Power to the People: Crowdfunding the Built Environment

What constitutes a worthwhile building project? The answer to this question depends completely on whom you ask. I have a background in design, so I am biased towards projects that adhere to sound design principles. A friend of mine adores the Melrose Market more for its collection of foods and shops than for its creative reuse of an old auto garage. A colleague of mine thinks a nondescript strip center in Denny Triangle is a fascinating project because of the return it provided the developer. Each of these people has a different metric by which they evaluate building projects, and to me, it highlights the apparent disconnect between the people who finance building projects…and everyone else. But is this disconnect real or just perceived?

 

To explore this question, I’ll start by telling you about a presentation about retirement my father-in-law gave my wife and me. My father-in-law is a former engineer for an insurance company, so risk is not something he takes lightly. In this presentation, my father-in-law explained the power compounding interest has on early retirement investments. He then highlighted the difference an investment yielding 8%-10% had over 30 years compared to an investment yielding 6%-8%. In this scenario, he told us, those two percentage points meant the difference between eating filet mignon and eating burgers when you retire (complete with pictures). In other words, a wise person will save for retirement now and find investments that provide an 8%-10% return. A wise lesson from my father-in-law.

 

So how does this story tie into the original question about worthwhile building projects? I recently shifted from a career in design to a career in development, and this shift has allowed me to see the connection quite clearly. See, I’m not the only person in the United States that has sat down with his father-in-law (or father, or financial advisor, or MSNBC) and heard the message about looking for an 8%-10% investment. There are lots of people who are targeting this type of return. They may not be investing in real estate directly, but this broadly accepted retirement strategy has powerful indirect effects. In fact, this is really what drives the real estate industry. If investors were looking different returns, the industry would look a lot different.

 

So how do we begin to bridge the gap between my friend who wants to see more projects like the Melrose Market and my colleague who is impressed by the returns the strip center developer received? Enter Fundrise, an upstart crowd-funding company based out of Washington DC that is looking to give everyday people the opportunity to invest in real estate more directly. Projects that once relied on “accredited investors” (aka “the 1%”) for equity investments are now open to almost anyone interested in investing. Their business model uses the power of the internet and rapidly changing finance laws to allow new investors the chance to put their money where their mouth is.

 

This new model opens up a slew of possibilities.  For example, a local project in Spokane, WA may not provided the returns needed to attract investors in Seattle, but with support from the local community, the project could get off the ground. As I said before, people use different metrics to evaluate whether a project is worthwhile, and Fundrise allows these people to consider those metrics when investing.

 

This reminds me of a group in the historic Pullman neighborhood of Chicago. These neighbors banded together to invest in a historic building on their street that had fallen into disrepair. Each neighbor bough $10,000 shares of stock, and with that money they were able to buy and rehab the building. After selling the building for a $5 loss per share, one of the shareholder commented, “Not a bad price to pay for saving a historic piece of our neighborhood.” These neighbors clearly had different metric for evaluating this real estate investment, and with new tools like Fundrise, people like this may be able to change the way we think about real estate investment.

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