Rethink Real Estate. For Good.

Development

DWELL riffs on Small Change.

“Meet the organization crowdfunding for affordable housing” writes Anjelie Rao for Dwell magazine. “Small Change aims to allow anyone—not just developers—to invest in projects across the country. Its founder, Eve Picker, shares how it’s opening a new lane to community change.

Real estate investment hasn’t always had the best reputation. House flipping, gentrification anxiety, and opaque LLCs have characterized a popular perspective on the industry. But Pittsburgh-based Small Change is a young company seeking to democratize the field and shift who participates in real estate investment—and how. Founded and led by architect-developer Eve Picker, Small Change has become a platform for minority and female developers, among others, seeking crowd-sourced funding to get smaller-scale projects that have positive impacts on their communities off the ground.

Crowdfunding’s heyday was born from ArtistShare, Kickstarter, Indiegogo, and their ilk operating under the premise that anyone should be able to invest in a good idea. But Small Change and other crowdfunded real estate platforms were facilitated by former President Barack Obama’s 2012 Jumpstart Our Business Startup (JOBS) Act and subsequent changes to Securities Exchange Commission (SEC) regulations, which allowed non-accredited investors (whose net worth and income are relatively low) to invest relatively small amounts of money into businesses. For real estate, this meant that anyone, with any income or net worth, could invest in eligible commercial or housing projects and receive returns on the project’s success; developers can raise up to $50 million from crowdfunded sources. While some projects featured on Small Change are for accredited investors only, many are open to everyone.“

Read the whole story here! 

BREIF. Boston Real Estate Inclusion Fund.

Kirk Sykes is Managing Director of Accordia Partners, LLC, a Boston-based real estate investment and development company. Accordia executes large scale public-private real estate projects with a goal of financial and socially responsible investing success. He was previously the head of Urban Strategy America Fund, L.P., an urban investment, development, and redevelopment commercial real estate equity fund focused on investment returns, economic development and environmental sustainability.

Mr. Sykes combines his professional training and hands-on experience in the areas of finance, investment, development, design, and construction to create customized responses to the complex issues of urban real estate development. His approach is grounded in the bottom-line driven perspective gained during his tenure as chairman of the Federal Reserve Bank of Boston, and other roles that included serving on Fleet Bank and BankBoston’s Community Bank Advisory Boards. He currently serves on the Eastern Bank Board of Trustees and Risk Management Committee and on the Board of Directors of Apartment Investment and Management Company. He was formerly a member of the Ares Commercial Real Estate (NYSE: ACRE) Board and Compensation Committee.

Mr. Sykes has attended the Harvard Business School Owner/President Management Program, the MIT Center for Real Estate Development Commercial Development Executive Program, and L’Ecole Polytechnique in Paris. He earned his Bachelor of Architecture from Cornell University.

Read the podcast transcript here

Eve Picker: [00:00:09] Hi there. Thanks for joining me on Rethink Real Estate. For Good. I’m Eve Picker and I’m on a mission to make real estate work for everyone. I love real estate. Real estate makes places good or bad, rich, or poor, beautiful, or not. In this show, I’m interviewing the disruptors, those creative thinkers and doers that are shrugging off the status quo in order to build better for everyone.

Eve: [00:00:52] Kirk Sykes is managing director of Accordia Partners, a Boston based real estate investment and development company. Accordia develops large public private real estate projects. Kirk was previously the head of Urban Strategy America Fund, perhaps one of the first urban real estate equity funds focused on the triple bottom line. And that brings us to this podcast. Kirk has had a highly successful career, but that is not enough for him. He has always given back. And for Kirk, that means helping the black community he is part of access capital and investment opportunities that have historically been unavailable to them. Listen in to learn more.

Eve: [00:01:48] Hello Kirk. Thank you so much for joining me today.

Kirk Sykes: [00:01:52] Eve it’s a pleasure to be with you.

Eve: [00:01:54] So you’ve had a pretty rock star career in real estate, founding, owning and managing companies in the financial services, real estate and architectural sectors, and even serving as the chairman of the board of the Federal Reserve Bank of Boston. But all the while, you’ve been building your profile. You’ve made inclusion for BIPOC and women in real estate a lifelong mission. My first question for you is a tough one, but how does it feel to be a black man in real estate today compared to, say, 25 years ago?

Kirk: [00:02:27] Well as we all know all real estate is local so I’ll answer that from the perspective of being in the Boston market. So, I would say it’s better in Boston. And I didn’t know that I would say that when I first came to Boston 40 years ago. But there has been a substantial improvement from the time that I first came to this market.

Eve: [00:02:53] That’s good to hear, because, you know, my vivid memories of ten, 15 years ago in Pittsburgh were entering a real estate event room and literally feeling like the only woman there. It was a pretty elite club. So, do you think we have come even vaguely close to equality?

Kirk: [00:03:15] You know, it’s hard to say what equality is. Commercial real estate has been notoriously inequitable, you know, due to the demands in terms of capital and access and going back to redlining and even where the banks’ insurance companies wouldn’t lend to people of color and also to women. So, I think we’re getting closer in equity in many ways. I think there are a lot more people, capable people, in the market that I’m in than there were when I started. I was one of a few, or a handful, and now I’d say I’m encouraged by the number of folks that have shown up. I can talk a bit about how we got there, if you like, at some point.

Eve: [00:04:09] Oh yeah. No, I’d like to know. And my next question will be what still needs to be fixed?

Kirk: [00:04:14] Yeah. So, a few things in the Boston market changed in the last 20 years. One of the most significant was something called the Massport Model. So, a public entity, the Port Authority decided that it would make inclusion by women and people of color in all aspects of projects, 25% of its selection criteria for who got to develop sites they controlled in Boston Seaport, which became very valuable over the last 20 years. That process has evolved and gotten better and has led us to BRIEF which we’ll talk about a little later. But I would say I never imagined Boston would be the leader in change in public disposition of valuable real estate assets. But it has evolved into that. And that Massport Model has now expanded to be part of the disposition and expectations of the city as a whole, and not just the state. So that’s quite an accomplishment for Boston.

Eve: [00:05:32] It is. So, it’s gone from being an unusual idea to something that’s sort of part of the fabric of doing real estate in that area, by the sounds of it.

