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Crowdfunding

December 6, 2013

What do rock bands, political movements, environmental groups, disaster-relief efforts, independent movie producers, playwrights, citizen journalists and a new Washington, D.C.based investment platform called Fundrise all have in common?

They’ve turned to the Internet and something called crowd-sourced financing as a way to raise money and enthusiasm for their projects.

This trend is also known as crowdfunding. In the case of Fundrise, its aim is to help developers raise money for projects by selling small amounts of equity to numerous investors.

In this new investment platform’s first effort, shares in one building went for as little as $100 each. By contrast, typical real estate investments require as much as a $50,000 investment.

Thirty-seven-year-old Ben Miller said he and his brother Daniel, came up with the idea for Fundrise three years ago as a way to raise money and involve local community members in the renovation of a building in an “emerging” neighborhood on H Street in the District.

When they launched the effort, it took them three months to raise $325,000 from 175 small investors to help turn a two-story building into a boutique noodle restaurant that was set to open in late 2012. The cost of the total project will be roughly $1.75 million, Ben said.

“We did this to solve a problem I was having in real estate development,” explained Ben. “The situation was that when I would go into a neighborhood, often it would be very difficult for people to understand what I was doing. And if they didn’t understand it, some of them would fight it.”

Usually, the District native said, it would be a small group of outspoken people who opposed his efforts. “So I asked myself, ‘what if we squared the circle and let the community become both a capital resource and a partner in our real estate projects, so they would have some skin in the game?’” he said.

“And you know what, it’s worked,” he stated. “It’s had two positive effects: It brought ‘normal’ people out of the woodwork who want normal things in the neighborhood, not just the ‘crazies’ who seem to be against everything.”

Miller said by having neighbors invested in a project’s success, they become willing to speak up at meetings and call officials who are in charge of issuing all important permits for things like plumbing and electrical wiring.

“It gets at the question of who is a shareholder,” said Miller, whose initial real focus was retail. He has since moved on to include office, residential, senior and affordable housing developments.

“I wondered why can’t local people have a stake? Why can’t your customers be part of your success? But I hadn’t seen any kind of small, neighborhood investment program like this, which I kind of based on the local food movement.”

His plan was given a boost in early 2012 with the passage of the “Jumpstart Our Business Startups Act” or JOBS Act, which encourages the funding of small businesses by easing securities regulations. It had bipartisan support, and was signed into law by President Barack Obama on April 5, 2012.

“I was literally sitting around complaining about how ‘big capital’ and Wall Street didn’t give a damn about neighborhoods, how the neighborhood hated Wall Street and how I was caught in the middle. I thought there had to be a better way.”

Miller said when he came up with the idea for Fundrise, skeptics told him he was crazy.

“Real estate people said I was nuts,” explained Miller, who said he had to qualify the offering with the Securities and Exchange Commission (SEC) and register with local securities regulators in Virginia and the District.

“The skeptics said ‘you can’t trust community members.’ They said, ‘You don’t want to tell them anything, let alone bring them in as partners because that’s suicide.’ And a $100 investment? They said that was insanity. But those people were wrong.

“Besides, I figured if you can’t beat the locals, join ‘em,” he quipped.

His first Fundrise-backed project was the historic preservation of an old building at 1351 H St. in D.C., which will become a Maketto Restaurant. He called the $325,000 he raised, a “painfully” small amount of money for all the effort it took to raise.

“And at the end, I thought that it was a horrible idea, and that it was pointless,” he said. “It was so darn hard. But the community loved it and went crazy over it; over the idea that they could have a share in this. In the past, people could invest in a Japanese manufacturing company, but not in something going up across the street. Now they can.”

In the second Fundrise deal, he raised $300,000 in a little over an hour for a $3.5 million project. It’s also on H Street, which he described as popular with “hipsters” like his 27-year-old brother and business partners. For both efforts, investors had to be local.

A third project he has his eye on is on Florida Avenue that will run between $150 million to $175 million. He is also part of a group that has bid on the $1-billion redevelopment of the Walter Reed Army Medical Campus.

