 | $ | 5,000 | ||||
| MEMBER’S EQUITY | ||||||||
| Common shares; unlimited shares authorized; 500 shares issued and outstanding | $ | 5,000 | $ | 5,000 | ||||
| Total Member’s Equity | 5,000 | 5,000 | ||||||
| Total Liabilities and Member’s Equity | $ | 5,000 | $ | 5,000 | ||||
*Derived from audited financial statements.
The accompanying notes are an integral part of these financial statements.
| F-2 |
Statements of Operations
| For the Six Months Ended June 30, 2018 (unaudited) | For the Six Months Ended June 30, 2017 (unaudited) | |||||||
| Income | ||||||||
| Interest income | $ | - | $ | - | ||||
| Rental income | - | - | ||||||
| Total income | - | - | ||||||
| Expenses | ||||||||
| Asset management and other fees – related party | - | - | ||||||
| General and administrative expenses | - | - | ||||||
| Total expenses | - | - | ||||||
| Net income (loss) | $ | - | $ | - | ||||
The accompanying notes are an integral part of these financial statements. In the opinion of management, all adjustments necessary, in order to make the interim financial statements not misleading, have been included.
| F-3 |
Statement of Member’s Equity
For the Six Months Ended June 30, 2018 (unaudited)
| Retained | ||||||||||||||||
| Earnings | Total | |||||||||||||||
| Common Shares | (Accumulated | Member’s | ||||||||||||||
| Shares | Amount | deficit) | Equity | |||||||||||||
| December 31, 2017 | 500 | $ | 5,000 | $ | - | $ | 5,000 | |||||||||
| Proceeds from issuance of common shares | - | - | - | - | ||||||||||||
| Offering costs | - | - | - | - | ||||||||||||
| Distributions declared on common shares | - | - | - | - | ||||||||||||
| Redemptions of common shares | - | - | - | - | ||||||||||||
| Net income (loss) | - | - | - | - | ||||||||||||
| June 30, 2018 | 500 | $ | 5,000 | $ | — | $ | 5,000 | |||||||||
The accompanying notes are an integral part of these financial statements.
| F-4 |
Statements of Cash Flows
| For the Six Months Ended June 30, 2018 (unaudited) | For the Six Months Ended June 30, 2017 (unaudited) | |||||||
| OPERATING ACTIVITES: | ||||||||
| Net income (loss) | $ | - | $ | - | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Net increase in interest receivable | - | - | ||||||
| Net increase in accounts payable and accrued expenses | - | - | ||||||
| Net cash provided by (used in) operating activities | - | - | ||||||
| INVESTING ACTIVITIES: | ||||||||
| Acquisition of real estate | - | - | ||||||
| Net cash provided by (used in) investing activities | - | - | ||||||
| FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common shares | - | - | ||||||
| Distributions paid | - | - | ||||||
| Net cash provided by (used in) financing activities | - | - | ||||||
| Net increase (decrease) in cash and cash equivalents | - | - | ||||||
| Cash and cash equivalents, beginning of period | 5,000 | 5,000 | ||||||
| Cash and cash equivalents, end of period | $ | 5,000 | $ | 5,000 | ||||
The accompanying notes are an integral part of these financial statements.
| F-5 |
Notes to the Financial Statements (Unaudited)
| 1. | Formation and Organization |
Fundrise Income eREIT II, LLC (the “Company”) was formed on November 19, 2015, as a Delaware Limited Liability Company and intends to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. The Company was organized primarily to originate, invest in and manage a diversified portfolio of commercial real investments and other real estate-related assets. The Company may make its investments through majority-owned subsidiaries, some of which may have rights to receive preferred economic returns. Substantially all of the Company’s business will be 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”).
As of June 30, 2018, the Company has not begun operations.
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.
On May 30, 2018, the Company filed an initial offering statement on Form 1-A with the SEC with respect to an offering (the “Offering”) of up to $50.0 million in common shares, for an initial price of $10.00 per share. This Offering was qualified by the SEC on August 22, 2018.
A maximum of $50.0 million in the Company’s common shares may be sold to the public in the initial offering, once qualified. The Manager has the authority to issue an unlimited number of common shares. As of June 30, 2018 and December 31, 2017, the Company had issued 500 common shares to Rise Companies Corp. (the “Sponsor”), an owner of the Manager, for an aggregate purchase price of $5,000. In addition, Fundrise, L.P., an affiliate of the Sponsor, has committed to purchase an aggregate of 9,500 common shares at $10.00 per share in a private placement for an aggregate purchase price of $95,000 due on a date no later than the date on which the Company raises and accepts at least $1.0 million in this Offering.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying financial statements of the Company are prepared on the accrual basis of accounting and conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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, 2017 balance sheet and certain disclosures are derived from the Company’s December 31, 2017 audited financial statements. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s offering circular, which was filed with the SEC. The financial statements as of June 30, 2018 and for the six months ended June 30, 2018 and 2017, 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-6 |
Estimates
The preparation of the 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 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 consist of money market funds, demand deposits and highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at cost which approximates fair value.