Kirk: [00:05:42] And it’s continuing to evolve. So now there is a request from the city on every development project that developers disclose what they are doing in terms of inclusion and equity, resiliency and affordability. And it is presumed that that may evolve further to be more than just a voluntary disclosure. So, I think the message is coming across that if you want to get approved or entitled to build a significant real estate asset, you need to be doing meaningful things in terms of transformation.

Eve: [00:06:20] So how? I mean, at least in that area, how close are we to equity? Like, how far do we still have to go? You know, you said you’ve been working on this for 25 years. Is it another 25 years? Is it around the corner?

Kirk: [00:06:35] Well, it’s a diverging trend line, isn’t it? If you look at opportunities and the number of people able to execute them. And that’s unfortunately related to access to capital in many ways because there isn’t sufficient accessibility to be in a position of controlling projects, not just to invest in a project, it’s who’s in the decision making position to leverage those projects to be transformational in terms of labor, in terms of occupancy, in terms of, you know, affordable retail, you know, all the transformative things that come along with control are so important. And if, by way of your question of equity, it’s a broad question. In terms of how many people will be able to be, able to own valuable commercial real estate assets, aren’t we playing a 400 year catch up game?

Eve: [00:07:38] Probably, yes.

Kirk: [00:07:39] Closing that gap.

Eve: [00:07:41] Yeah

Kirk: [00:07:41] But there is reason for optimism. When I took over Real Estate Executive Council in the early 2000s as the preeminent organization of African American real estate executives in the country, it grew from 30 to 70 people, but now it’s 250 people. So, that seems to be exponential growth and something to celebrate.

Eve: [00:08:05] Right. Although I have to say this, and people have heard me say this before, when I look at the investments made by VCs in 2023 versus 2000, nothing has changed. I mean, you’re looking at companies, you know, women-owned companies, 2% of the investment dollars, minority-owned companies, 1% of the investment made during that year. That feels to me like we’re never going to get anywhere.

Kirk: [00:08:37] It’s easy to be disheartened and it’s hard to continue in the face of the challenges. But, you know, you mentioned venture. I think something has changed. I have the good fortune to be the father of the founder, one of the founders of black VC and, BLCK VC didn’t just try to promote people going into venture as investments, but creating an ecosystem where BIPOC and women venture platforms could be launched. So now, while the numbers are still pretty small, you know, I think when Sydney Sykes went to the Valley after Stanford Business School, it was 300 folks of color in venture platforms. Probably hasn’t gone up a lot, but there are a lot more people nationally in that ecosystem of venture investing platforms which didn’t exist before black VC. So, I’m encouraged, I guess, and I’m an optimist. I’m a developer, I got to be an optimist.

Eve: [00:09:40] I tend to be discouraged and encouraged in cycles, you know, with my platform. Small Change. What I’ve seen in that, the world of democratized investment opportunities is that there’s a very large percentage of women and minority owned businesses looking at that tool as a way to startup businesses. And I think that will eventually Sort of become part of the status quo. So that’s also I think a check mark, right?

Kirk: [00:10:07] Yeah. That’s true.

Eve: [00:10:08] Okay. So, what initiatives in particular have you tackled over the years in an effort to move this needle?

Kirk: [00:10:15] Yeah, interesting. You know, I’ve had a few hats, as you’ve mentioned, from architect to developer to investor. So, I guess it depends on which hat I’m wearing. But I like to say I’ve built community with a pencil, a dollar and a brick, and building community is important to me. They’ve all worked well at different times. So, if I were to point to some specific opportunities or, I should say, initiatives, going back to the 90s we changed the point system on the largest highway construction project in America, the Big Dig, $20 billion.

Eve: [00:10:56] Oh, I remember that.

Kirk: [00:10:57] But we found out people were winning contracts by a very few points. So, when we gave value and attention to including first time and diverse team members or companies, it automatically, out of greed, kind of propelled opportunity for those companies to grow. In 2000 we got involved with developing the first African American owned branded hotel in New England. And it was in an Empowerment Zone. And we learned how to use Empowerment Zone financing and tax preferences to create the most diverse workforce, in terms of construction and union labor. The first African American general manager, a hotel staff that was 98% people of color, mostly women. So, leveraging the Empowerment Zone objectives to create change. And then coming into early 2000s with the launch of Urban Strategy America Fund, which I started, which was sort of the early socially responsible investing private equity strategy, which included all the banks and a number of institutional investors and pension funds, we created change in terms of keeping track and measuring investment with women and people of color and transformation of communities and we found investors that wanted to invest in that. And so, you know, I could keep going, I guess what the theme is that over the years, not only the initiatives have changed but the tools required to create change have changed. And so, I keep trying to evolve to stay one step ahead. And now with the BRIEF vehicle we’ve launched with Small Change, we’re trying to figure out how to make large scale commercial real estate opportunities that typically don’t see commercial real estate investors out of the diverse communities more available and accessible. So, thank you for helping us with that.

Eve: [00:13:15] Oh sure. Well, it’s been a little bit disappointing in some ways, but we can talk about that too. But let’s talk about that BRIEF and what and who is BRIEF and what inspired it.

Kirk: [00:13:26] BRIEF, Boston Real Estate Inclusion Fund, kind of came out of that evolving leadership in Boston to want to create opportunities for people of color and women to invest in some of the growth that’s happening and has been happening specifically around the life science industry, but in other industries as well. And so, three partners came together. We were once competitors and, you know, we joined up to identify commercial real estate investment opportunities in the city and then bring retail investors together with Basis Investment Group. And Basis as the largest woman of color owned platform in commercial real estate, having done about 6 billion, had the ability to come in and finance investments and underwrite investments with large scale developers who had very attractive opportunities. And then we came along and syndicated out a portion of that to make it available to smaller retail investors, qualified investors, who could invest $50,000 or more. And now we’re putting about $3 million into one venture, which Basis has put $11 million into with related companies.

Eve: [00:14:50] So this opportunity is on Small Change, but it’s accredited investors only, or qualified investors. That’s my disappointment and for yours too, right, that it couldn’t be non-accredited investors, because if you can’t get your foot in the door, then it’s pretty hard to start building wealth. But nevertheless, the rules dictated that. And so, you’re trying to raise 3.75 million towards this pretty spectacular life sciences project in Boston. Do you want to tell us a bit about the building and the tenants and developers?