“Ultimately, we didn’t raise that much money for those first two projects,” he said. “We just wanted to have the people in on this because they wield the power,” he said. “If I want big money I will go to New York.”

Miller said if two percent of the Walter Reed project is allocated to local investment that would only raise about $20 million. But if each investor is putting in $1,000, that equals 20,000 people who are stakeholders.

“Two percent is like a fee,” he said. “But just think about what you can do with 20,000 voices. That’s a lot of people pulling for you. Not everyone will like this, because it requires more transparency, but I think it is a good model for real estate entrepreneurs. I’ve spoken with other developers around the country and I think this is going to take off.”

While there are no guarantees, Miller said the return to investors should range between 8 and 20 percent depending on the deal.

Making a lot of money isn’t why District resident Micah Lubens put his money into the two H Street projects.

“I don’t think I’m your typical commercial real estate investor,” said Lubens, a native of Boston who works for a marketing and communications company.

“I learned about Fundrise through the food side because I am really into the restaurant scene in D.C. I saw in a blog that Toki Underground was going to be involved in a new venture where I could own part of it.

“The more I read, the more intrigued I was,” said Lubens, 26. “Also, now that I’ve lived in D.C. for seven years, I was ready to own part of the city. It was even better to invest — even if it was only $100 — in a restaurant where I’d be going anyway.”

Lubens has since purchased six shares — at $100 each — in the second Fundrise project on H Street. “And yeah, I’d like to make my money back on that. But for the first one, it was more about owning part of my neighborhood, helping it thrive…

“And when my parents came to visit after that first investment, I took them over to H Street to show them ‘my’ building,” he said with a laugh. “But it’s been cool to watch this idea grow where regular people can invest in projects like this. I’m excited to see where it goes.”

Michael Ferlito, a Detroit developer and principal with the Ferlito Group, said a friend involved in a technology startup told him he should check out Fundrise because it looked like an interesting online fundraising platform.

“I wouldn’t exactly call myself an ‘adventurous’ developer, but I was instantly on board with crowd-sourced fundraising, especially the way they want to do it,” explained Ferlito, who said he met with Miller in September.

“There are four or five pieces of property I’d like to use this on,” said the 25-year-old Detroit native.

“The greatest thing about this for the properties that I’m looking at is that the people who live near them would love to see these buildings developed. The model for community crowdfunding to bring an old, dilapidated building back to life is so strong there that you can feel it.

“I have three letters of intent out there, so the process has been started. But as soon as I learned about Fundrise, I went searching for opportunities and the first one is a multi-use project in downtown Detroit.”

Ferlito said another prospect is in Corktown, about a mile west of downtown Detroit. If all goes well, he hopes to raise at least 35 percent of the funding needed for the developments, which would range in cost from $5 million to $8 million.

Ferlito said it is “close to impossible to raise money in Detroit, at least in senior debt, which is typically secured, priority loans or borrowed money that a company must repay first if it goes out of business, for downtown. There are one or two downtown banks that will lend, but the primary funder for senior debt at least would be the federal government under the HUD 221(d)(4) program.

“For developers and other investors, though, there is a lot of enthusiasm. A lot of people here still love the city and developers can’t get their hands on enough property. The activity is huge, so there would be support for what Fundrise wants to do.”

On the West Coast, Sig Anderson, a co-founder of City Center Realty Partners in San Francisco, said his company may use Fundrise if it can come up with a project that is a good fit.

“In the past, we’ve used traditional equity sources, mainly private equity funds out of New York,” he said.

“They are looking for much larger, single investment checks to be written than what Fundrise is capable of doing, which is to provide more efficiencies for smaller equity raised. For us, that’s compelling for some of the smaller deals that we work on.”

Anderson said his company does mostly urban, retail, office and mixed-use developments in Minneapolis, the San Francisco Bay Area and throughout the West.

“It would depend on the investment deal, but I see no reason why we wouldn’t be able to use their platform for projects all over the country if we find the right developments that fit this model,” he said.