Cash may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250,000 per institution. The Company mitigates credit risk by placing cash with major financial institutions. To date, the Company has not experienced any losses with respect to cash.
Organizational and Offering Costs
Organization and offering costs of the Company are initially being paid by the Manager on behalf of the Company. These organization and offering costs include all expenses to be paid by the Company in connection with the formation of the Company and the qualification of the Offering, and the marketing and distribution of shares, including, without limitation, expenses for printing, and amending offering statements or supplementing offering circulars, mailing and distributing costs, telephones, Internet and other telecommunications costs, all advertising and marketing expenses, charges of experts and fees, expenses and taxes related to the filing, registration and qualification of the sale of shares under federal and state laws, including taxes and fees and accountants’ and attorneys’ fees. The Company anticipates that, 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 organization and offering costs paid by them on behalf of the Company. The Manager has decided that the Company shall only reimburse the Manager for the organization 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 organization 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 can never exceed 0.50% of the aggregate gross offering proceeds from the Offering provided. 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 organization and offering costs, plus new costs incurred since the last reimbursement payment, exceeds the reimbursement limit described above for the applicable monthly installment, the excess will be eligible for reimbursement in subsequent months (subject to the 0.50% limit), calculated on an accumulated basis, until the Manager has been reimbursed in full.
The Company will book a liability for organization 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. When the Company’s NAV exceeds the Hurdle Rate, it will book a liability with a corresponding reduction to equity for offering costs, and a liability and a corresponding expense to general and administrative expenses for organization costs.
As of June 30, 2018 and December 31, 2017, the Manager had incurred total organizational and offering costs of approximately $280,000 and $247,000, respectively, on behalf of the Company. However, because the Company has not yet begun operations and because the Hurdle Rate has not been met, no costs are eligible to be reimbursed to the Manager.
| F-7 |
Share Redemptions
Share repurchases are recorded as a reduction of common share par value under our redemption plan, pursuant to which we may elect to redeem shares at the request of our members, subject to certain exceptions, conditions, and limitations. The maximum number of shares purchasable by us in any period depends on a number of factors and is at the discretion of our Manager.
The Company has adopted a redemption plan whereby, on a monthly basis, an investor has the opportunity to obtain liquidity monthly, following a minimum 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 accordance with the SEC’s current guidance on redemption plans, we 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 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 commercial 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 commercial real estate assets are paid off or sold, but we do not intend to redeem more than 5.00% of the common shares outstanding during any calendar year. Notwithstanding the foregoing, we are not obligated to redeem common shares under the redemption plan.
In addition, our Manager may, in its sole discretion, amend, suspend, or terminate the redemption plan at any time without prior notice, including to protect our operations and our non-redeemed members, to prevent an undue burden on our liquidity, 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, 2018. 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 |
Accounting Pronouncements
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 difference effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B). By electing to extend the transition period for complying with new or revised accounting standards, these financial statements may not be comparable to companies that adopt accounting standard updates upon the public business entity effective dates.
| 3. | 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 public offering, and the acquisition, management and sale of the Company’s real estate investments.
The Manager will be reimbursed for organization and offering expenses incurred in conjunction with the Offering subject to meeting the Hurdle Rate. The Company will reimburse the Manager, subject to the reimbursement limit previously described, 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. See Note 2, “Summary of Significant Accounting Policies, Organizational and Offering Costs”.
The Company will pay the Manager a quarterly asset management fee of one-fourth of 0.85%, which, until December 31, 2018, 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 December 31, 2018 (the “fee waiver period”), to waive its asset management fee. Following the conclusion of the fee waiver period, our 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.
The Company will reimburse our Manager for actual expenses incurred on our behalf in connection with the special servicing of non-performing assets. The Manager will determine, in its sole discretion, whether an asset is non-performing.
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.
| F-9 |
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.
As June 30, 2018 and December 31, 2017, the Company had not purchased any investments from Fundrise Lending, LLC.
Fundrise, L.P.
Fundrise, L.P., an affiliate of the Sponsor, has committed to purchase an aggregate of 9,500 common shares at $10.00 per share in a private placement for an aggregate purchase price of $95,000 due on a date no later than the date on which the Company raises and accepts at least $1.0 million in this offering.
