Tag Archives: Fundrise

Crowdfunding and cooperatives – more thoughts on Fundrise and alternative models for urban development and finance

CC image from harrypope

Following up on the previous post on the limits and potential benefits of Fundrise:

First, from Payton Chung, an excellent breakdown of the limits and potential benefits of the crowdfunding platform. Payton identifies three general benefits to a Fundrise-like system: ‘slower’ and cheaper money; participation and trust of the investors; and as an opening for even better investment vehicles.

The idea of ‘slower’ money refers to the more patient investment from Class C shareholders who cannot realistically expect a quick flip or immediate return. Such patient capital is particularly useful when navigating projects that do not follow the path of least regulatory resistance – as Payton notes, slower money “eases longer-term thinking about the investment.”

Participation and trust speak to the idea of channeling broad-but-shallow support for development from a mostly silent pool of the community (potentially representing a silent majority). Payton notes that some local control helps gain support, but that support is not limitless. I would liken it to the disparate treatment of chain stores and restaurants compared to locally owned ones. The local retailers might gain more support than a chain, but that support is far from universal or far from guaranteed.

Transitioning to better investment vehicles requires more than just what Fundrise is offering – not just for development, but for long–term ownership and stewardship. Payton cites co-ops as an example:

Fundrise is certainly a great idea, but the lack of community control limits its ability to establish trust in the community development enterprise. Yet it’s an important part of a broader conversation that’s just beginning around using crowdfunding innovations to improve communities. We can try many other tools — some new, some tried-and-true — to give communities greater control and input over their character and future. Cooperative businesses, like the one I founded, are growing all across America, and they play a key role in affordably housing thousands of Washingtonians (including myself).

Second, the idea of an increasing role for cooperatives is linked to the second article: an update on the status of DC’s mandatory inclusionary zoning statute from Aaron Wiener at the City Paper.

The code requires the provision of subsidized housing units for all developments above a certain size. However, in for-sale properties, the requirement to preserve long-term affordability in the units requires some sort of deed restriction to prevent the later sale of a unit at market rates. This both limits the long-term appreciation of the property, but also makes traditional mortgage-based finance difficult. Such a program for preserving long-term affordability might be at odds with the traditional model of housing finance and home ownership. Wiener writes:

The central difficulty in selling the units has been that lenders were unwilling to provide loans for IZ units because those units would remain affordable in the event of foreclosure, limiting the bank’s ability to recoup its money. But recently, the rules changed to allow the units to return to market prices.

Purchasers of affordable units have issues with the system, as well. Cooperative ownership (both market-rate and limited equity) might present a better way to manage permanently affordable units.

Real estate as investment vs. real estate as city-building

CC image from John M.

Fundrise is one of the most hyped developments in real estate in recent years. Is it a major shift in real estate investment? Maybe, maybe not. If nothing else, Fundrise and the surrounding hype/criticism exposes the dual nature of real estate as both an investment and the critical element of how we build our cities.

In last week’s Washington Post, Jonathan O’Connell sought to burst the bubble by soliciting the opinions of various real estate and financial experts on the terms and conditions that Fundrise offers to potential investors:

“I would never recommend this kind of investment for my clients,” said Russell McAlmond, president of Evergreen Capital Management. “It has almost every kind of risk imaginable that one may have with commercial real estate. If it works and they find a tenant, you may receive some kind of return, but by taking huge risks.”

Said Derek Tharp, of Mote Wealth Management: “They may have noble intentions and it may work, but if anybody does do this, this should be money they could otherwise just flush down the toilet.”

The problem with the evaluation of these experts is that the mis-diagnose the purpose of an investment in a Fundrise offering. Emily Badger responds in Atlantic Cities: 

Crowdfunded real estate isn’t an important idea because it may enable the lady next door to make it big like a real-estate developer. It’s an important idea because it changes the trajectory of neighborhoods. The crowdfunding mechanism changes what gets built. O’Connell’s query with wealth investors – who have no reason to be interested in this question – misses this point.

This isn’t to say that the wealth managers aren’t correct; investing all of one’s savings into Fundrise would not be a wise investment. But they approach Fundrise with a fundamentally different mindset than one does if they think of it as Kickstarter for cities. It’s not as if donors (perhaps a more useful term in this case than ‘investors’) are rigorously investigating the potential returns of such investments – Gawker raised more than $200,000 to buy a video of Toronto Mayor Rob Ford allegedly smoking crack, after all.

The combination of common purpose, a large base of donors/investors allows for individuals to risk little individually (some Fundrise shares are as small as $100) while potentially pooling resources at a sufficient scale to have an impact. I suppose one of the wealth managers could make the case that the $100 share would be better invested in an IRA, but that likely misunderstands why someone would buy such a share (or why someone gives money to a Kickstarter campaign, or to a political candidate).

So, will it work? That is, will it deliver quality projects while satisfying the demands of investors (whatever those demands may be – if they exist at all) so that people will still give up their money for new projects? Matt Yglesias is skeptical (for a variety of legal and technical reasons), but notes that if it works, it could do so by slaying neighborhood opposition to new development:

Still, the main reason I want to believe isn’t because I hope for a huge return, it’s about politics. Specifically the toxic local politics that too often loads the dice against change and new businesses. Here in Washington, even a proposal as innocuous as replacing a vacant storefront with a functioning restaurant attracts politically potent complaints about noise and traffic…

The real promise of Fundrise is that it gives pro-growth members of the community a way to become literally and figuratively invested in the success of a project. A building owned by hundreds of local people, rather than owned as part of a pooled investment vehicle marketed to pension funds, is one that’s much more likely to get a sympathetic hearing from local authorities. It’s also one that’s much more likely to inspire people to show up to meetings and hearings and make the case for development and expansion. As George Mason University Law School’s David Schleicher has observed, despite the stereotype of politically powerful real-estate developers, in practice most cities’ legal framework “creates a peculiar procedure that privileges the intense preferences of local residents opposed to new building.”

The other potential benefit isn’t just in cutting through local politics, but in better aligning the dual roles of real estate investment and city building. In a profile of Fundrise in the New York Times, founder Ben Miller put it this way:

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.”

In other words, a great deal of real estate development simply follows the path of least resistance. If Fundrise really takes off, it will do so by changing that path on the finance side. The Fundrise management team is also selling themselves, as they are essentially asking for silent partners for these projects. If their investors are to help smooth over an approvals process, they’ll need to feel involved enough in the concept to lend their support – in addition to their cash.

They are selling the chance to help shape the city more than they are selling the chance to invest in it.