7EMPIRE - 2019 Update
The 7EMPIRE project closed the construction loan in 2019, achieved building permits and began the 21-month construction process in May 2019.
From January to May the construction documents were design and a building permit was obtained. Demolition and site prep started in May and finished in June. July, August and September were site grading and excavation, a process that preps the site for foundations and concrete work, and site utility work for mechanical, electrical and plumbing.
October was the start of the concrete work , which as can be seen in the photos above entails laying rebar, forms and pouring concrete. Columns and the 2nd floor deck started to be erected in December. Current status is that 2 of the 3 sections of the site have a completed concrete slab. Section 1 has a completed concrete slab, columns and deck (2nd floor). Section 2 has a completed concrete slab and walls and columns are going up to support that deck. Section 3 rebar work is being completed and concrete pour should commence in January.
Overall the project was slower than it should have been to get mobilized and to get through the grading process. The project as of now is still on track to complete in 1Q 2021, but that timeline may be in some jeopardy with how long it is taking to finishing pouring section 3 of the site.
Currently even though there have been a few unforeseen costs, the overall construction budget remains within budget, with potential savings on the horizon.
The process to find a construction lender and negotiate terms was a long 6-month process. Involved were multiple interviews between Derek and Neal and potential lenders. There were a few choices of different lenders that offered different loan types. Ultimately Guardian Life Insurance was chosen as the lender because of the long term construction to permanent loan offered.
The loan is a long term 10 year term that allows for the same lender to provide the construction funding and the long-term loan. The advantages of this loan structure is there is a fixed interest rate (5.15%) and no pressure to refinance a short-term construction loan upon completion of construction. In the event that the market slows around the end of construction, the long term removes the risk of having any difficulty finding new financing. The downside that if interest rates decline or stay flat the interest rate today may end up being higher than what it could be when construction complete. Additionally not being able to refinance at the end of construction limits the amount of cash-out that might be earned in a refinance. In summary, for the financing we chose stability and less upside instead of slightly more risk for more upside on a refinancing.
The construction loan terms were finalized at the end of 2018 and the loan was officially closed in March 2019. Neal, Derek and the other two principals have signed on for partial loan recourse that will remain in place until the project in completed and fully leased.
The project costs in 2019 have been funded by equity contributions from TriForge (of which Fremont Village is a 30% partner) and our limited equity partner CFT. The total equity requirement is $24 million, 85% is being fulfilled by CFT ($20.4 million) and the remaining $3.6 million is being fulfilled by TCP. Fremont Village's portion of the $3.6 million is $1.08 million.
Currently (as of Dec 2019) TCP has contributed about $2 million in equity, with $600,000 being the Fremont Village portion. Another $408,000 will be contributed this quarter (1Q 2020), at which point the loan will begin funding. Fremont Village has contributed $300,000 in cash and Neal has contributed $300,000 in developer fees (earned from the 7EMPIRE project) that instead of earning he chose to re-contribute on Fremont Village's behalf to reduce the cash needs from Fremont Village in 2019. This $300K developer fee contribution will eventually need to be replaced by a cash investment from Fremont Village. Currently Fremont Village has a $300,000 liability to Neal.
In 2020, 7EMPIRE will get through about 80% of the construction phase and at the end of 2020 the structure should be complete and the construction work will be mostly interior focused. Tenant marketing will begin in 4Q 2020 or 1Q 2021. The construction loan will pick up most of the funding needs in 2020, unless the project exceeds budget.
The rental market in Japantown continues to hold and grow, although the rent growth is not as aggressive as it has been in years past. The other large project in Japantown (a 500-unit project) that is located a block away is under construction. The prevailing thought was that this larger project was going to be phased, but the developer of that site is currently underway on all 500 units. More high-quality residential and retail product in Japantown will have a positive effect on 7EMPIRE in the long-term, but will put pressure on lease-up in the short-term. Since 7EMPIRE is structured for a long-term hold, ultimately other high-quality developments in the neighborhood will only add to the value of our investment.