Commercial corridors can be the proverbial front doors of neighborhoods across the United States. However, when visitors or prospective investors are greeted by blight, it can discourage future construction or home purchases.
It’s an issue developer Lyneir Richardson is trying to address in a number of urban neighborhoods and he’s testing out a relatively new funding mechanism to do so.
Made possible by a series of changes to U.S. SEC (Securities and Exchange Commission) regulations under the American JOBS (Jumpstart Our Business Startups) Act, crowdfunding allows developers to raise capital from a large number of non-accredited and accredited investors to help finance residential and commercial endeavors.
It was signed into law in 2012, but it’s taken years to write the regulations and spread the word about this new development and investment vehicle.
More recently crowdfunding has gained traction in the real estate industry, with several online platforms cropping up that seek to level the playing field for people across all races, genders, socio-economic groups, and geographic locations.
Its growing use, including the risks and rewards, was the subject of a ULI webinar on Sept. 28 titled “Americas YLG: Crowdfunding for Real Estate.”
Hosted by the ULI Americas Young Leaders Group and moderated by NYU Stern School of Business Adjunct Associate Professor of Finance Mark Bhasin, the event featured the CEOs of two platforms--Groundfloor Finance co-founder Brian Dally and SmallChange.co founder Eve Picker. The two businesses employ different securities regulations to achieve their missions.
While investors often turn to crowdfunding because they have difficulty securing venture capital money or loans from banks, Richardson, co-founder and CEO of The Chicago TREND Corporation, said he chose SmallChange.co to democratize ownership of two shopping centers located in predominantly Black neighborhoods in West Baltimore, Maryland.
Relying on small to large investments from over 300 people, Richardson bought Walbrook Junction Shopping Center and Edmondson Village Shopping Center in 2020 and 2023 respectively.
Walbrook Junction, which spans about 50,000 square feet (4,645.2 sq m), and the much larger Edmondson Village were both dilapidated at the time of the purchases. Since then, he’s secured subsidies from the city and state to begin redevelopment.
“We were looking to make a social impact in these communities by allowing residents to own a piece of their community,” said Richardson. “Over 330 people invested as little as $1,000 using the SmallChange platform.”
“Fifty-one percent of our investors are low or moderate income, 42 percent are women and 53 percent are African American,” Richardson said. “I’m very proud of those statistics.”
Richardson said a strong commercial corridor can raise property values and attract further investment, adding people are more likely to take pride in their communities and patronize businesses in which they have a stake.
“After all, how often do investors knock on your door and ask you if you want to own part of the local grocery store on your block?” he asked.
It’s just the beginning of Richardson’s campaign, which he hopes will one day include 20 shopping centers.
“Over the next three years, we hope to create ownership opportunities for as many as 1,000 community investors using crowdfunding platforms,” said Richardson.
Expanding opportunities for minority and women developers and investors in a predominantly white and male industry is an important goal for SmallChange.co.
Founded in 2016, SmallChange.co utilizes SEC regulations, including Regulation Crowdfunding, to assist developers in raising debt and equity funding for residential and commercial projects.
Anyone 18 or older is eligible to invest, but there are a number of rules that must be followed.
“It is important to us that the projects listed on our platform make some meaningful impact,” said Picker, which the company measures using its proprietary Small Change Index.
“Impact can take many forms,” said Picker. “Perhaps the project is net zero or perhaps community ownership is an important goal.”
A project may also be going up in a neighborhood that has not had investment for a while, or it may involve a Black- or women-led team.
“To us, all of these add to the typical bottom line of a project, providing a value return in addition to a financial one,” said Picker.
“In the end, we hope to play an important alternative financing role,” Picker said. “Sixty-three percent of the projects listed on our platform to date are owned by minorities and/or women. It is clear that there is a need.”
While SmallChange.co is focused on providing assistance to those whose projects will have a positive impact, Dally said Groundfloor seeks to make real estate investment more accessible to everyone, including non-accredited investors, also known as retail investors.
“We’re creating an alternative to the stock market that lets people from all socio-economic backgrounds invest and save for their future via real estate,” said Dally.
The company was the very first to be qualified under Regulation A by the SEC to offer debt-based real estate investment opportunities to both accredited and non-accredited investors alike, said Dally.
Today, it has more than 230,000 registered users, who utilize its platform for short-term, high-yield investment opportunities.
“We offer fractionalized real estate investments,” said Dally. “If someone is in the business of house flipping or new home construction and needs capital to get the project off the ground, we’ll provide a loan and sometimes partner as an equity investor as well.”
“We create and offer the investment opportunity to retail investors to participate in via our platform,” said Dally. “When the project is finished and the house sells or is refinanced, investors are repaid their principal and interest, and/or a share of the profit, usually in a span of only nine to 18 months.”
Dally said since the underlying real estate asset secures the investments, they offer an unusually low level of risk relative to the potential return.
“Our investors can choose from hundreds of different projects and get started with as little as $100, with a minimum investment per project of ten dollars. The historical rate of return across the 3,000 investments we’ve repaid is about 10 percent.”
There are no fees for investors and the low barrier of entry means most people participate in hundreds of projects at a time, said Dally.
“Our offerings are regulated by the SEC, so we offer a level of transparency and consistency that is rare for private market investments,” said Dally. “We’ve also been doing this for ten years now and the results speak for themselves.”
In the coming weeks, a next-generation, mobile-first version of Groundfloor will be introduced, allowing for more automation and instant diversification.
“Investors using the new app will only need to transfer funds onto Groundfloor’s platform and the dollars will be allocated automatically into all available loans, usually 80 to 100 at a time,” said Dally.
While the webinar focused on two platforms as examples of the trends and opportunities for sponsors and investors, there are a number of other crowdfunding sites, including CrowdStreet, which works with accredited investors, and Fundrise, which focuses on eREITs (equity real estate investment trusts) and other real estate funds.
“Both take a different approach than Groundfloor, which is the first and largest platform qualified by regulators to offer direct real estate investing to all investors at scale,” said Dally.
There are also a number of Regulation Crowdfunding platforms similar to SmallChange.co, such as Republic, Wefunder and StartEngine.
Although these sites do open up opportunities to make challenging projects a reality, provide an entryway for small investors, and allow people to diversify their portfolios, Bhasin, senior vice president at Basis Investment Group, cautions there are risks involved.
A case in point, said Bhasin, PeerStreet, which filed for Chapter 11 bankruptcy protection this year.
Founded in 2013, the platform serves two sides of the marketplace, providing accredited investors access to real estate-related debt investments and connecting lenders and borrowers to capital sources.
“Higher interest rates, reduced demand for mortgage loans, and the declining appetites of institutional buyers for below-market-rate loans played a key role in the company’s decline,” said Bhasin.
Other issues, said Dally, in contrast to Groundfloor “PeerStreet limited its securities offerings to accredited investors in order to avoid regulatory scrutiny and served as a reseller rather than an originator of the credit underlying its investments.”
Bhasin said PeerStreet should serve as a warning, reminding everyone that despite its many advantages, crowdfunding carries risks.
“I advise everyone to do their due diligence before investing,” said Bhasin.