Kirk: [00:15:25] Yeah, yeah, the building is exciting in that it’s a life sciences building for Vertex Pharmaceuticals, which is a fortune 100 pharmaceutical company. The project itself is about $418 million, 344,000ft². But what’s more exciting is that Vertex is the 100% commercial tenant for the building, and it’s expected to come in as a equity investor alongside the retail investors. The sponsor is equally impressive, related companies, which build projects like Hudson Yards in New York, is the sponsor for the venture and is quite qualified and capable in the Boston market. We’re excited to make this available in much smaller retail investor increments to qualified investors than has typically happened before. And with your help, we’re making that possible.

Eve: [00:16:26] Yeah. So, the disappointment is that because this is such a small piece of the pie, right, of a very large project, it’s really a passive investment into that project. And so therefore non-accredited investors are not permitted to invest through regulation crowdfunding, which is a very big disappointment. But maybe someone at the SEC is listening.

Kirk: [00:16:50] Well, we’re happy to at least, this is a very cutting-edge effort in our opinion. And hopefully it will continue to get even better in terms of its availability as time goes on.

Eve: [00:17:03] So what is the ultimate goal for BRIEF?

Kirk: [00:17:06] Yeah. So, you know, BRIEF is ultimately trying to promote opportunities for diverse investors, Bipoc and women investors, who don’t get a chance to participate in these investments. But our ultimate goal is for transformational real estate investments that do well and do good. And, specifically, in the terms of inclusion and all aspects of inclusion, which is a dimension of this project. 50% of the project’s participants are women and people of color. It is a LEED-certified building and aspires to be Net Zero. So, in terms of ESG dimensions, this is a home run. So doing well and doing good, as was the case back when I launched my triple bottom line fund in 2005 is People, Planet, Profit. And I like to say that there are not the other two Ps without the profit P but the same is true in terms of the People and Planet dimension. And we will look forward to chronicling how this building is transformational and we’re excited that people can actually also be profitable in doing that.

Eve: [00:18:32] So for anyone who’s listening, if you don’t already know, we are at SmallChange.co. So you started life as, or at least your career not life, as an architecture student. And what led you to start a fund? It’s a pretty big step. Yeah.

Kirk: [00:18:49] Big step. You know, I think the cornerstone of everything I’ve done in my life has been about building community. And that sounds rather broad, but, you know, my family came out of the black community in Alabama, and my great grandparents were involved in setting up the education system in Alabama. And, you know, we’ve always been part, not only of building community in the black community, but standing up for civil rights. Grandfather testified in the Scottsboro trial, helped black people have a voice up to the Supreme Court to be on juries in America. So, there’s an obligation where to much those who’s given, much is expected. And I think that’s a roundabout way of saying I see real estate as my vehicle for giving back. And you heard me say earlier, I built community with a pencil, a dollar and a brick, and they’ve all worked at various times. I’m kind of agnostic. I want them all to be, all the tools on the table, to achieve the outcomes we want to try to attain. And so, that’s the path I’ve chosen for my life. And the fund vehicle has been maybe the most transformational, because you’re leveraging capital and you’re able to leverage that to create the change that sometimes doesn’t get attained without capital leverage.

Eve: [00:20:26] Yeah, I personally agree. You’re a real estate developer, what sort of projects are you working on today?

Kirk: [00:20:33] Our singular and greatest focus beyond BRIEF, and BRIEF has the ability to be in lots of investments in an investor role as it’s evaluated and underwritten, and we’re able to be confident that we can share that with retail investors in a way that they can make an intelligent investment decision. Beyond that, we are developing 6,000,000ft² at a place called Dorchester Bay City, and this is a 15-year capstone project. We’ve been at it for four. It’s 36 acres on a peninsula on the Red Line in Boston, on the water next to the third largest park, next to an urban beach, next to the third most diverse university in the country. And we are extremely excited about that project. So, for me, I’ve gotten more focused in my efforts, and they are really bifurcated between the retail opportunities for diverse investors that BRIEF affords and the transformation and placemaking and inclusion that can be attained through a 6,000,000 square foot, $5 billion project.

Eve: [00:21:52] So what have been some of your very biggest challenges over the years and maybe disappointments?

Kirk: [00:21:59] Yeah. You know, it’s interesting. I guess I don’t see barriers, I see opportunities. And so, I suppose in that regard everything’s a disappointment, right? Or anything that gets in your way.

Eve: [00:22:16] Yes.

Kirk: [00:22:17] But, you know, I’ve been very fortunate to take advantage of opportunities that have been presented to me, and many of them have showed up in ways that I never expected. So, I go into life looking for a great story. If I come up with a great outcome, then it’s an additional success. And so, I try not to be disappointed, but, you know, I would like to have been where we are now 20 years ago, in terms of being able to access 36 acres and do a 6,000,000 square foot project. But, you know, it wasn’t the time. And by that, what I mean is I didn’t have the capital relationships. I hadn’t spent the time in financial institutions and environments. So, I’m not answering your question because, as an optimist it’s really hard for me to look at and find the disappointments. I just see them as impediments that can be removed.

Eve: [00:23:23] Interesting. So, they just even, they just become bigger challenges.

Speaker3: [00:23:28] Well, you know, makes life interesting, right? I mean, if it were easy, everybody would do it. And many of the opportunities have come out of adversity. When we acquired the Crosstown site, we were unable to test for anything by the agreement on the contract. There was a lead paint factory underneath it.

Eve: [00:23:50] Oh.

Kirk: [00:23:51] So a guy with no money had a project for a city block. But he had a lead paint factory he had to get rid of. So, we created an environmental risk transfer company with an insurance company and an engineering company. We fixed the problem. We got the regulatory closure. I sold the company back to them. They went on and did it for other people. So, I guess the story of that is, maybe the opportunity was there because somebody else knew there was a lead paint factory, or maybe they didn’t know how to solve the problem, but once you can remove it, it became a valuable asset. And we own that asset today. But if I gave up…

Eve: [00:24:33] You wouldn’t own it. That’s right. I’m going to go back to BRIEF at the moment and the 22 DryDock offering. What will success look like for you with that offering?

