Crowdfunding holds the potential to improve accountability and shine light on the currently ill-understood development process, better aligning the interests of developers and communities. No, for-profit equity issuance may not be as democratic as other means of ownership, and doesn’t guarantee community control. Yet in a conversation we had after my previous blog post, Ben Miller mentioned a few aspects about Fundrise’s plans offer a way for developers to work with, rather than against, neighborhood wishes:
1. Besides relatively cheap capital, crowdfunding allows the owners (the crowd) to learn about, openly discuss, and perhaps make the trade-offs necessary to keep an urban commercial district balanced.
Gentrification along a retail corridor usually results in a familiar tale of woe,, repeated in city after city:
- a few businesses pioneer the area
- they draw more customers in
- sales and values rise, more shops open
- land owners cash in, raise rents
- better-capitalized, less interesting shops move in
- the pioneer businesses get priced out.
The end result is a tragedy of the commons, where nobody is accountable for maintaining the “unique, authentic, cool vibe” that initially drew people to the area, which is subsequently lost as each owner maximizes her own value.
Non-profit or public ownership of anchor institutions (i.e., public markets, performing arts centers) can sometimes prevent the cycle from reaching its zenith, but much of the cool factor often stems from local, for-profit businesses ineligible for non-profit status. But as it currently stands, few owners are willing to take the financial penalty that comes with cross-subsidizing interesting retail — aside from a few examples of particularly generous landlords (whose heirs may not be so generous) or with moguls who own a significant chunk of land.
Those moguls can act like shopping mall landlords: one of the big breakthroughs for the mall was the realization that the right mix of retailers could offer something for everyone in the family, all under one roof. Unified ownership and management can afford to pick and choose tenants to perfect that mix: Jonathan O’Connell at the Post unearthed a Morningstar report about Tysons Galleria finding that some mall tenants pay almost three times as much per foot as others within the same mall.
Community ownership of retail space creates a similar opportunity: the crowd can choose to forego the higher cash rents that a chain retailer or formulaic restaurant might offer, and instead opt to derive non-monetary value from something less lucrative but more interesting. The crowd has an advantage over a mogul or mall owner: no one individual or company has all the answers, and unlike a corporate owner, the crowd isn’t obliged to answer to a financier who would probably say no.
The public policy tools available to tame the cycle of commercial gentrification are so blunt as to be useless, or even counter-productive: “formula retail” ordinances, inanely specific use regulations, liquor license moratoriums, retail rent control, or the good old-fashioned BANANA techniques of downzoning and historic-designation overreach. Even CDC control hasn’t always proved durable, since non-profit CDCs have limited access to capital markets.
2. At 906 H St., Fundrise is crowdsourcing tenant ideas; this was one of the plans from the start (and a separate platform called Popularise). The Maketto market at 1351 H St. had earlier won in a similar vote. Requests for for-profit retail amenities (rather than non-profit public facilities) also dominate other crowdsourced public involvement platforms, like Neighborland.
Pairing crowdfunding with crowdsourcing allows potential patrons to “put their money where their mouth is.” Since businesses answer only to customers with cash, directly involving only the investor pool doesn’t quite pose the same that’s-not-real-democracy quandary. Unlike with a cooperative business, the crowd has little say over the inside workings of the business — which bypasses the micro-managing tendency of co-ops, and allows individual entrepreneurs to bring their singular visions to fruition.
In instances where promised for-profit retail amenities are an important element of a community benefits package, crowdsourcing those amenities and backing them with crowdfunded capital could ensure the longevity of those businesses.
Crowdsourcing tenant ideas also reduces costs for the developers (and thus investors) for brokerage and for carrying costs. And if the crowd has an idea that doesn’t exist yet — Ben and I both wondered why there aren’t proper dive bars around* — it also has a built-in vehicle for raising capital.
3. My earlier post riffed off a Post article highlighting how wealth managers didn’t look kindly upon Fundrise as an investment. From their standpoint, it’s not a product that they understand: it’s illiquid, it’s highly speculative, and poorly diversified. A good portfolio allocation strategy should include only a small slice for crowdfunding investments for these reasons — but the same rules apply for any high-net-worth “qualified investor” who, up until now, has always had the option of making a private-placement investment of a small (or even large) slice of their portfolio into illiquid real estate equity.
It’s also funny how the same wealth managers rarely comment on the value of homeownership, a similarly large, illiquid, and leveraged investment that most Americans have over-weighted their portfolios with. Yes, diversification is a good thing, but so is community ownership, and so is education. Crowdfunding real estate investors are likely to be within their home market — one of the few markets in which their superior on-the-ground market knowledge gives them an edge over outside investors. In gateway cities like Washington, D.C., regional property values are inflated by the presence of so much outside capital chasing returns and liquidity, and crowdfunding — along with even more democratic investment vehicles like investment co-ops, credit unions, community bonds, and the like — offers a venue for urban communities to leverage their own investment dollars and assert some (limited) level of economic control over their own fates.
A correction about equity classes: Ben Miller from Fundrise (whose latest public offering sold out) noted via Twitter that my recent post about Fundrise makes “A few small errors about the equity” — which I’ve corrected, and for which I apologize. Indeed, Fundrise equity is pari passu: all classes receive equal economic rights. In the event of a liquidation, debt holders will be paid first, but if there’s a haircut for equity holders it would be equal — you get back proportionately what you paid in.
Ben explained that shareholder dilution would be more likely to occur through a recapitalization or subsequent rights offering. If the corporation needs more capital, Class A shareholders would have the opportunity to make member loans, but Class C shareholders would not — that would get complicated and probably wouldn’t be worth the paperwork. Those member loans would then be senior to equity, but junior to the mortgage.