Daniel Miller is the sort of 26-year-old who's any real estate developer's dream hire: he has a dual B.S. and M.B.A. from The Wharton School at the University of Pennsylvania, where he studied real estate and finance, not to mention three separate licenses from the Financial Industry Regulatory Authority (FINRA), meaning he can do complex, cool-sounding things involving securities and investments that laypeople will never truly understand.
Yet Miller kept it in the family after graduating, first working for his dad—he "developed a lot of iconic mixed-use projects in DC" and was largely focused on "economic development oriented, public private projects, emerging neighborhoods"—and then spinning off with his older brother, Benjamin, "to do our own creative real estate development projects" in their hometown of Washington DC.
"Basically as we started developing these properties on H Street NE and brought a bunch of them to private equity firms, and just realized they were not the right investors for the project," Miller explains. "They didn't know the neighborhood, they didn't care about the tenants we were talking about, they didn't know block to block what made sense, they just didn't really have an intuitive sense of the projects. In addition, they only wanted to fund large projects."
That's when, in July 2010, the Miller brothers founded Fundrise, a platform "to allow people locally to invest in real estate projects to give them power to shape their neighborhood but also provide capital to projects," he says, "particularly small, mid-size creative projects that are otherwise very hard to put together that would have a huge and beneficial impact on the community."
Curbed DC editor Valerie Paschall describes the impact of Fundrise on the local community. "I like that Fundrise gives the people of DC a voice in how their neighborhood is revitalized," she says. "I think it says something that these buildings are reaching their funding goals a lot quicker and that [the Millers] are able to start getting more involved with other areas of the city."
Illustrating Paschall's point is Fundrise's first project, a two-story commercial space on H Street NE that's fully funded—$325,000 was raised from 175 individual investors—under construction, and set to open as the restaurant Maketto by the end of the year. With a few other of their own projects also fully funded and in various stages, now Miller, one of 10 on staff, is working to scale Fundrise into a platform for developers around the country can use on their own projects. "There was really no precedent, there's almost no investments that are locally oriented," he says, adding that they're firming up work with developers in Cleveland, NYC, San Francisco, Oregon, Seattle, Chicago, and Philly. "Now we're scaling it as a platform that allows developers to do what we were doing: raise capital from a local audience and help finance and allow them to participate in real etate projects."
And is it really the first crowd-sourcing investment model of its kind?
Yeah, it is. So last year, Regulation D—which is how most money for real estate is raised, only accredited investors can invest, you can't publicly mark it—$1.4 trillion was raised using that exemption. [Read more on the Fundrise blog.] And we used Regulation A, which is basically a state-qualified public offering. You take this huge, huge filing work with the SEC and local regulators and have them sign off on it. We were the only group in the country to qualify for one, and we raised $325,000. When we started meeting with a lot of developers and we realized that what they wanted was the same platform we had, where they could bring in their investors as a community of people, raise capital, and provide all the back-end software to manage what would be a growing investor base.
It sounds like there are a lot of developers are intriqued by this idea. What benefit is there to them in using a platform like this?
The biggest benefit is that you now have investors who are consumers who are participating in the project. A lot of the NIMBYism—the issues of five or 10 neighbors trying to block a project—if you have a few hundred invested they're going to support it, they're going to participate, they're going to help with permitting, liquor licenses, and so on. You now have an engaged audience more likely to rent an apartment if it's an apartment building, more likely to shop or spend money at the restaurant or retail store. It's really activating a group of people to support local development projects. Also it's a real form of capital, particularly for more creative projects where they're either a smaller size, or they're in an emerging neighborhood, or they're just not institutional. If you want to buy a big downtown office building, there's a lot of private equity firms that'll write the check, but if you want to do a $5M renovation with a couple of apartments above and a cool restaurant on the ground floor, there are very few places to raise money in those types of projects.
Sure. Walk me through a project so I have an understanding of how the process works.
For our first project, we bought the building for $825,000 initially. We had about $500,000 in equity. We raised that capital through friends and family, people who cut us $25,000, $50,000, $100,000 checks. We closed on that property and then filed a public offering. The public offering process takes roughly six months because you have to go back and forth with regulators and it's very time consuming, but then in that period we signed a lease with a great local chef, permitted everything, got everything ready to build, and last August the deal went live on Fundrise. We raised $325,000 from 175 people. Anybody in DC or Virginia could invest. A $100 share was minimum, everything was transacted online, all the docs were signed online, and then that capital went to the build-out of the restaurant. That project (?), funded last fall, is under construction right now and should open near the end of this year. And now we have an engaged audience of people whom we're emailing about the project, who are supportive and excited about it. The public money is only a portion of the deal—it's not all the capital, but it's a really powerful new way to get an audience of people excited about the project.
What's in it for them? When will they see financial reward?
It's financially oriented. These are investments; it's not Kickstarter, which is based on donations. It's literally an investment—they own a share of the LLC that owns the building. On that deal the investers get their money back, plus a preferred return of 10 percent and then after that then we split the upside 70/30. Basically the developer would get 30 percent of the cash flow thereafter and the investors would get 70 percent. It's a lease with the restaurant, so the cash flow comes from the rent that the restaurant's going to pay.
And is it the kind of thing where you're going to write them a check every month? How does payment work?
