Crowdfunding the skyscraper – Curbed

The commercial real estate developer Rodrigo Nio has a problem with commercial real estate development. The immense amount of wealth it generates, he argues, falls into the hands of too few people. People like him.

Nios sitting in the corner office of the New York headquarters of Prodigy Network, his 50-person company with offices in Miami, Buenos Aires, and his native Bogot, Colombia. Hes been developing real estate since the early 1990s, and by all appearances has made a successful go of it. But hes also an unusually reflective real estate mogul. He sees that sometimes the success of one comes at the expense of others, and he wants that to change. The idolization of capital has created greed and mistrust between people, he says. We need a revolution of unity, a revolution of oneness.

The problem, he says, traces back to the passage of the Securities Act of 1933, a U.S. law that, among other provisions, drew a hard line between investment opportunities offered to the public and those offered to an accredited group of private investors. Private offerings were allowed to be significantly more valuable than public ones, and that select group of accredited investors was empowered to reap the rewards. Think of a startup: A venture capitalist could invest an unlimited amount in a company like Google, while an individual could buy far fewer shares on the regulated stock market, and only once Google went public. That legalized and institutionalized exclusion, separation, and privilege, Nio says.

Now, hes trying to erase those divisions through crowdfundinga relatively new model of real estate development that, thanks to a recent exemption to the Securities Act, allows anyone to be a potential investor. Developers like Nio are now able to mimic the Kickstarter approach by proposing a project and inviting the public to help fund it. But instead of receiving a thank you note or t-shirt as a reward, investors get a cut of the profits.

The rule changes are still new in the U.S.; restrictions were first loosened in 2012 to allow crowdfunded investment opportunities from accredited investorsthose who earn more than $200,000 a year or have a net worth above $1 millionand the market fully opened to everyone last year. But Nio has been using crowdfunding to develop real estate since 2010. He started in Colombia, where crowdfunding has long been legal. In downtown Bogot, his first crowdfunded venture is a two-tower skyscraper called BD Bacat thats set to open later this year. Peaking at 67 stories, its the tallest building in the country and the second tallest in South America.

The idolization of capital has created greed and mistrust between people. We need a revolution of unity, a revolution of oneness.Rodrigo Nio

Now, hes using the crowdfunding approach to develop real estate in New York City, one of the most valuable markets in the world, where hes been based for 20 years. Two projects are already open, and three more are under construction. All five have been financed through crowdfunding.

And hes not alone. In recent years, dozens of real estate crowdfunding platforms have popped up, offering seasoned investors and rookies alike the opportunity to buy shares of real estate developments across the street or around the world. The projects these platforms help fund run the real estate gamut, from flipped houses to urban condo conversions to self-storage facilities to hotels to shopping centers to office towers. For some, its just another technology-enabled avenue to make investments. For Nio, its a way to undo the system of haves and have-nots that the Securities Act of 1933 put in place.

Crowdfunding is a paradigm of inclusion and access for all, he says. I think that the best thing is that the illusion of separation between individuals is now gone.

In the nascent field of real estate crowdfunding, Ian Ippolito is probably the most knowledgeable investor.

A self-described serial entrepreneur, hes followed the build-sell-repeat model of entrepreneurship to the point where managing his money has become a full-time job.

Hed tried all the traditional stuffstocks: too risky; bonds: the yield is terriblebut wanted to find something new. After he sold his last company in 2012, he came across LendingClub, an online platform that pools investors to make loans directly to individuals and businesses. By sidestepping the overhead and fees of traditional lenders, LendingClub was able to offer lower interest rates to borrowers and higher returns to investors. Other computer-enabled fintech financial services began to flourish around this time, and Ippolito dove in.

Real estate crowdfunding was still a new concept, but it exploded on the fintech scene as soon as the 2012 law change went into effect. It went from pretty much nothing when the law started to about a hundred platforms really, really quickly, Ippolito says. I thought this could be huge, this might be a fantastic thing. But its so disorganized and you cant figure out which site is which and which one to invest in, theyre all so different.

So Ippolito started researching. He learned which crowdfunding sites focused on equity, where investors essentially become shareholders in a property, and which focused on debt, where investors are direct lenders to a property owner or mortgage holder. He compared the minimum investments that each site required and analyzed what kinds of returns theyd likely provide. He looked at what kinds of properties each site was offering, and how many projects they had to offer investors. After a few months, he felt confident enough to start investing. He also saw another business opportunity and launched The Real-Estate Crowdfunding Review, a website that compiles all his research and features rankings, and reviews all of the roughly 150 real estate crowdfunding websites now operating.

The current top ranking platform is PeerStreet, which primarily focuses on investments in existing private real estate loans. (Prodigy Network is ranked 19th.) Ippolitos review highlights PeerStreets $1,000 minimum investment as far more appealing than the fields $10,000 average. He also notes the sites transparency, allowing users to review the performances of all its past investments. The company has garnered the interest of high-profile investors, including Dr. Michael Burry, who famously predicted the crash of the housing market in 2007. PeerStreets investments have similar yields to LendingClub, but are backed by real estate and carry very attractive loan-to-value ratios, Burry is quoted on PeerStreets site. He calls it simply a smarter way to invest.