Kirk: [00:24:45] Yeah. You know, success here, because it’s all about the qualified investor and their ability to obtain the expected outcome. So, we’ve been able to scrub a lot of the risk in this project. One of the advantages of coming in later, which is not always where people of color are invited to come in, usually it’s in an effort to win something. If you come join me, I’ll tell you what you won. Win, win. This is the exact opposite of that. We’ve reverse engineered inclusion. And so, to your question, success will look like a predictable outcome where people attain the 1.7 equity multiple that they’re expected to get and the 17% internal rate of return. But the only way to do that is to have risk adjusted returns that are based in fact. And so, 22 DryDock project is unique in that 60% of the project has been bought out in terms of construction costs. Normally, you don’t know that when you go into a project, it has a tenant for 100% of the space. Normally you don’t have a tenant before you start a project. It has the success of a very viable fortune 100 pharmaceutical company who has a building across the street already in their headquarters in it. So, there is certainty of tenancy. And so, I guess I’m describing to you predictable outcomes that track along the lines of the underwriting that we offer to our investors. The by-product is that we can engage a lot of people of color and women in the execution of this project, and that we can prove that doing well is not at the exclusion of doing good or the opposite.

Eve: [00:26:46] Well, on that note, I thank you very much for joining me. You’ve had a pretty spectacular career. I’m not sure what else to say. I was gonna say, what’s next for you? But it sounds like you have your hands full.

Kirk: [00:27:02] You know it’s interesting. I keep finding things that I should do. I took over as the president of NAIOP for the largest national…

Eve: [00:27:14] Oh, I know NAIOP well, that was one of the real estate industry events that really turned me off a while back.

Kirk: [00:27:22] Yeah, but that’s been exciting because there’s a whole regulatory piece. I’m skiing every continent of the world so I’m off to New Zealand in August.

Eve: [00:27:33] Oh, close to my home country.

Kirk: [00:27:35] That’s right. And I’ve been there and love it. And Oceania is a destination for us. So, you know, I think BRIEF will be a wonderful thing to bring to fruition and bring ten more BRIEF projects to Small Change and have them bring lots and lots of retail investors into the fold. It’ll be great.

Eve: [00:27:57] Well, we would love that too. So, we’re ready for it.

Kirk: [00:28:00] I know you are.

Eve: [00:28:01] Thank you very much, Kirk. It’s been it’s been a pleasure.

Kirk: [00:28:05] Thank you Eve. You take care.

Eve: [00:28:12] I hope you enjoyed today’s guest and our deep dive. You can find out more about this episode or others you might have missed on the show notes page at RethinkRealEstateforGood.co. There’s lots to listen to there. Please support this podcast and all the great work my guests do by sharing it with others, posting about it on social media, or leaving a rating and a review. To catch all the latest from me, you can follow me on LinkedIn. Even better, if you’re ready to dabble in some impact investing, head on over to smallchange.co where I spend most of my time. A special thanks to David Allardice for his excellent editing of this podcast and original music. And a big thanks to you for spending your time with me today. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.

Image courtesy of Kirk Sykes

Manufactured authenticity.

Scott Snodgrass is a founding partner of Meristem Communities, a Houston-based real estate development firm committed to creating Places for People™️ with mindful, fine-grained developments. Meristem is a resiliency-focused developer whose guiding principles create human-centric design by thoughtfully, sustainably, and holistically connecting the land and its natural resources with people.

Scott is an innovative entrepreneur and former farmer who leads with respect for the land and the environment, carefully strategizing an interconnected resilience of all systems—natural, human, and built. His vision has always been to create neighborhoods that honor and nurture local ecosystems, empowering people to live a more holistic way of life with renewed appreciation for their natural surroundings. This vision is being brought to fruition in Indigo, one of Meristem’s first developments in the suburbs of Houston, designed with a foundational connection to agriculture and built around a human-scale working farm and pasture. The Meristem belief is that it’s the sum of a thousand small decisions that create more engaging, more interesting, and more livable neighborhoods.

Alongside his work at Meristem, Scott works collaboratively with developers and consultants to create unique and exceptional agricultural amenities (agrihoods) within master-planned communities through Agmenity. He has become a thought leader in the national agrihood movement, regularly speaking on the topic at regional and national conferences. Scott is a member of several community organizations including the Urban Land Institute (ULI), currently serving on a national committee and most recently contributed to their 2018 ULI Agrihood Report. Scott holds a Bachelor of Arts in political science and government from The University of Texas at Austin.

Read the podcast transcript here

Eve Picker: [00:00:06] Hi there. Thanks for joining me on Rethink Real Estate. For Good. I’m Eve Picker and I’m on a mission to make real estate work for everyone. I love real estate. Real estate makes places good or bad, rich, or poor, beautiful, or not. In this show, I’m interviewing the disruptors, those creative thinkers and doers that are shrugging off the status quo in order to build better for everyone.

Eve: [00:00:43] In real estate development, envisioning how future societies will live can often feel like masterminding a high-tech work of science fiction. Just outside of Houston, a new development of the future is emerging. But instead of flying cars and skyscraping utopias, this version of Tomorrowland has its roots firmly and sustainably planted in days gone by. Indigo, a 235-acre community, is being developed by Scott Snodgrass and his partner Clayton Garrett, both farmers. They have thoughtfully gone against the norm in every aspect of this project, focusing first and foremost on people and a human scale to encourage interaction. Downsized lots and homes, a working farm, the integration of small businesses, careful attention paid to embracing everyone all make this project one worth watching. You’ll want to listen in to learn more.

Eve: [00:01:54] Hi, Scott. It’s really nice to have you join me today.

Scott Snodgrass: [00:01:57] Thank you so much for having me. I’ve been a big fan of yours and the podcast, at least for the past couple of years, and so, excited to be able to join today.

Eve: [00:02:06] Oh thank you. You’ve been heard to say that in community development, envisioning how future societies will live can often feel like masterminding a high-tech work of science fiction. Why is that?

Scott: [00:02:21] Well, uh, we don’t really know what the future holds for how people are going to live, but I think that we have maybe 40,000 years or something of history with how people live. And certainly, in modern history, we have some great analogues to look back at and so, I think it’s really about learning with what we’ve done in the past, but then also applying the technological changes we’ve had to the future. We’re a little slow to adopt some technologies. I think it’s real easy to see technologies and think it’s the future. And these sexy technologies that are always being sold by some company for some high price and you have to sign up for their subscription, and they own all of your data and all that. And we’re a little wary of that. But I do think that as we look into the future, sometimes we are doing the same thing that a science fiction writer would do in imagining what the world’s going to be like in the future.

Eve: [00:03:16] That’s true. So, and you are a former farmer amongst other things. How does a former farmer become a real estate developer?

