“I like the grittiness of cities,” says Eve Picker, a Pittsburgh resident of 31 years who maintains a healthy Australian twang. “I like to think about places that have been left behind. What will it take to get people to put their money into places like that?”
For Picker, it’s not just a rhetorical question. At 223 North Atlantic Avenue, in Pittsburgh’s Garfield neighborhood, Picker is building a Tiny House on a former vacant lot. Over 300 vacant lots still checkerboard the neighborhood.
At just 350 square feet, Tiny House is designed to create affordable, walkable homeownership at a time when family size is at historic lows and interest in urban living is on the rise. It’s less than a mile from the East Liberty neighborhood, home to new restaurants, shops, AlphaLab Gear (a startup incubator) and Google. Picker estimates the Tiny House mortgage will be $750 a month.
“It’s an experiment to get people to think about Garfield differently, to think about vacant land in the neighborhood as an opportunity, not a liability,” Picker says. She thinks Tiny House can spur an entry market of inexpensive, tiny homes in Garfield.
Banks, for any number of reasons (loan-to-value constraints, or persistent racism) still aren’t willing to finance projects in neighborhoods like Garfield. Picker, who has been doing real estate development in Pittsburgh for more than 20 years, turned instead to real estate crowdfunding for Tiny House.
An estimated $2.5 billion has gone into real estate crowdfunding in 2015. Most predictions expect even more next year, thanks to recent changes in SEC regulations, which, starting in mid-2016, will allow unaccredited investors (those with a net worth below $1 million or annual income below $200,000) into real estate investment territory that was once exclusive to the wealthiest.
Fundrise raised excitement recently with the launch of the first-ever eREIT (REIT stands for real estate investment trust, a type of real estate investment vehicle created by a 1960 federal legislation). It raised $50 million online in a matter of hours.
The democratization of commercial and residential real estate investment is a significant achievement. But so far, real estate crowdfunding platforms by and large represent democratization of either high-end development (as in the case of Fundrise) or, at the other end of the development spectrum, according to Picker, little attention to quality design and construction.
Confident there are others out there who believe in a different vision, Picker created a new real estate crowdfunding platform, Small Change, to give those others a chance to invest in Tiny House and other similar projects that create high-quality, urban, walkable, equitable development.
In order to differentiate the Small Change platform for its non-financial goals, Picker and her team created the Change Index, a rating given for each listed project right alongside the term and interest rate.
The index started out as a way for them to say “no.”
“We started talking about how we pick projects,” Picker explains. “How do we tell someone they’re not suited to raise money on our platform without offending them? We needed an indicator to make it clear to other developers and investors what we’re trying to do.”
The index developed from there, not as a way to outright exclude projects below a certain threshold, but rather as a way for any developer or investor interested in utilizing their platform to see clearly and up front what counts most on Small Change.
The surprisingly simple index consists of components grouped into three areas: mobility, sustainability and economic vitality. Projects, for example, can get one point for a walkscore over 70, or half a point for a bikescore over 70. Half a point for “activating the street” with front porches on homes or sidewalk cafes for local businesses. Half a point for creating more than 10 jobs, or for being in the principal city of the metropolitan region, or for being located in an underserved community. One point for creating affordable housing. The maximum index score is 10 points.
“Initially it was much more complicated,” says Picker. “Our goal has always been to make our platform accessible and in plain English. I’m a sophisticated developer and investor and I go to some of the other real estate crowdfunding sites and I don’t know what they’re talking about. We don’t want people to feel excluded by language like that.”
Picker and her team tested earlier versions out on existing real estate projects in order to get a sense of how to weight each component. They also created slightly different versions for commercial versus residential development.
“Over time we might need to correct these a bit. Things keep coming up that are interesting to us,” Picker says.
Small Change, in partnership with Chicago-based American Homeowner Preservation, is also planning a real estate crowdfunding conference for March 24 next year, in Pittsburgh, which will include a discussion on how to court impact investors into the real estate crowdfunding market. The index is part of the vision to help make that happen.
Picker plans to have at least six projects listed on Small Change in its first year. Tiny House, the first active investment listed, offers a projected 7.5 percent return with a 36-month term, for a minimum investment of $1,000. It scored a 9.5 on the Change Index.
Tiny House’s Change Index rating (Credit: Small Change)
The Equity Factor is made possible with the support of the Surdna Foundation.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.