The recent opening of a communal food and retail market in a revitalized Washington, D.C. neighborhood provided a unique opportunity for a leading real estate crowdfunding platform to look back at its roots.
“Back” in 2010, which is eons for crowdfunding, Dan and Ben Miller wanted to redevelop an old storefront in an area of Washington D.C. that few people paid attention to. Seems simple enough, but then it came time to obtain financing. From that process, Fundrise was born.
“What really drove us to build Fundrise was the investors we were dealing with really didn’t understand the deals we were doing,” Fundrise President Dan Miller said. “They were in a neighborhood they weren’t familiar with.”
Stop us if you’ve heard this before. Someone comes up with a great idea to give a facelift to a neighborhood eyesore while maybe making a few bucks in the process. The place is just sitting there, long enough for it to be obvious people aren’t lining up to repurpose it.
There’s plenty of support in the community, so George Bailey goes to the bank.
This is where the story takes a dark turn. Bailey passionately describes how the project will improve the community. The new spot will serve a need. People are behind them. It’s low risk and it won’t even cost that much.
On the other side of the table, you can practically see Old Man Potter doing the mental checklist.
“Where is this place? That’s in Bedford Falls?”
“They only want how much? I’m practically losing money sitting here…”
Dan and his brother Ben stayed in that process long enough to learn traditional institutions had limited appetites for small loans designed to improve properties in areas they knew nothing about.
“And that’s ridiculous,” Mr. Miller said, “Because it eliminates 95 percent of the country.”
And at that moment the Miller brothers saw opportunity in the large gap where deals do not make sense within the business structures of large lending institutions.
Sitting in that void were whole communities of potential investors with an emotional investment in where they live, people who will support efforts to make theirs a better place. Agreed they are unlikely to be able to throw big dollars into the pot, but you get enough of them throwing in what they can, and you don’t need that much anyway, and… Fundrise was born.
“In 2010 with Maketto we were the most vertically integrated company of all time,” Mr. Miller laughed. “We bought, financed, and leased the building, found the tenants, managed the construction, built Fundrise as a platform to sell the offering, dealt with the Regulation A filings. All those actions for one transaction.”
Kickstarter was just gathering momentum and the Millers saw a natural fit in real estate, for if people are willing to back projects they care about they’d surely invest in real estate they care about too.
Five years ago creating Fundrise was much harder than it would be today. How hard you ask? Even finding lawyers agreeing to work on the concept was a challenge. The Millers were turned down by the first six firms they approached before they found someone who thought it was possible.
While working through the regulatory issues, the Millers began to sense they were on to something big. They began hearing from developers across the country who were having the same problem they were in accessing institutional capital for small projects in unknown neighborhoods, ones not known to investors and decision makers in New York or Los Angeles.
These developers began asking to access the Fundrise platform.
“We hit on a much bigger problem that was national and even international in scope,” Mr. Miller recalled. “That’s when we shifted from being real estate developers and started putting all our attention into Fundrise.”
For the next 18 months, the Fundrise team worked to educate regulators while simultaneously filing the needed documents. Most had not seen this mechanism before so they had to get used to the entire Fundrise structure.
“They kept wondering why we were spending hundreds of thousands of dollars on legal issues for one small project,” Mr. Miller said.
While it took some effort to get bureaucrats to see how this new concept operated, at its cure the Fundrise premise was very simple. Allow local people to pool their investments in real estate that matters to them, that will make a difference at home.
Fundrise was being created in the wake of the recession, and that worked in its favor, Mr. Miller believes.
“There was a desire for things to be simplified,” he recalled. “There were these complex products where no one even knew what they were buying. We gave investors the opportunity to connect directly with a project online.”
Mr. Miller added Fundrise was part of a broader cultural shift of simplifying operations by allowing technology to make a more efficient connection, one notably in e-commerce’s impact on the retail industry.
On April 13, 2015, Maketto, which initially raised $325,000 from 175 investors, opened in Washington D.C.’s revitalized H Street Corridor, now home to more than 100 retails shops and a diverse assortment of clubs, restaurants and bars, more than 50 of which have been developed since 2010. Maketto includes a restaurant led by noted chef Eric Bruner-Yang, a gourmet coffee shop, bakery, outdoor vendor stalls, and a DURKL clothing store.
It is a proud moment for the Fundrise team.
“I guess it’s a culmination of a lot of what we worked on,” Mr. Miller said. “Seeing the reality of these investors helping to build and develop what at the time was a non-traditional use of the space but what is now one that has really helped revamp that neighborhood and brought in a higher caliber of development and tenant.”
Beyond contributing ideas and capital, grassroots investors help projects progress in additional ways, Mr. Miller advised. Community members attend board meetings and help with zonings and filings. They buy condos in new housing projects.
They can also place heat on politicians and bureaucrats, an experience Mr. Miller saw first hand on Maketto.
“DC Water said it would take four months to obtain a permit,” Mr. Miller recalled. “We had investors calling their council member saying they wanted an expedited review and we got one in two weeks.”
While there are a few real estate crowdfunding platforms that have a socially beneficial component, most are strictly investment deals allowing investors access to prime opportunities across the country, often with a short-term exit strategy.
Fundrise approached things differently from the start, Mr. Miller said. They were self-funded for the first three years, a key step in allowing the Millers to direct its path in that key formative time.
“We come from a different angle,” Mr. Miller explained. “Every one of those real estate crowdfunding platforms has only done accredited deals and they don’t seem to have very much interest in retail.”
“We started out with a $100 minimum because we wanted to prove the point everybody could invest in this deal. A $100 investor is definitely not a profitable investor for a normal company, but we built it all so everything could be done digitally.”
Most Fundrise deals now have a $5,000 minimum investment, but each year a few select ones come with the $100 minimum “to prove it works,” Mr. Miller said.
Fundrise now has offices in several major centers, a key component in helping them keep that differentiating community aspect alive, Mr. Miller said. They only expand to one city at a time so they can take the time to properly understand its neighborhoods, needs and opportunities.
Mr. Miller sees opportunity in a couple of sectors. He is excited about opportunities in secondary markets like Denver, Nashville and Portland, along with emerging areas of core large markets.
Opportunity and potential is rich in Fundrise’s first project in Detroit, one market screaming for revitalization. They are partnering with Larson Realty Group to redevelop Tiger Stadium.
“We’re putting in a lot more work than just making sure it’s an efficient investment platform,” Mr. Miller said.
“Everyone there went to a baseball game. Why aren’t they able to get involved in the process as community members and investors?”