Scott: [00:03:24] It’s a great question. It’s the one that most people ask, right away off the start. But my business partner and I, we have a company called Agmenity, and it manages farms for master plan community developers, hospitals, school districts, cities and counties. And so, we had experience in agriculture and started that company as a service company to help incorporate agriculture into more real estate developments and have been doing that work since 2015. And we had, our first project is called Harvest Green. It’s here in Houston. The real estate developer was just a wonderful company and their general manager on the project, Shay Shafi, was just an incredibly generous guy. And he brought us into every single development meeting, you know, so every week or every two weeks for years. And sometimes…

Eve: [00:04:18] You caught the bug!

Scott: [00:04:19] Right. We were like, why are we here talking about engineering? And he said, well, hey, this whole like, agriculture in a community thing is relatively new in the modern framework. And so we want to make sure that we’re catching any of those conflict points. And so we got to see the behind the scenes. And we got to ask questions about, well, why are you making this decision and why are you making that decision? And Clayton and I, my business partner, we had always felt like what could be more impactful on someone’s life than the food they eat. Nothing, right? And then we saw this whole real estate development world and said, oh, wow. Like, real estate development actually has a lot to do with what food people eat and a whole host of other things. And so, this is also incredibly impactful work. So, we hired a COO at Agmenity who does a tremendous job, runs the company better than we ever did or could and is really leading that company in a growth throughout the country right now. And so, Clayton and I have been able to focus at Meristem Communities and put our energy there and really work on our first project, Indigo.

Eve: [00:05:23] And so Meristem Communities you launched with your partner. And how long ago was that?

Scott: [00:05:28] Now we just launched meristem in 2021. We owned a piece of property, um, that we had had a large-scale farm on, and we were starting to be surrounded by suburban development outside of Houston. And so, that farm was never going to grow to the full size of the property we had purchased, we realized. And so, we said, okay, well, what do we do with the rest of this property? And so, we had been walking alongside real estate developers and we said, well, let’s look at this. And we started talking to some folks about some mixed-use and sports parks and light industrial even. And none of it felt quite right. And then Covid hit, and everything stopped for a while. And then single-family real estate caught on fire, for good and for bad. And we said, okay, well, this is kind of our only option right now. And frankly, because of the demand that home builders had for lots at that time, it put us in a position where two farmers could become real estate developers because the home builders were so desperate for lots. And that was really the key that opened up financing and all the other agreements that we needed to get moving.

Eve: [00:06:38] Interesting. So, then I have to ask you, does this community differ from conventional urban plan communities? And if it does, how?

Scott: [00:06:48] Certainly for Houston, it is shockingly different, we discovered right away. Our conversations with our home builders weren’t easy, even though their demand for lots was so high. But, you know, we’ve done a number of things at Indigo that are different than the norm. You know, first off, we do have agriculture incorporated into the community. How could two farmers, you know, develop a community that didn’t have agriculture? So, we knew we had to do that, but we actually don’t find ourselves talking about it that much, related to Indigo. We see the big differences that we have are really our focus on walkability, and that means using homes that have their garages on alleys and the front doors either on the street or on a green space. And that was a very difficult framework for the Houston development world to understand. For whatever reason, Houston has just rarely had any alleys since the 50s or 60s. The city’s abandoned a lot of them in the urban core and master plan community developers just haven’t used them. And so, you know, we can easily travel around the country and see alley-loaded neighborhoods. You know, the traditional neighborhood design framework all around the country. Dallas even has a lot of it. And so, it was easy to go see it but we had a hard time getting our, our builders on board with doing that. So that was kind of the first hurdle and something we were doing that was very different. And then the second part of that was smaller…

Eve: [00:08:14] So actually let’s back up. So, the importance of alleys means that, you know, no driveways on the front, the front of the houses are really for people, not for cars and, and trash and cars are relegated to the alley. Right?

Scott: [00:08:29] Yeah. So, our tagline at Meristem Communities is places for people. And you know, we imagine a world where cars, corporations and capital are not the primary stakeholders. And those other three things are tools that humans can use to achieve their goals, but they’re not the primary stakeholders. And unfortunately, our real estate system, as you know and talk about all the time, is currently built for cars, corporations and capital. And so, we believe that it’s an important shift in the design framework as you’re designing a community to look at people first. So yes, garages on the back. That reduces our curb cuts and our conflict points for vehicles and for for driveways and sidewalks. Yeah.

Eve: [00:09:12] And people. Safer for kids.

Scott: [00:09:13] Yep. Safer for kids and all that. It allows us to have on-street parking and a lot more of it because we don’t have all of those curb cuts now, for the driveways. And it also means that when cars pull off of the road onto the alley, there’s a very limited number of cars on those alleys as well, because they serve small pockets of homes. And so even those spaces are relatively safe as well.

Eve: [00:09:35] That’s a really major urban planning feature, but I feel like I need to go back a step and ask you what your vision was. Like, what’s the overall vision for this community, and where did you draw inspiration from? Aside from the farm?

Scott: [00:09:51] And we have this conversation a lot too, like. Our PR team will ask, you know, what’s the theme of the community? And we keep coming back to it’s places for people. That really is the theme. You have to do everything. You can’t just pick one thing to do. And so, we’re incorporating agriculture into our development. We’re using alleys. We’re creating safer streets. Wherever our sidewalks cross the street we have a raised pedestrian crossing or a raised intersection table. We have narrower streets, we have on street parking, we have bulb-outs. We have all these things to create a safer environment for people and focus on that. And then we’ve also done the mixing of uses by having residential and retail and other commercial in the same space and, you know, bringing that into the neighborhood instead of pushing it out onto the major thoroughfare adjacent to our neighborhood and turning its back to the community, we’ve really brought that retail into the community and had it face the community and be really central there. And so, I think you have to do all those things. So, places for people really is the theme but then walkability and safe streets has to be an important part of that.

Eve: [00:11:00] So how big is this community? How many homes are we talking about? How many people?

Scott: [00:11:04] So we have 235 acres within the development. More than 60% of that is open space. So, we have a 25-acre lake. We have, you know, miles of walking trails and sidewalks and everything. And we also have these, we basically created a street grid and then took out every other street and made it a green space. And so, homes still front on those green spaces, and they’re served by the alleys in the back. So, we have a lot of open space there. We have, uh, 661 homes for sale. And then, and that’s a range of attached and detached and cottages and more traditional single-family homes for our market. And then we also have about 150 apartment units, but they’re distributed through a number of buildings. We have these mansion apartments that are six- and seven-unit apartments that just look like a banker’s house, that we’re putting on some of the green spaces. And then we have some, like, smaller 30-unit buildings of micro units that look like brownstones that are in what we call Indigo Commons, which is the real town center, mixed-use area of the neighborhood.

