Commie Real Estate Development

Real estate development is essentially a math problem. How a development looks and functions is conditioned by the limits of engineering and zoning, financing, and what revenue can be generated when construction is finished. Rents, for example, are set by what people are likely to pay and how much money needs to be generated each month to cover debt service. Like any other business, real estate development can be a risky proposition with marginal profits. Generating the capital for new projects is usually a challenge, especially for innovative projects. In the end, all the numbers have to add up so that costs are covered by revenue.

What if everyone could participate in the real estate development game? What if the overall financing of a project depended significantly on money raised from people most interested in what the building looks like and how it functions because they live near by? What if building new projects, and the risks associated with them, were shared by private developers and people in the community?

It isn’t a far-fetched idea. Years ago I discovered the Ethical Property Company, a venture based in London that generates capital from private individuals in small increments as investments in acquisition, renovation, or redevelopment of real estate. How effective has it been? Here’s a summary from a recent annual report:

The Ethical Property Company owns and operates 15 centres across the UK, providing 15,000 sq m/161,000 sq ft of rentable office, event and retail space to charities, social enterprises, voluntary and campaign groups. We also provide management services to other like-minded landlords and are currently responsible for the operation of an additional six centres across the country. In total, we support over 230 organisations as tenants while over the last year an additional 460 organisations have taken advantage of the meeting and conference space within the centres we manage.

I know, I know, it’s another country and they spell funny and all that. But the idea is one that really makes a lot of sense. Why hasn’t it happened in the United States? Well, someone is trying.

Fundrise is a new Washington D.C.-based venture that is trying to create what amounts to a small-scale Real Estate Investment Trust (REIT) in which investors can put money into a real estate project and reap some of the financial benefits from success. A typical REIT is gigantic, with hundreds of millions of dollars in real estate equity not to mention, sometimes, millions of square feet of land or space. Plum Creek timber is a REIT and so is Shurgard Storage.

Fundrise is a rather modest venture by comparison, and is an LLC, not a REIT. They’ve raised $203,500 from 121 investors (who have to be from Virginia or DC) with a goal of raising $325,000. The investors will own about 28 percent of the project with the rest being held by a private LLC. That means that the project costs are in the $1 million area.

A lot of people would scoff at $325,000. “Not a lot of money,” they’d say, “for a large project.” And it is true that there would be a lot of overhead to manage the contributions, thank investors, deal with the Securities and Exchange Commission and figure out payments to hundreds of small-bore investors. It’s an important start to prove that it can be done.

Community investment in real estate is an idea that I proposed earlier this year when there was a big dust-up over the possibility that Capitol Hill icon Bauhaus Books and Coffee would be a casualty of mixed use development. The Bauhaus panic inspired a wave of hyperbole from Capitol Hill Seattle Blog, which blustered about the coming of Eastside developers and the end of life as we know it on Capitol Hill.

We should put that energy into building a financing vehicle to share some of the risks and benefits with developers. Instead of cursing the private sector and real estate market we should use it to benefit a broader span of the local economy and give everyone—not just single-family homeowners—the chance to cash in as growth increases property values over time.

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Roger Valdez is a Seattle researcher and writer. He read through Seattle’s land use code and blogged about it. He currently directs housing programs at a local non-profit.