The project will be big: 40,000 square feet of mixed-use space with a restaurant from former “Top Chef” contestant Sylva Senat, a co-working space and business incubator, and a new home for a landscape architecture firm that specializes in green roofs. Plus, its 39 residential apartments are meant to be market-rate affordable — leased at a monthly rate that people who live in the surrounding Northwest Philadelphia neighborhood can afford without a rental subsidy.
To raise the $7.2 million necessary to build the project out, Mosaic Development Partners could have gone the simple route, says Gregory Reaves, principal and managing partner of the Philadelphia-based firm. The project, called Golaski Labs, wouldn’t have been difficult to finance, and Mosaic probably could have done it with a single investor, Reaves says. Instead, the firm has developed a complex financing structure that will take advantage of New Markets Tax Credits, a small portion of equity offered through the crowdfunding service Small Change, and capital raised through the new Opportunity Zones tax incentive created as part of the Tax Cuts and Jobs Act passed at the end of 2017.
With major concerns still looming that Opportunity Zones may result in projects that do not benefit — or worse, cause displacement from — the economically-distressed communities that the incentive is meant to benefit, the designation of Opportunity Zones appears to be making project financing easier for Mosaic, Reaves says. When the Opportunity Zones designations were announced, most of the projects that Mosaic had in the pipeline fell within one of the zones, according to Reaves. That includes Golaski Labs.
Opportunity Zones allow investors to avoid some taxes on capital gains income by investing them in projects or businesses located in low-income areas designated by states earlier this year, although it’s a federal tax incentive. So far, as Next City has recently covered, the program has generated significant interest from experienced investors, with stock ownership in companies, real estate, or even works of art they’re looking to sell — thus generating capital gains income. Only capital gains income is eligible for the tax benefits of Opportunity Zones.
“The problem with that is that you’re now getting very sophisticated investors coming in at the Opportunity Zone level, and where you’re going to struggle is with getting equity at the small investor level,” Reaves says.
Mosaic set up the equity portion of the Golaski Labs deal like a sort of race. Participants can invest in one of two entities set up by the company. Accredited investors — a term from the Securities and Exchange Commission meaning annual income of at least $200,000 ($300,000 for jointly-filing couples) in each of the past two years or a net worth of at least $1 million — can invest a minimum of least $5,000 of capital gains income into an Opportunity Zone fund. Meanwhile, anyone over the age of 18 can invest a minimum of $500 in a separate entity through Small Change. The whole offering will move forward if Mosaic raises at least a combined $100,000 through either fund.
With 28 days to go, the project is just shy of its $100,000 minimum crowdfunding goal on Small Change. Reaves says the firm turned to crowdfunding as a way to create opportunities for small-time investors, hopefully including some from the neighborhood, to buy into the project.
“Our business is built around going into disenfranchised neighborhoods and creating communities where people feel that they are not being disenfranchised from the new things that are happening,” Reaves says.
In carrying out a variety of new development and rehab projects around Philadelphia (including this one covered by Next City), Mosaic has tried to drum up investments from small-time investors before, particularly among communities of color and other communities that are not well-represented in the investor classes, according to Reaves. But the response was “very low,” he says.
Reaves says the firm had underestimated the “educational effort” that’s required to make people who aren’t experienced investors comfortable with buying into development projects. Small Change has a system in place to collect very small investments, making the barrier to participation lower, and hopefully inviting more “nontraditional” investors in.
“Being a for-profit developer, we’re creating what we think are not only gestures about how to bring community together, but also vehicles by which the communities can participate in what we’re doing,” Reaves says.
Small Change has closed nine offerings to date, says founder and CEO Eve Picker, raising between $95,000 and $300,000 per project. The group assesses projects’ viability, but doesn’t make any determinations about which investments are “worthwhile” from a financial standpoint. It is required to include risk disclosures by the Securities and Exchange Commission.
As a crowdfunding platform, Small Change is different from Kickstarter or IndieGoGo in that it offers actual investments with an expected financial return, though there’s also the risk of investors losing their money. Small Change isn’t the only crowdfunding platform to offer investments connected to Opportunity Zone tax incentives — as Next City has previously reported, Fundrise is seeking to raise a $500 million fund to invest in multiple properties through the new tax incentive program, with two properties already in its Opportunity Zone portfolio.
The minimum investment across the Small Change platform is $500. The anticipated return on a $1,000 investment is $2,737 after seven years or $3,096 after ten years. For every project it lists, the site also includes an index of characteristics like walkability, affordability, green features and other urbanistic considerations.
“Our Small Change Index is designed to show investors what socially responsible acts each developer is taking, in regards to how it meets the needs of the neighborhood,” Picker says. “The great thing about crowdfunding is that it’s up to investors to decide.”
For now, Mosaic is marketing the crowdfunding directly to potential investors the partners know and hoping the word spreads out to those investors’ networks, Reaves says. They’re hoping to drum up investment especially from people of color and women. For future crowdfunding offerings, Reaves says they may set up a bigger marketing budget. Their goal with crowdfunding is to expand the community of people who can see a direct benefit from real estate development. And their goal with projects like Golaski Labs is to create spaces that will improve communities while remaining accessible to the residents that already live there.
“We consider the highest and best use to be the use that people in these communities can actually afford to live in without a public subsidy,” Reaves says.
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our monthly Bottom Line newsletter. The Bottom Line is made possible with support from Citi Community Development.
Jared Brey is a freelance reporter based in Philadelphia. His work has been featured in Philadelphia magazine, PlanPhilly, Hidden City, The Philadelphia Inquirer, City & State, Grid magazine, and other publications.