Eve: [00:12:17] And so you’re under construction, right?

Scott: [00:12:21] Correct.

Eve: [00:12:21] How far into this project are you? What percentage complete and how many people live there?

Scott: [00:12:27] So, we don’t have anyone living yet, but our section one, the model homes for the community are going to start construction here in just a few weeks. So, all of section one, which is a little more than a third of the community, all of the storm sewer, the sanitary sewer, water lines, all that’s in the water plant. And, you know, we built our own water plant and wastewater treatment plant because we didn’t have services in our area. And so, all of that is in and the paving starts this week. And so, they’re moving real quick for us. Hopefully the weather holds up for us and they’ll be out there pouring concrete for the next 30 days or so, and then we’ll have those first 265 lots available for sale. And I’ll tell you, we’ve been doing some really intentional, small-scale and intimate cultivation of the potential home buyers. And our home builders are saying the demand is intense and we believe that we’re going to sell out really quickly. So, we’re already getting section two ready. And construction for section two will start in just a few months here.

Eve: [00:13:28] And so, I have to ask how affordable are these homes?

Scott: [00:13:32] So, we are in the probably least affordable quadrant of the city. And again, partially that’s what allowed us as, you know, two simple farmers to deal. But also, what we’ve done is compare ourselves to the communities around us and if we wanted to push towards affordability, what could we do? Because Houston’s always been very affordable compared to the rest of the country but during Covid it changed quite a bit. And so, we’ve seen the same thing now where your firefighters, police officers, teachers, social workers can no longer, or anyone working in retail, can no longer afford to live even in the communities where they work. And it felt really wrong for a community to tell the people serving it they had to go somewhere else. That just felt inhuman. And so, we said, okay, we’ve got to find a way to solve for that problem. And so, one of the ways we did that was by pushing for smaller lot size, because we saw an opportunity where lots in Houston had become huge, you know, mostly in the 70s and 80s and 90s and that mostly that’s wasted space. People aren’t using those portions of their lots. So what we did was really densify our neighborhood, compared to the suburbs, you know, 3.2, 3.4, maybe four units per acre is the standard in the suburbs. I think we’re at almost eight units per acre. And then if you look at like, you know, net density in some smaller pockets in the neighborhood, we even flirt with 20 units per acre in our most dense areas. And so that’s a very different calculation. And that’s just on the first side.

Eve: [00:15:10] What were the zoning restrictions you have to contend with to get there?

Scott: [00:15:15] Most of our property was in the unincorporated county, and the county that we’re in has very little in the way of requirements for subdivisions or development. So, it’s kind of the wild, wild West out here.

Eve: [00:15:26] And that reminds me of, I don’t know if you ever used to play SimCity.

Scott: [00:15:29] Yeah, yeah.

Eve: [00:15:31] I just, you know, no restrictions.

Scott: [00:15:35] Yep.

Eve: [00:15:36] Insanity. Yeah.

Scott: [00:15:38] Yeah. So, then we, but we did have a portion of our property that was in the extraterritorial jurisdiction of the city of Richmond, which is our closest jurisdiction. We reached out to Richmond and said, hey, we’d love ultimately for our neighborhood to be a part of the city. So, we worked with them on a development agreement, and they have the right to annex our property in about ten years when we’re done with the development process. And that development agreement, so their, their minimum lot size was 6000ft², in the city of Richmond. And through our development agreement, we got that down.

Eve: [00:16:11] That’s a really huge.

Scott: [00:16:13] Right. Yeah. It’s big for the minimum. Right.

Eve: [00:16:15] Yes. Yeah,

Scott: [00:16:16] Maybe a maximum. It’d be okay. So, we worked with them and got that down to 2000ft², which is allowing us to do some cottage homes that are in that, like 950 to 1450 square footage range. That really serve, and that’s what we saw, was the suburbs of Houston have almost entirely been built for two parents with children families. There’s just so many homes built for that family formation, which in Texas is now like 20% of our family formation.

Eve: [00:16:49] Oh that’s really interesting.

Scott: [00:16:50] So the other 80% of family formations or household formations we’re just ignoring. People who want to live together, who aren’t married and have trouble with financing. You know, we have single parent families who affording a giant home like that can be really difficult. You know, all these different formations, you know, like couples who don’t want to have kids, which is more and more common today. And so, like, why are we only building these five-bedroom, you know, mini mansions in the suburbs? So, we shifted everything down on lot square footage and home square footage to create more of an ecosystem so that we’re providing homes for that wider range of people. And then especially wanted to do the aging in place concept where you could buy your first home in our neighborhood, you could rent here, then you can buy your first home in our neighborhood, and then you can size up your home as your family grows and size down as it doesn’t, as it shrinks and create all of that in one place for people.

Eve: [00:17:47] This is pretty challenging stuff that you’ve tackled for two farmers. First time real estate development. I have to ask, there’s a lot of infrastructure to put in place. How challenging was it to put the funds together for this project?

Scott: [00:18:01] I think we’re very persistent and we’re very persuasive. And then the market was really hot at that time. Like, we have the privilege of that and the privilege of both being white males, which does make a difference when you’re trying to get financing.

Eve: [00:18:15] Definitely.

Scott: [00:18:16] Absolutely. And then at the same time we were just willing to take no for an answer over and over again and go to the next person. And so we heard no, a bunch of times. We didn’t fit the traditional needs. You know, everybody understandably wanted a huge chunk of cash equity in the deal. And we didn’t have any money, we’re farmers, and we didn’t know anybody who was going to do that for us. And we didn’t want to go out and find an equity partner who would ultimately control the decision making. We wanted that to be us. So, we just kept working and working until we found a private lender that was willing to take on our deal, that was trying to move more into Texas. They had been developers in the past, which we really loved because they understood the development process. They’ve been very flexible. They are not very cheap. And I think that is the place that people need to get over that mental hurdle that, in our minds, we will pay for flexibility over and over and over again because it really brings resilience. When you lock yourself into this tiny little box of requirements and allow that lender or the bank to pull the rug out from under you whenever they decide to, that’s a tenuous place to be that we didn’t want to be. And so, we are happy to pay very high interest rates for very large sums of money for a long time in order to get the flexibility that we need. So, sure, we take a haircut in our profit at the end. And I think that’s what most people struggle with. But it does make our development more resilient.