Additionally, as an alternative means of acquiring loans or other investments for which we do not yet have sufficient funds, Fundrise L.P. may provide capital to Fundrise Lending, LLC for the purposes of acquiring investments where there would otherwise be insufficient capital. As of June 30, 2018 and December 31, 2017, 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 the sole member of the Company and holds 500 shares as of June 30, 2018 and December 31, 2017.
Executive Officers of Our Manager
As of the date of these financial statements, the executive officers of our Manager and their positions and offices are as follows:
| Name | Position | |
| Benjamin S. Miller | Chief Executive Officer and Interim Chief Financial Officer and Treasurer | |
| Brandon T. Jenkins | Chief Operating Officer | |
| Bjorn J. Hall | General Counsel, Chief Compliance Officer and Secretary |
Benjamin S. Miller currently serves as Chief Executive Officer of our Manager and has served as Chief Executive Officer and Director of our Sponsor since its inception on March 14, 2012. As of February 9, 2016, Mr. Miller is also serving as Interim Chief Financial Officer and Treasurer of our Manager.
Brandon T. Jenkins currently serves as Chief Operating Officer of our Manager and has served in the same role for our Sponsor since February of 2014, prior to which time he served as Head of Product Development and Director of Real Estate.
Bjorn J. Hall currently serves as the General Counsel, Chief Compliance Officer and Secretary of our Manager and has served in such capacities with our Sponsor since February 2014.
| 4. | 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.
| F-10 |
| 5. | Commitments and Contingencies |
Legal Proceedings
As of the date of the 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.
| 6. | Subsequent Events |
Offering
The Offering was deemed qualified by the SEC on August 22, 2018. As of October 26, 2018, we had raised total gross offering proceeds of approximately $13.4 million from settled subscriptions (including the $100,000 received in the private placements to our sponsor, Rise Companies Corp., and Fundrise, L.P., an affiliate of our sponsor), and had settled subscriptions in our offering and private placements for a gross aggregate of approximately 1.34 million of our common shares.
New Investments
As of October 26, 2018, the Company has made real estate investments totaling approximately $6.8 million.
Distributions Payable
On September 4, 2018, the Manager of the Company declared its first daily distribution of $0.0019178082 per share (the “September 2018 Daily Distribution Amount”) for members of record as of the close of business on each day of the period commencing on September 6, 2018 and ending on September 30, 2018 (the “September 2018 Distribution Period”). The distributions are payable to members of record as of the close of business on each day of the September 2018 Distribution Period. The September 2018 distribution totaled approximately $20,000, and was paid on October 10, 2018.
On September 26, 2018, the Manager of the Company declared a daily distribution of $0.0019178082 per share (the “October 2018 Daily Distribution Amount”) for members of record as of the close of business on each day of the period commencing on October 1, 2018 and ending on October 31, 2018 (the “October 2018 Distribution Period”). The distributions are payable to members of record as of the close of business on each day of the October 2018 Distribution Period. The October 2018 distribution is scheduled to be paid prior to January 21, 2019.
Promissory Grid Note
On August 17, 2018, the Company entered into a promissory grid note, as borrower, with Rise Companies Corp., our Sponsor, as lender. The grid note serves as a means to provide liquidity during capital raising periods for the Company and the Sponsor’s other investment funds. The loan bears a 3.0% interest rate and expires on January 31, 2019. The total drawn between the ten noteholders may not exceed an aggregate amount of $10.0 million. On August 30, 2018, the Company drew on the grid note in the amount of approximately $6.8 million. On October 8, 2018, the Company repaid the entire balance of the promissory grid note including related interest of approximately $13,000.
| F-11 |
PART III – EXHIBITS
Index to Exhibits
| * | Previously filed. |
| F-12 |
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this special financial report on Form 1-SA to be signed on its behalf by the undersigned, thereunto duly authorized, in Washington, D.C. on October 26, 2018.
| Fundrise Income eREIT II, LLC | ||
| By: | Fundrise Advisors, LLC, its manager | |
| By: | /s/ Benjamin S. Miller | ||
| Name: | Benjamin S. Miller | ||
| Title: | Chief Executive Officer | ||
Pursuant to the requirements of Regulation A, this 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 | October 26, 2018 |
| Benjamin S. Miller | Fundrise Advisors, LLC (Principal Executive Officer) |
|
|
/s/ Benjamin S. Miller |
Interim Chief Financial Officer and Treasurer of Fundrise Advisors, LLC |
October 26, 2018 |
| Benjamin S. Miller | (Principal Financial Officer and Principal Accounting Officer) |
| F-13 |