On Monday, Fundrise will make their newest offering at 906 H Street NE in DC available to investors. Many real estate journalists have covered this innovative investment company’s crowdsourcing strategy, with Urban Turf naming Fundrise a top real estate trend of 2012. This development is the company’s second crowd-sourced project and their third property on H Street. Without special approval, publicly advertised offerings can only seek funding from accredited investors, but Fundrise has has gone through a cumbersome process through DC, Virginia, and federal securities regulators to permit any individual to invest in their newest offering with a $100 minimum investments.
Because of the high regulatory hurdles standing in the way of marketing public offerings to a broad audience, Fundrise is currently the only group in the country doing so. Daniel Miller, Co-Founder of Fundrise, explained that he thinks crowdfunding has significant potential to improve incentives for focusing on the long run in development. From an urban development perspective, one benefit of crowdsourcing is that small companies do not face the same pressure to post quarterly profits that larger, publicly-traded firms do. Because real estate is a long-term investment that doesn’t always demonstrate profits on a timetable that’s attractive to Wall Street investors, crowdsourcing provides an opportunity for development financing that will not have a short-term bias. The difficulty in getting legal approval for small investors, however, demonstrates the regulatory bias in favor of large firms. Daniel said:
When you’re invested in a broader portfolio like a REIT that owns 400 or 500 malls, it’s very difficult to measure success because there are only financial indicators. But if you’re invested in a single property — the tenant is open, he’s paying rent, he has good sales — it’s much easier to measure success. There’s transparency in reporting. A lot of these big companies don’t give you a lot of information on individual properties. We think that this blend of a single asset that is easier to understand with transparent reporting is going to make people focus less on short-term profits and actually understand the individual asset.
Both financial regulations and local entitlement processes have created bias toward large developers and toward repetitive development patterns. Crowdsourcing offers an opportunity for smaller scale projects with the potential to be simultaneously more innovative and lower risk. Daniel pointed out that crowdsourcing connects a development to its customers. “Over time as there are more crowdfunded projects, we think those are more likely to be successful in terms of having better sales, in terms of having support from the neighborhood, and in terms of getting through entitlements,” he said. “I think that local investors are going to take a lot of risk out of the project. By better linking supply and demand and having more people support that investment, we think that provides a better chance of that business succeeding.”
From a tax perspective, crowdsourcing in real estate offers investors the same well-publicized advantages that they can achieve in a REIT. Daniel explains, “Right now we are structured as an LLC, but we have the same tax advantages as a REIT. There’s no double taxation — income and losses are passed through to the investor, so it’s about the most tax efficient vehicle possible. A REIT was created to allow the general population to invest in real estate, so in some ways what we’re doing is a return to the original REIT concept. But we’re focused on individual properties rather than nationwide portfolios because we think that when people invest in their own neighborhood, there are social benefits to that.”
In addition to introducing increased transparency into measuring development success or failure, crowdsourcing may help projects make it through the entitlement process. Daniel said this may have been the case with Fundrise’s first crowdsourced project. “We had a bunch of investors email the permit office for 1351 H Street and email their council member to help get the permits. Particularly with entitlements and liquor licenses, we think that transparency and having investors communicate with permit offices is really going to help move it forward and speed up the process.”
If you’re a DC or Virginia resident interested in investing in 906 H Street NE, create an account at Fundrise and register to get priority access. “I think it’s exciting that this is most people’s first chance to invest in commercial real estate,” Daniel said.