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Building cities from the crowd upPrint

Thriving Communities | April 5, 2014 | By James Bruckbauer

Fundrise lets neighbors invest in properties like this one. (Photo: Fundrise.com)

A two-story 6,500 sq. ft. brick building sits empty at 906 H Street NE in Washington, D.C. Built in the 1920s, the storefront has lots of character, lots of potential, and the neighborhood's growing foot traffic makes it well suited for a new restaurant or trendy store.

A local developer with plans to restore the building to its full potential went online to ask locals if they wanted to help. For as little as $100, anyone interested in seeing the building thrive could invest in the property, with an expected 7 percent return.

By the time it was over, 361 people—many without any development experience—chipped in.

It’s a new approach to real estate fundraising. Fundrise allows average people to invest in property development even if they lack the credibility and capital of a wealthy developer.

For northern Michigan, it’s a tool that offers a fascinating new approach for rebuilding our area’s village centers and reinvesting in Traverse City’s emerging neighborhoods like Eighth Street, 14th Street, and Garfield Avenue.

The process is simple. A real estate company creates a profile on the Fundrise website and lists the property details and all their financial information along with their goals and vision. Then the developer asks Fundrise members if they want to chip in by purchasing shares until they reach their goal. Membership is free.

Fundrise solves two challenges with traditional property development.

The first challenge is money. Developers often face massive construction costs that can’t always be covered by conventional banks. Permitting, legal fees, and environmental reviews alone can cost tens of thousands of dollars. A tool like Fundrise allows developers to fill in the funding gaps by asking neighbors to invest.

In the H Street example, the developer is taking on about 75 percent of the project’s cost through conventional banks, and the other 25 percent—roughly $350,000—will come from individuals who want to see the project move forward.

The second challenge is participation. Because the financial capital required for even two- or three-story buildings is so high, the average person is unable to engage in the development market. In other words, you may have a great idea for that empty lot near your home, but unless you have a big pocketbook and a long track record of successful projects, your dream is out of reach. This tool gives you a say.

For people like me who have always wanted to invest in projects that will boost growth where people can walk and bike to get around, and who want to see more activity in up-and-coming neighborhoods, the idea is compelling.

Further, Traverse City is a good fit for Fundrise. Our area already maintains a strong spirit of collaboration and our people are engaged and passionate about how this region grows.

It could also become a major boost for villages in the Grand Traverse region that are reinvesting in their main streets. If capital from traditional banks is limited, neighbors and community leaders can pitch in to help.

Right now Fundrise is only available in big cities, but the model applies to big cities and small towns alike. After all, while 906 H Street is in a major metropolitan area, its building style—a two-story brick building with lots of room on the ground floor for a retail shop—can be seen in almost any small town or Main Street in Michigan.

Fundrise is rapidly expanding into other markets outside urban centers. In fact, we’ll soon see a Michigan-specific version. The Michigan Municipal League (MML), an association representing cities, counties, and townships all over the state, is partnering with Fundrise and another crowdfunding company called Localstake to launch a Michigan-based fundraising tool that will help real estate and local business get off the ground. MML expects CrowdfundingMI to be available by this summer.

Recent legislative action put Michigan in a strong position to take advantage of tools like Fundrise and Local Stake. Last December, Gov. Rick Snyder signed a law that allows Michigan-based companies to raise money from an unlimited amount of individual investors. Under the law, individual “unaccredited” investors can invest up to $10,000 in a company, while “accredited” investors can make more than $10,000. Michigan is one a few states to allow this.

For northern Michigan, the concept of “crowdfunding” for real estate development has promise.

If you want more background on Fundrise, Emily Badger’s 2012 post in Atlantic Cities aptly describes why the tool was created and how it works. You can read it here.

What do you think? Would you want to invest in property development in your neighborhood?

 

James Bruckbauer is the Michigan Land Use Institute’s transportation policy specialist. Follow him on Twitter at @jimbruckb. Reach him at james@mlui.org.