Eve: [00:19:44] So you will have a working farm in this community?

Scott: [00:19:48] Yeah.

Eve: [00:19:48] How does that go?

Scott: [00:19:50] It’s 42 acres. And really, what most people will experience is the front three and a half acres, which are right at the entrance to the community, and it bumps right up into the town square area. And that’s the vegetable farm. So that’s where vegetables and flowers will be grown. That’s where people can go and buy some vegetables from the farm. They can take classes, they can interact with the farmers, maybe even have their own little plot to grow some vegetables in. And then the, on the back side of the property, the remainder of the farm is pasture and orchards. And so we will probably have laying hens, you know, hundreds and hundreds of laying hens and do egg production on the farm as well. And we’ll have some programming back there, but in a more limited basis that’ll mostly be a farmer’s work area on the back side of the farm.

Eve: [00:20:38] It sounds idyllic. And then also, where did you get your inspiration from for the architecture for the community, like, and what is the architecture like?

Scott: [00:20:48] We have a funny phrase we find ourselves using more and more, and that phrase is manufactured authenticity.

Eve: [00:20:54] Kind of like Disneyland, right?

Scott: [00:20:57] Yeah, in some ways. And there’s some parts of Disneyland that Disney did really well. Right? And really speak to people. There’s other parts of it that are cloying, I would say and, you know, are saccharine. But what we wanted to do, because we were developing what was just entirely farmland, not a single tree on our property, no structures at all. We felt like for people to feel like it was a place we needed to create some age, some patina on the community. So, we’ve done a few different things. You know, one, we went out and bought two 50-foot-tall live oak trees and had them planted at the property, and that was not cheap. But doing that, you know, at least makes it feel like something was here before. And then as we planned the architecture of our buildings, like the first commercial building we’re building is called the filling station. And so, it’s a little bit tongue in cheek that it was a 1930s Art Deco gas station. And then all of the decorations on it had been stripped off. It had been stripped back to its basic form, and it was no longer a gas station. It wasn’t serving cars now, now it’s serving people. So, it’s a general store, coffee, beer, wine, light breakfast and lunch options and then sells vegetables from the farm, eggs, pickles, jams and jellies, all that. And acts as the third place for the community to really activate at the beginning, where there’s cafe seating and it’s like, come hang out here, use the Wi-Fi, do whatever. So, the architecture of that building was really intentional, that it refers not only to an architectural style of the past, but also acts like it had been adaptive, reused, at some point in the future. And that goes all the way to like, choosing a polished concrete floor finish. You know, where do you incorporate some concrete block, like would have been in those buildings before so that you can see it, even if that’s not our modern construction method? So, there’s some touches to it that are Disney but what we’re hoping to do is really just give people that subconscious feeling of like, this isn’t a brand new whitewashed, you know, place. There’s some age here to, to help the community form in the beginning.

Eve: [00:23:11] And so how do you balance, like, modern amenities with this notion of small-town living?

Scott: [00:23:17] Part of that is actually doing your research on amenities and finding out what people want, and then looking at life cycle cost and value to the community. You know, in Houston, we’ve had an amenity arms race over the years, and people in other places in the country are shocked when they hear how low our association fees are compared to the amenities people get. Usually when I say we’re $1,700, they say, oh, $1,700 a month. That’s a that’s a little bit high. But we’ve seen numbers like that, and we say, no, $1,700 a year, is our cost. It’s shocking to people. And so, we wanted to, like we do with so many other things, go counterculture on that a little bit and say, what do people actually want? So, in Houston, every community has a pool, but those pools are only open three months a year. They cost millions of dollars to install, and they cost like a quarter million a year to staff and maintain. And so, we looked at that and said, okay, well, is there really the value? Like I have three elementary aged kids and we have eight pools we can go to in our neighborhood, which is ridiculous. But we go like 5 or 6 times a year. So, the amount of money that I’m paying in HOA fees towards that pool, it probably doesn’t calculate out to where it actually makes sense. And so we decided not to build a pool at Indigo.

Scott: [00:24:35] We have an amenity lake that is like a nature lake that you can swim in that we’re putting a dock on so if you want to swim, you can go there. But also, if you just desperately want to go to a pool, there are private pool clubs in the area, or you can go to a fitness center with a pool and those sorts of things. So, part of it was like getting rid of the big plays. In Houston these crystal lagoons have become all the rage, where people spend $10 million building a beach. You know, it’s an enormous pool, essentially. And we didn’t want to saddle our residents with that kind of debt. And we feel like with those big giant plays may get you a bunch of media coverage, but they’re really risky long term. So, we’ve downsized our amenities and done more of them and spread them out more throughout the community. So, it’s little things like a couple of bocce ball courts here and a natural children’s playground over here, and a small dog park over here, and a meditation maze over here, and some moving water and wind chimes over here. And really just spread those out and diffuse them throughout the community so that they’re more easily accessible. And that’s a part of the walkability. And they’re, I guess, maybe a little more equitably spread out throughout the community too, so that everyone has access to them, but not saddling the community with any specific, really large-scale debt.

Eve: [00:25:55] Yes, yeah. So, who will live there and where are they going to come from?

Scott: [00:25:59] So we did a lot of research at the beginning. We used a company called Kantar that has a giant database of demographics, looked at who lives in our area, which generation do they fall into? And then they even segment each generation by behavior. So, for example, there’s a millennial segment that’s a little more career-oriented, that’s a little more go, go, go. Then there’s another segment. So, I’m in that segment. My business partner Clayton’s in the other segment, which is a little more family oriented, a little more self-care oriented. And so, you know, it’s interesting to see the different segments and how they’re, how they want to live. So, my segment might be happier in a town home in an urban area. My business partner’s, you know, his segment might be a little bit more happy in a home, a smaller home, but with a little bit more of a lot around it and not attached. So, we did that research. Then we went out and looked at who’s in our area of those segments and then designed our home types for them. And then, we actually had 700 people answer a survey with questions about amenities and other things in our community and got amazing feedback from that that we incorporated into what we were doing. And then we took all of that to our home builders and said, here’s really what we want to see for the homes in this area. And we have architectural guidelines that control what they can build. We control the square footage band. We approve the elevations for the homes, what they look like on their facades and all of that. And then the goal is that once we get that done, we can hand it over to the homeowners’ association, and then the control can relax. And we want people to be able to have their own impact on what their home looks like.