We have third-party escrow set up, so the funds go into an account and it only closes when the developer and the title company sign off. They can use our platform to send distributions because they have everyone's bank account. It's really a set of tools for developers, so they write investor updates, send distributions, distribute [the tax document] K-1s, raise capital, and so on.
Say you have a developer who wants to do a 10-unit residential building in Crown Heights, Brooklyn. Could I invest and also live there?
Those are some of the things we want to overlay. On the first deal, we leased the building to a restaurant and if you invested more than $1,000 in the property you get 10 percent off at the restaurant. Maybe if you're one of the top 20 investors in the deal, maybe you'd have the first ability to lease an apartment, or you'd get a discount on the condo sale. Ideally developers will figure out a way tie in the asset to the investment.
Would the investors have a say in, what the building looks like or what a new grocery store sells?
The developer has all the power and the rights in terms of actual decision-making, but the idea is that it's wise to engage your audience. It's about building a brand and relationships with people. It's not in the contract that it's a democratic decision, but the smart developer would listen to people.
Do you anticipate people investing in multiple deals at once?
It's going to be a bit blended. We have a lot of people invest in multiple deals, as well as a lot of new investors. The biggest two draws are relationships—knowing the developer, knowing the tenant, having a relationship to someone involved in the project and its location—and proximity to the space. Those are the two driving factors and then after that there are other factors; you know, like architecture, but generally we find that it's relationship oriented and then location based.
One has to live physically near the project in order to invest in it?
Well, it's state by state. We could take each offering and register them in every single state, but it would cost a lot of money, and really most of the investors are local. But when the new regulations are in place, anyone nationally can invest. Our guess is that it will still be 80 percent local and then maybe some people who grew up in the neighborhood and then moved away. With our own projects, we registered them in DC and Virginia so that's where our investor base comes from.
What else is in the works right now?
We'll probably have five or six cities within the next 60 days using our platform. Basically we go to these markets and try to find the top few developers in town who are doing what we're doing—those creative projects—with track records and strong reputations, and we allow them to use Fundrise to build a brand around their development company, test out deals that people are intested in, and then do the filings and raise capital locally. The next six months are basically about launching new markets.
What do you look for in a market when you're contemplating expanding there?
We go to a city and try to meet as many people as possible: city officials, developers, well-connected people who know what's going on on the ground. We tend to pretty quickly when we meet a developer know if they're the right fit; you know, creative with right types of projects. Some poeple submit online—we get 15 or 20 developers a day submitting online—and we think maybe only two or three a week are actually vaible. A lot are, like, I'm trying to buy a piece of Arizona and need some money, which is not the right use and not what we're intending to do.
Is this something you think would benefit neighborhoods that perhaps aren't quite popular yet?
Yeah, I think this is best for those markets. The more commoditized the market, the more that there's already lots of money willing to enter. Like, we've had much much more success in Brooklyn than in Manhattan. Because there are billions of dollars chasing deals in Manhattan and they close really fast, what you bring to the table is much less powerful than in certain projects in Brooklyn where there's a neighborhood community aspect and there's a base of people who want to support it, but there may be less capital available. We think it works better in places where people locally know that the neighborhood's great—all the residents nearby buying homes love it—but institutional capital has yet to recognize it.
I read a more critical piece recently in the Washington Post that basically contended that these investments are not wise and that financial advisors would not recommend their clients invest in Fundrise projects. How do you respond to that?
One, they completely missed the aspect of location. All of the five people interviewed had no proximity to the deal. So of course they're like, I don't understand this. Sure, if somebody showed me a deal in Kansas, I'd have no idea how to comment on it. It's not my domain. And then second, most financial advisors have a Schwab-type account where they have all the assets they're investing for the client, and they get fees on that. And so if they take money out of that and invest it into a private transaction, they don't get compensated. It would be completely not in their interests to recommend these investments—you're basically giving up fees. A normal financial advisor's not going to give up assets. But we do understand the skepticism. It's generally early in what we think is a long phase. But real estate as an asset is one of the best assets in the world, so we think everyone should have some investments and be able to invest in local real estate.
It sounds like this is just the bginning to you. What do you see yourself doing in 20 or 30 years?
It's going to be a long time. It's been three years so far and we're just here, which is remarkable—we're successful in that people are excited about the concept and that every project we've developed is funded 100 percent, but it's going to be a lot of work to scale it.
What is it like for you to be so young in this industry? Do you meet tons of skepticism?
Not anymore, maybe when we first started. When we started were weren't looking for acceptance—we were just looking for the one out of five, one out of ten, guys who got what we were talking about. Now people are starting to get it and come around, but we had to start with our own projects because no developer was going to let a couple hundred small-dollar investors in their deal without us being the guinea pig. So yeah, we just made it happen—we did whatever it took. And about the age thing: it helps in the sense of that we come with more technology-oriented perspective, and growing up around real estate development is why we have such an understanding of development and how the process works, what's solved by local investment, etcetera, that we can then apply to a young perspective of knowing technology and digital. If you're a 23-year-old person out of Stanford who can code, you can't really create this business. You don't know enough, there are too many layers. Then if you're a 40-year-old successful real estate developer, you're really unlikely to throw your business out the door to start somthing like this. There's a really weird, tricky balance where we have a lucky skill set to be able to do both.
· All Young Guns 2013 coverage [Curbed National]
· Fundrise [official site]