Can Crowdfunded Real Estate Create Equitable Economic Development? – Next City
The Equity Factor

Can Crowdfunded Real Estate Create Equitable Economic Development?

The front entrance of the Ace Hotel Pittsburgh (Photo by Rob Larson)

Even in what might seem like the most dire of circumstances, change is happening. Some of it emerges from within the community. Some of it comes from without. There’s never a guarantee that those visions line up exactly, but when they do, the result can be a beautiful thing: a community’s hopes, dreams, aspirations amplified by the support and solidarity of outsiders. Sometimes it’s the only way to move the needle when it comes to jobs, wealth and opportunity. While it can be hard to tell when such harmony exists, stories can speak for themselves.

The story of the Ace Hotel Pittsburgh began with a community group, East Liberty Development Inc. (ELDI), purchasing the vacant former YMCA building in Pittsburgh’s East Liberty neighborhood, a community that has experienced a tremendous wave of revitalization in the past few years. (Next City chronicled ELDI’s work that led to the hotel)

“I don’t know if I would have characterized it as blight, but for sure the building was a wasted asset for a long time,” says Zack Block, director of Repair the World: Pittsburgh, a local chapter of the service organization that embeds fellows in local partner organizations. Their Pittsburgh office is also in East Liberty. “It’s a really beautiful space from an architectural standpoint. Something this group did well was restoring it.”

The hotel finally opened in December 2015, at a total acquisition, rehabilitation and construction cost of around $25 million, of which around $17 million came via New Markets Tax Credits. That total also includes a $2 million loan for energy efficiency improvements from The Reinvestment Fund, a Philadelphia-based CDFI (community development financial institution).

The project was originally slated to cost around $23 million, but rehabbing buildings almost always means cost overruns, as fixing one problem can often reveal one or two more. The project’s $2.3 million in cost overruns were covered by an investment from the first-of-a-kind eREIT (electronic Real Estate Investment Vehicle) from FundRise, an online platform for crowdfunding real estate investment.

Congress created REITs in 1960 to allow a wider swath of Americans access to the benefits of real estate investment, including income from tenant rents. They have a few interesting features. REITs must distribute at least 90 percent of their income to shareholders each year. REITs must also be “widely owned,” currently defined by the U.S. Securities and Exchange Commission (SEC) as “no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year.”

If you have a 401k or another retirement plan option that invests through mutual funds, check your mutual fund portfolio or ask your financial advisor if you own shares in any REITs. The answer is probably yes. More than 200 REITs trade on U.S. stock exchanges, with a total market value of more than $900 billion. There are also untraded public REITs and private REITs.

For the most part, REITs go about investing in real estate (usually commercial) in a very opaque way. Most people have no idea where their money goes when it gets into the hands of a REIT, not that it is typically easy to find out if they wanted to. Since most people who own shares in a REIT own them through mutual funds, they don’t even know they own them. Untraded public REITs and private REITs, meanwhile, are typically reserved for only the wealthiest and most connected investors.

FundRise’s eREIT is the first and so far only untraded REIT that is available directly to “non-accredited investors,” defined by the SEC as people with a net worth of less than $1 million or annual income below $200,000.

The minimum investment is $1,000, which anyone can make through FundRise’s online platform. It’s not an anytime thing, however. FundRise has been selling eREIT shares in monthly rounds, offering around $1 million in shares each time. The first few rounds, starting last November, sold out within hours of each round opening. The most recent round sold out in less than an hour. According to Ben Miller, co-founder and CEO of FundRise, the average investment so far has been around $5,000.

Investing in the eREIT isn’t recommended for everyone. As Miller says, “we’re looking at someone making $75,000-$150,000 a year, young professionals, who want to put maybe 20 to 30 percent of their investment portfolio in real estate.” Those making less than that should not consider investing in the eREIT, he recommends.

While FundRise does not disclose its exact underwriting process or methods and algorithms for parsing through the 7,000 deals it evaluates a year, it does showcase eREIT investments prominently on its website. It’s a huge appeal for investors like Pittsburgher Nick Orsborn, who has invested $5,000 in the eREIT so far. FundRise actually contacted him by email to ask about the Ace Hotel before making the eREIT investment. It was the first he had heard of FundRise’s involvement in the Ace Hotel project. It epitomized what he was hoping to get out of investing in the eREIT – a stronger connection to where his savings were being invested.

“It made it feel that much more real to me,” Orsborn says. “I actually bought my first house in East Liberty back in 2009. I’ve driven by the building so many times.”

The size of investments FundRise says it’s targeting for eREIT deals fall just beyond what urban infill developers like ELDI can raise from friends, family and community lenders like CDFIs, but also fall below the $5-$10 million minimum that most big institutional lenders like publicly-traded REITs or other large investors want.

“We operate in this sort of space, this gap in the market,” Miller says.

What other deals might lie in that gap? Miller credits those in Pittsburgh, from its public leaders to its business and civic leaders like ELDI, for creating a market that appeals to FundRise so much that they project investing another $20 million in the area over the next one to two years. If the Ace Hotel Pittsburgh is any indication, those could mean deals that lead to jobs and opportunity for communities that have long been denied both.

Ninety percent of Ace Hotel Pittsburgh Employees live inside Pittsburgh city limits. Twenty-eight percent live in East Liberty or in a neighborhood bordering East Liberty (18 percent of its full-time employees live in the same zip code as the hotel). There are also 30 local vendors that have ties to the hotel, including Strong II Dry Cleaners, located in Homewood, another underserved and largely black neighborhood in Pittsburgh.

There’s no guarantee that every project in the eREIT’s target investment market will generate that kind of equitable economic development. But Miller says if you can get FundRise a deal that can produce the kind of financial returns they’ve been advertising to eREIT investors — 12-14 percent on average — they certainly won’t count it against you if you’re doing all the above.

The Equity Factor is made possible with the support of the Surdna Foundation.

Oscar is a Next City 2015-2016 equitable cities fellow. A New York City-based journalist with a background in global development and social enterprise, he has written about impact investing, microfinance, fair trade, entrepreneurship and more for publications such as Fast Company and NextBillion.net. He has a B.A. in Economics from Villanova University.

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Tags: real estatecrowdfundingimpact investing