Tuesday, November 20, 2012

Crowdfunding Local Development

By Matt Tester, Project Manager.

As the reality of our Great Reset takes shape, I’ve developed a fascination with the question of how our places – infrastructure and buildings – will be financed and developed going forward. My last post covered a cadre of urbanists making waves with a fiscal argument for efficient infrastructure development that prioritizes local return. In this post, I want to highlight what I think is one of the most exciting ideas to land in the realm of placemaking: crowdfunded real estate development.

As covered by Emily Badger in Atlantic Cities (read the piece – it’s long and it’s good), Washington D.C.-based brothers Dan and Ben Miller have launched the first investment platform through which anyone can invest in local real estate projects. Their new company, Fundrise, provides a website listing local investment offerings (properties) in which anyone with a computer and money to invest can buy shares. What their existence means is that neighborhood residents can invest in neighborhood projects, shaping their community’s destiny in unprecedented ways.

According to its founders, Fundrise has arisen in response to a real estate development model that produces a disposable built environment while also excluding the average citizen from enjoying the bounty (historically) generated by commercial real estate projects. The predominant real estate investment vehicles are accessible only to certified investors and poorly account for local preferences, resulting in cookie-cutter properties. Citizens can’t invest in projects that most acutely impact their neighborhoods. Further, local projects that lack scale or fail to meet pre-defined criteria struggle to find capital. Quirky projects that local residents might love often fall through the cracks.

Fundrise’s early projects have shown promise. Shares for their first project, a two-story brick building in Northeast Washington, D.C., sold out in three months and design work will begin this year for the Asian-inspired market that will fill the space. Still, the crowdfunding model faces challenges. For instance, the Miller brothers have swallowed almost a million dollars navigating regulatory webs and developing the concept; most developers wouldn’t stomach those sunk costs. The potential for fraud certainly exists, just as it does in any complex investment. And, of course, the investment could tank – businesses fail and the buildings that house them sometimes share the same fate.

Despite the challenges, companies like Fundrise may be ushering in one of the most disruptive ideas to ever hit real estate development. The problem of up-front regulatory costs may be circumvented by Fundrise’s model, which would allow other developers to simply list their projects on the Fundrise website. If Fundrise provides the investment platform (think Kickstarter), each developer’s project wouldn’t require its own version. And, the more painless the process, the more interest developers will take, and the more we’ll see local residents pouring money into projects in their own neighborhoods. I, for one, would welcome the age of local development finance. I’ve already got my eye on a few properties in my neighborhood’s commercial district, and will be watching with interest.