Real estate upstarts like Fundrise are transforming the way real estate projects are built and who profits from them, by allowing the public to invest in an asset class that has traditionally been the exclusive domain of wealthy investors and private equity firms.
The practice of crowdfunding real estate is spreading from South America — where Prodigy Network recently raised around $239 million from 3,100 Colombians to build a 66-story skyscraper in Bogotá — to New York, where the developer Urban Muse is hoping to offer a slice of a Brooklyn Bridge Park project to the public.
Taking a page from Web sites 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, by allowing 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 neighborhood.”
Daniel 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 neighborhood, couldn’t have more of a say in what was being built there.
They realized 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 may 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 — at 906 H Street NE — 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 $100 a share. All told, 3,500 shares were offered to the public — or 25 percent 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 $1,000 for 10 shares. In addition to the potential financial gain — an estimated 7 percent 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 neighborhood’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 actually 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 $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.
Under that law, unaccredited investors may invest up to $2,000 a year, or 5 percent of their income or net worth (whichever is greater), in private firms, like a real estate limited liability company, as long as the investment takes place on a site or broker-dealer registered with the Securities and Exchange Commission. The law, however, has been bogged down at the S.E.C., which missed an end-of-year deadline to complete rules.
Until then, crowdfunding companies must either restrict investments to accredited investors or, as Fundrise has done, register each development project with the S.E.C. — a process that can take months and tens of thousands of dollars. For now, says Benjamin Miller, offerings are being subsidized to prove the concept. But the brothers hope that eventually the process of offering shares to the public will become much easier.
One of their first projects, 1351 H Street NE, a tear-down building in Washington’s H Street Northeast neighborhood, will include a Taiwanese ramen restaurant run by a chef with a local following, food stalls and a retail shop — an idiosyncratic project that would have been a hard sell for conventional investors. But scores of neighborhood residents were happy to invest an average of $2,000 each.
That first deal took three months to close. A subsequent offering — for $320,000 worth of shares in 1539 Seventh Street NW, a 3,600-square-foot building in the Shaw neighborhood — sold out in three hours. And the 906 H Street deal was on track to sell out.
The investing public will also benefit from appreciation of the property — a new streetcar line that will run down H Street is expected to accelerate a revival already under way and bolster real estate values.
Gina Schafer, the owner of several Ace hardware stores in the Washington area, invested in two Fundrise projects. “I thought it was cool the minute I saw it,” she said. “We don’t own our hardware store spaces, because real estate is so expensive here, but wish we could.” The H Street projects are “a way for us to get involved in the crazy D.C. real estate market and support our local community.” She said that her first dividend payment was on its way.
Lately, the Miller brothers have been to New York, where they talked with local developers about using the Fundrise platform on community-scale projects in the $500,000 to $1 million range. They have been in touch with Jason Goodman, the chief executive of Third Ward, the co-working space that 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 the John Street 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 September 11 Memorial and Museum.
Under the joint bid, Urban Muse would allow New Yorkers to invest up to $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 may consider public participation “a gimmick.”
He’s not sure crowdfunding is suited to large, complex projects. “In real estate, $10 million to $20 million projects are easy. But if you need $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 percent down in cash — or $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 last 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 neighborhood. It’s bottom-up development instead of top-down, and that is totally unique. Nobody understands a neighborhood better than the people who live there or are stakeholders.
“To me, it’s like, why hasn’t this already happened?”
Correction: May 16, 2013
A picture caption with an article on the Square Feet pages on Wednesday about crowdfunding for development projects described incorrectly the status of a joint venture between Fundrise, a Web platform that raises such funds, and the New York real estate developer Urban Muse. The venture is bidding on the right to develop a parcel adjacent to the Manhattan Bridge; it has not started development. The article also misstated the proximity of Fundrise’s project at 1351 H Street NE in Washington to Dupont Circle in that city. It is more than three miles from Dupont Circle; it is not “near.”