But in January, Ippolito reported that PeerStreet had seen the first foreclosure on one of its investments. Though Ippolito sees it as only a minor setback compared to other platforms that have already folded, it does highlight the risks of this type of investing. Due diligence is crucial for investors, as many of the offerings posted on these platforms are scattered throughout the country in places that may be unfamiliar. And for the platforms themselves, Ippolito says they need to be very careful about what debt they take on or which developers project they put before their investors. But that doesnt always happen.

The platforms job should be, theoretically, to read through those proposals, pick only the good ones, and then present those to the investors, Ippolito says. But the problem is theres kind of a conflict of interest there, because if theyre too picky, theyre not going to have enough offerings, and thats a problem on most of the sites. So theres a temptation to, I dont want to say cut corners, but to not be as thorough as they should be.

With so many different platforms in a field thats still new, quality varies wildly, and so do operational standards. Most offerings are still only available to accredited investors. No one has really quite figured it out, like whats the magic formula, whats the best way, Ippolito says. So I think the industry kind of has to mature, and once it gets that going then I think youll see a whole bunch of people rushing to invest.

You have to stand at least a few blocks away from BD Bacat to really see the whole thing. Its two towers, 56 and 67 stories tall, rise like steep staircases of glass and steel. Theyre a sharp contrast to the rest of Bogot, Colombia, where, despite a population of around 10 million people, the citys core is mostly a low-rise jumble. There are some tall buildings in Bogot, but theyve become a rare species. The last tower of any vertical significance was built more than 30 years ago. So the opening of BD Bacat later this year will be something of a statement.

But its not just about the size. Nobody wanted to do a skyscraper of this magnitude, Nio says. Concerns about currency devaluation and Colombias shaky commodities-based economy have scared many developers off from seeking financing from banks. Traditional institutional equity doesnt make sense because of the country risk and because of the devaluation, he says. If the economy got too volatile, senior lenders most likely would take over the equity and wipe out the developers.

Instead of receiving a thank -you note or t-shirt as a reward, investors get a cut of the profits.

To do a project of this size, crowdfunding was the best option. So the developer, BD Promotores, partnered with Prodigy Network to build up a pool of people to fund the project. They fitted out a showroom to lure investors and advertised in magazines and on television. More than 3,000 individuals invested, raising roughly $145 million.

Mara Nurth Macas and her family were some of the first new residents to receive an apartment in the building. We looked at the project on Saturday and Sunday we made the decision to buy it, she said in an interview conducted by the developer and provided to Curbed. (The developer would not connect Curbed with an investor directly.) Shes worked downtown for more than 25 years, and she says BD Bacat was a clear opportunity to invest in a project that would attract tenants and businesses. What excites me most is to know that I am part of one of the most important projects in the country.

And thats why the project is very relevant, Nio says. It is not that its the tallest building in Colombia. It is that the tallest building in Colombia was funded all cash by its own people.

When it opens, the project will feature 457 apartments, 382 hotel rooms, 117 offices, and a three-story shopping center accessible from the street. Rents from these spaces will trickle down to the investors in the form of quarterly dividends.

Its an attractive investment for a growing number of Colombians, and Prodigy Network has built two other projects in the city that tap into that demand. One is an upscale hotel in the posh neighborhood of El Chic. Carolina Leon, a project manager in Prodigy Networks Bogot office, explains that its popular among businesspeople. Its interior design is inspired by an indigenous ethnic group called the Kogi and a rooftop pool looks out on mountains that hug the citys edge.

The other project is a $25 million office building a few miles from the airport. Accented with bold yellow columns, its six floors are clad in smooth brown panels and jut out at haphazard angles to create a decidedly modern feel in an area dominated by workaday metal warehouses and brick two- stories. Leon is especially proud of the roof, which is covered in artificial turf and ringed by a walking track. Planes taking off from the airports runways fly directly overhead.

Inside, the office spaces will be leased unfinished, aside from themed common areas on each floor. One is outfitted with cave-like cubby holes for informal meetings. Another will have video game consoles and padded seats in the shape of Pac-Man. Another will have a pool table. Each can be accessed via tube slide from the floor above. Like Facebook, Leon says.

This kind of creative office space is relatively rare in Colombia, and thats part of its selling pointboth to future tenants and to the roughly 480 individuals whove invested in the building at $17,000 a share. Thats the minimum investment, which varies by project and by crowdfunding platform. Leon and her husband even bought in.

The relatively low entry point and the comparative stability of physical real estate has made crowdfunding a successful development strategy in Colombia for Prodigy Network. Its been a good way for more people to benefit financially from commercial real estate, Nio says, but its also a viable way for a real estate developer like Nio to get more projects built.

So when the laws changed in the U.S., Nio was quick to shift his focus to the significantly larger market of New York. I think it has potential everywhere, he says. Because its all about access.

