Forget Wall Street Investors, Local Residents Fund Neighborhood Development

Gina Schaefer says she loves her new neighborhood, and she’s putting her money where her mouth is.

Schaefer has lived in Washington, D.C., for 22 years and recently invested in a new property being developed close to her new home -- if she ever wonders about the return on her investment, all she has to do is take a walk.

“There is a lot of development going on in my area and I want to be able to walk by and say ‘hey that’s partially mine’ or ‘I’m an investor in this property’ or take my friends to the business that is going to go into that building and help support that building as a patron,” she says.

Schaefer, who runs hardware stores across the District, uses online-crowd equity platform Fundrise to invest in local real estate. The website, which was launched in August 2012 by brothers Ben and Dan Miller, allows local residents to buy shares in neighborhood development projects.

“We take a building and we take it 'public' so you can buy a share of the company that owns this building, the way you’d own a share of Apple of IBM,” says Ben. He says share pricing is based on demand, with some shares selling for $100 and others up to $25,000.

“When you own a share of the company that owns this building you get cash flow from the rents, you are like a landlord, so you get rental income every year, you get appreciation if the building appreciates, if the neighborhood grows, the value of the stock grows with it.”

The brothers are sons of a well-known D.C. developer and have been in the real estate industry for more than 15 years, and they invest in every property they offer.

“If you think about it, you can invest in a Japanese manufacturing company and a coal mine in Sierra Leone but you can’t invest across the street. So having something tangible transforms how you think about investing,” Ben says.

Schaefer has participated in two Fundrise offerings so far, buying $10,000 in shares for her investment project and $25,000 in a second. “We are really interested in being part of something that makes the community better, so that’s been very exciting for us just to be involved in that grass roots level, particularly because we lease so many spaces ourselves and we haven’t had the ability to own any of them.”

“If you think about it, you can invest in a Japanese manufacturing company and a coal mine in Sierra Leone but you can’t invest across the street. So having something tangible transforms how you think about investing”

- Ben Miller, co-founder of Fundrise

By reducing the need to raise money from traditional lenders like private equity firms, Miller says the red tape that often plagues development is erased. “We are going directly to the main investor, the real person with the money, you cut out all the middle men which makes the cost of capital a lot less, everybody benefits, the investor gets a better return and the developer gets a lower cost of capital.”

He also points to the social benefits. “One of the challenges with money today is that you’ve taken out a lot of the people; there’s no people in the money -- it’s been stripped of the social capital. By bringing people back in the real estate you transform what’s possible, and instead of having an ‘us/they relationship’, they are your partner.”

Of course, real estate investing isn’t without risk.

“This recession has taken a complex situation and has complicated it beyond belief,” says Rick DeKam, principle of Midwest Realty Group in Portage, Mich.

DeKam says he hopes Fundrise’s financing method works, but warns consumers should do their due diligence before investing. “Make sure you ask for all disclosures, know what will happen if a building doesn’t lease out, if a tenant fails to make rent and get details on any fee structures.”

Fundrise’s first public offering sits on H Street in NE, Washington D.C., and will soon be home to an Asian-themed, high-end food market. But that’s hard to imagine now in its gutted state and the lonely ripped velvet couch tossed in the corner.

“It starts with retail and then it’s going to transition into the restaurant and market. The second floor will be a cafe,” Ben says.

Ben’s ability to look at vacant buildings and envision their potential is enviable, but Fundrise’s road to approval from state and federal securities regulators wasn’t as easy to predict. Not only did they have to get approval from the Securities and Exchange Commission before making a public offering, they also need approval from regulators in Virginia, Maryland and D.C.

“When we first started with this idea, we couldn’t even find a lawyer who thought it was possible, it took us six months to find a guy who actually used to work at the SEC who said ‘oh you can totally do this.”

Because the concept of offering property shares online was new, regulators were skeptical and the company faced many roadblocks, but after nine months and 12 pounds of documentation, they got approval.

“At the end, a lot of the regulators saw it as a new way to bring new jobs, small capital into neighborhoods and they were excited about it,” Miller says.

The company recently made history by getting awarded proposal rights to redevelop a closed library from Washington D.C.

“No one has ever done this -- this is the first time in the nation a public deal is going to be offered back to the public rather than be sold back to the company.” The site will be home to 30 apartments with retail space at street level.

While the project was a big win for Fundrise, Ben says this is just the beginning.

“This is the future of how cities will get built, over time people will have the power to build their own cities to invest in local places and profit from places they go to. It just makes sense that local people should be able to invest in and build local places."