Taking a page from websites like Kickstarter and Indiegogo, real estate upstarts like Fundrise, Property Peers, Realty Mogul and Prodigy Network, which is based in New York, are transforming the way real estate projects are built and who profits from them. They allow the public to invest in an asset class that has traditionally been the exclusive domain of wealthy investors and private equity firms.
“It’s a very simple concept,” said Daniel Miller, co-founder of Fundrise. “You should be able to invest in your neighbourhood.” Mr Miller, 25, and his brother Benjamin, 36, are the pioneers behind Fundrise, a Web platform that lets communities invest in local real estate projects.
Sons of a prominent developer in the Washington area, the brothers began wondering a few years ago why people in a community, like the transitional H Street NE neighbourhood near Dupont Circle, could not have more of a say in what was being built there.
They realised that who the investors are and where the money comes from determine what gets built: Distant private equity backers who see a deal as simply an investment vehicle tend to put up cookie-cutter projects and strip malls anchored by chain stores – hardly what the community might want or need.
“Who your money is affects what you build, but no one ever thinks about that,” said Benjamin Miller, who also co-founded a site called Popularise that lets developers solicit input from the community. “We’re taking an institutional asset and changing who gets to invest in it.”
A faded two-story brick building on Washington’s H Street seems an unlikely site for a revolution. But the unassuming structure on Monday became the latest commercial development project to be open to public investment.
Financial stakes in the renovation project were offered to residents of Washington and Virginia on Fundrise.com. By Tuesday morning, investors had snapped up 1,500 shares priced at US$100 a share. All told, 3,500 shares were offered to the public – or 25 per cent of the project cost (the rest was raised from private investors and West Mill Capital, the Millers’ development firm).
Cameron Cook, a 25-year-old project manager and Web developer who lives close to H Street NE, was among the first to invest, paying US$1,000 for 10 shares. In addition to the potential financial gain – an estimated 7 per cent annual dividend from rental revenue plus appreciation in the property – he was drawn to the novelty of the idea and the ability to directly take part in the neighbourhood’s revival.
“I think it’s cool that the community can be more in control of what’s happening around them,” Mr Cook said.
That seemingly simple idea is a radical departure from conventional practice and requires some financial and regulatory gymnastics. Under current law, only wealthy “accredited” investors (typically those with a net worth of US$1 million or more) are allowed to invest in private firms.
But recent changes to securities laws ushered in by the Jumpstart Our Business Startups Act, signed into law in April 2012, will soon make it much easier for the Millers and other new-breed developers to “crowdfund” real estate.
Lately, the Miller brothers have been to New York, where they talked with developers about using the Fundrise platform on community-scale projects in the US$500,000 to US$1 million range. They have been in touch with Jason Goodman, the chief executive of Third Ward, which is building a 30,000 square foot commercial kitchen and incubator in the Crown Heights section of Brooklyn, and Dan Biederman, the developer behind the Bryant Park revival.
In their first New York partnership, they teamed up with Glauco Lolli-Ghetti, founder and principal of Urban Muse, to bid for rights to develop a parcel on the northern edge of the Brooklyn Bridge Park development project.
The site, a fenced-in lot adjacent to the Manhattan Bridge, is zoned for up to 130 residential units as well as ground-floor retail. Mr Lolli-Ghetti envisions a 120,000 square foot building designed by Snohetta, which created the Norwegian Opera House and the Sept 11 Memorial & Museum.
Under the joint bid, Urban Muse would allow New Yorkers to invest up to US$1 million in the retail component.
“Retail is such an amenity, I wanted it to be woven into the community,” said Mr Lolli-Ghetti, although he worries that city officials handling the request for proposals might consider public participation “a gimmick”. He is not sure crowdfunding is suited to large, complex projects.
“In real estate, US$10 million to US$20 million projects are easy,” he said. “But if you need US$500,000 to buy a (small) property and put a local tenant on the street floor, you can’t do it. It’s too small for private equity.”
Mr Goodman of Third Ward, the co-working and educational space in Bushwick, is a long-term leaseholder who said owning the building through usual lending would require putting 50 per cent down in cash – or US$7.5 million, an amount out of reach for now.
Buying it with the help of small investors is “something we’ve started to explore again”, he said. (Its Crown Heights commercial kitchen project opening next year is largely financed by Goldman Sachs.) The Third Ward mailing list of 80,000 people, 3,000 members, 15 investors and thousands of students who have taken classes there over the past six years could be a ready investor base.
“Many of them would be very interested in different ways of participating,” Mr Goodman said. “This is game-changing for small businesses like ours but also for the neighbourhood. It’s bottom-up development instead of top-down, and that is totally unique. Nobody understands a neighbourhood better than the people who live there or are stakeholders.
“To me, it’s like, why hasn’t this already happened?” – NYT
Source: BT Perium – AMY CORTESE