In New Yorkthe city of Trump Tower, barely used foreign-owned luxury suites, and buildings named after their starchitect designerstheres much less democratic symbolism in gathering a crowd to develop a piece of real estate. Nio didnt go to New York for that.

Rather, hes there precisely because New York is a city where real estate is understood as a good investment, and where those who want to develop something ambitious can find a way to pull it off.

Though his projects still rely mainly on a crowd of individual investors and eschew formal loans from banks, Nio is not shy about tapping large institutional investors to help leverage the funding of his crowd.

Thats why I have this office, Nio says from his 16th floor perch on Wall Street (in another notorious Trump building, its probably worth noting), to look out these windows to remind me that these are the best assets in the world.

Those famous Financial District assets have helped enable Prodigy Networks two completed New York projects, buildings featuring furnished apartments for short- and long-term stays that Nio calls legal Airbnbs.

Wall Street funds have also played a role in its three other New York projects, slated to open later this year. Theyre part of what Prodigy Network is calling The Assemblage, coworking and co-living facilities geared toward what slick marketing materials refer to as a community of individuals who believe the world is at the verge of a collective conscious evolution, transitioning from a society defined by individualism and separation into one of mutual interconnectedness. The buildings will have short-term apartments, private offices, shared work areas, and lounges. A plant-based juice and elixir bar will also be accessible at each location.

For the crowd, the minimum investment for these projects ranges from $10,000 to $50,000; the three projects are expected to cost about $150 million. Roughly 1,200 investors from seven different countries will be co-owners, and the annual rate of return is projected to be between 12 percent and 16 percent. By focusing on coworking and co-living spaces, Nio is hoping to materialize his crowd-centric ethos into buildings, while also making a profit. Its the best of both worlds, Nio says. Its the best of capitalism and the best of socialism.

Whether the Assemblage turns out to be the community of mutual interconnectedness that Nio envisions remains to be seen. But some say projects like these can show the potential power of crowdfunding that allows like-minded people to come together to help create something that wouldnt otherwise exist.

Ethan Mollick is an assistant professor at the University of Pennsylvanias Wharton School of Business whos studied crowdfunding extensively. He argues that seemingly odd projects like the virtual reality headset Oculus Rift were only made possible because a group of passionate supporters coalesced to create a pot of initial seed funding that larger companies or venture capitalists or traditional funders wouldnt.

By focusing on co-working and co-living spaces, Nio is hoping to materialize his crowd-centric ethos into buildings, while also making a profit.

People forget the crowd part about crowdfunding, Mollick says. Crowdfundings ultimately about activating communities to make things happen.

And, as with projects like the Oculus Rift, its the most passionate and interested people who can see why a project makes sense. Mollick says that principle can easily apply to real estate crowdfunding.

Getting local people that know something or have specialized expertise to invest acts as a signal that the market is wrong about something. Who would know best what part of a neighborhood is going to gentrify next? Who would know best if there would be demand in an area for a new kind of commercial venture? People who live in the area, Mollick says. Real estate funding is at its best when its actually incorporating people who know something about why this is a good investment.

Thats how Fundrise, another prominent crowdfunding platform, started out. By focusing on projects in Washington D.C. neighborhoods that other developers and investors were ignoring, the company was able to build up local support for projects in the form of investments. Its really potentially a radical transformation of urban planning, of development, of investment, of local government, Fundrise CEO Ben Miller told CityLab back in 2012, shortly after the laws changed to allow crowdfunding.

Mollick says this kind of local connection does have a potential to transform how development happens and how neighborhoods evolve. Hes hoping to conduct new research looking into whether projects that receive crowdfunding get less neighborhood opposition than projects that arent crowdfunded. I suspect that the answer would probably be yes, he says.

For the most part, though, real estate crowdfunding is used as an investment tool. The projects put before investors are often distant buildings that have questionable merit in terms of community and neighborhood development. Many are suburban shopping centers or single family homes. And sometimes, the money coming into these projects can have negative impacts on their surrounding neighborhoods. Crowdfunding has been criticized for allowing outside money to fuel gentrification in some places.

Ippolito of the Real-Estate Crowdfunding Review says the field is still young and will continue to evolve. More project typesand potentially more ambitious effortswill likely begin to emerge as the process becomes more standardized. I think whats going to happen is a lot of the weaker platforms are just going to disappear, unfortunately, he says. Because there are just too many of them right now.

Mollick says the field will start to mature, but it still faces some big questions, particularly in what happens when an investor in a crowdfunded project wants to sell or get out. The secondary market worry is a big one across all of equity crowdfunding, he says. The issue is its early days.

From Nios view, these issues will sort themselves out. He sees his own crowdfunding business continuing to grow in the U.S. and beyond, and perhaps even branching out to other areas, like renewable energy production.

Ultimately, its about changing a system that concentrates the proceeds of development. By getting more people involved and sharing in those proceeds, he says the projects that get developed will fall closer in line with peoples shared interests. Its collective mutual caretaking to make money, he says. That is crowdfunding.

Editor: Sara Polsky

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Crowdfunding the skyscraper – Curbed

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