Eve: [00:27:46] So how do baby boomers and seniors fit into your plan?

Scott: [00:27:51] Well, I mean, baby boomers are such a huge part of the population right now. And a lot of them, I’m sure everyone’s seen the articles are holding on to to larger homes and not moving out of them. And that’s creating a little bit of a scarcity for homes, for families that are growing. And I think one of the reasons is that they haven’t been given alternatives, other than the age qualified 55 and up communities and we’ve had conversations with a lot of people who don’t want to live in one of those.

Eve: [00:28:19] Me included.

Scott: [00:28:21] Right? They want to be around younger people and specifically probably even their families. And so, at Indigo, we’ve tried to design the community again, where it’s a complete community with opportunities for everyone. So, we looked at what are some good housing types for people who are downsizing, empty-nesters, aging populations. You know, there’s things like more one-story buildings, or if it’s a two-story, try to make sure your primary suites on the ground floor, and then looking at the the walkability for those homes as well. Mobility is different for every different person. But there’s some commonalities and so for people who are a little bit older, having a place to rest every 150ft or so is really critical. And so, we’ve tried to design our walking network so that there is both shade and places to stop and rest as you make your way from your home to the different places throughout the community.

Eve: [00:29:17] So what about cultural and racial diversity?

Scott: [00:29:21] Our county is the second most diverse county in the country after Queens, I think. And so, it is 25% white, 25% Black, 25% Hispanic, and 25% Asian. And the Asian population is incredibly diverse itself with a lot of Indian and Pakistani, Chinese and Vietnamese populations in our area. And so, we feel like, really fortunate to be in a place like that. Yet at the same time, the suburban neighborhoods can still be fairly white in our area. And so I think some of that is like the messaging that you present to the world when you’re asking people to come join you. So, we’ve been really intentional with our marketing team. And we took our entire design team, including marketing through some DEI workshops and learning about cultural differences and how we can approach things maybe differently with that, with cultural differences in mind. And that’s been, I think, really impactful so far in the narrative that we’re telling, making sure that our marketing materials are representative of the communities around us and the people that we are inviting to come join us. And then we’re even working on a home-buyer resources guide. Basically, if people come to try and buy a home in Indigo and are, either think they won’t qualify to buy the home or try and don’t qualify, we have some secondary resources that are designed to overcome the hurdles that people of color and women and other class distinctions have faced in real estate. I mean, I think real estate is in the top 2 or 3, you know, racist and classist…

[00:31:05] Oh yeah,

[00:31:06] Institutions that we have in the country easily. Right? I mean, the prison system.

Eve: [00:31:10] Maybe the top.

Scott: [00:31:11] Yeah. And so, we want to work against those things in every way that we can. And so, we actually are in the process of building out an equity framework for Indigo and looking at like, what are all the spheres of influence that we have and we’re targeting. So, we have eight strategies that we’re ultimately going to be targeting throughout the community for things that we can do to overcome historic barriers to either renting or real estate ownership.

Eve: [00:31:39] Wow! It sounds to me like farmers do a lot of research. You’re used to that. Yeah. So, what have been some of your biggest challenges and disappointments?

Scott: [00:31:49] Challenges and disappointments?

Eve: [00:31:50] Maybe none?

Scott: [00:31:52] Yeah. No, no, we’ve definitely had challenges. I mean, working with the city, everybody told us that our city was like the worst city to work with in Houston. That’s what the development world said. We found them to be great to work with. It just took a lot of work and time to get them convinced of what we were trying to say, but we brought data to them. You know, narrower streets. It’s the fire chiefs don’t like narrower streets because it restricts access, right? So, then we have conversations about, okay, but a narrower street means slower speeds and means less kids die when they get hit by cars. So let’s balance like, how many home fires do you have in your area? Not very many. Okay, well, maybe more kids are being hit by cars and we should balance that out. So, we just went with those things. It took longer than I think we expected, and I think we’d be a little faster next time. But I also think people need time to wrap their heads around things, and you have to give that to them. So that’s maybe one of the big challenges. And then, you know, there’s a bit of a regret, I’ll say, that in the design of the neighborhood, we didn’t like bleed the retail into the residential part more than we did.

Eve: [00:32:56] I was going to ask about that. What is the retail and where is it? Yeah.

Scott: [00:32:59] So, we have what we call Indigo Commons. It’s right next to the farm. It’s surrounded by the neighborhood. But I wish that, you know, we still have like a street as the dividing line between the mixed use and the residential. And I wish that we had been smarter and had retail on both sides of the street, I think, instead of. And so, take more of that corridor mindset than the block mindset when we were looking at land use. And so, that’s a big regret, is like pulling a few little neighborhood retail places, pulling a restaurant to like a busy corner somewhere in the residential section. I mean, all of our homes are within a seven-minute walk of the commons. So, it’s not like you’re that far away, but it still would be nice to have pulled a few things out. So, I think that’s one thing there. You know, definitely on the commercial side, there’s been some challenges. We have what we call our incremental retail buildings. So, we did the whole household formation conversation on the housing side. And we were getting like halfway through the planning of the mixed-use area. And then we said, wait a minute, we need to do the same thing for businesses that we did over there. What about the barbershop that just wants to have two seats and doesn’t need 2000ft²? Why should they be paying for 2000ft² if they don’t need it? So, we did the same thing and started downsizing and right-sizing. And you know, we’re farmers. We’ve known a lot of chefs in Houston because we sold to a lot of them over the years, and just saw too many extractive relationships between landlords and tenant restaurants, where restaurant gets a little bit of press for the chef having great food, and then all of a sudden, they get slammed and they’re just so busy for a month.

Scott: [00:34:40] And then the landlord says, you know what? Your lease is up in a couple months, we’re going to go ahead and double your rent for next year. And that restaurant may not even be making money. They just appear to be busy and got some press. And so, to fight that a little bit, we wanted to have some tenant-owned retail. And so, we’ve designed these incremental retail buildings. It’s an 800 square foot footprint, 2 or 3 stories. So, 1600 or 2400ft² maximum. The bottom floor has to be active retail. We need the foot traffic for those buildings. But then on the second and third floor, it could be more retail. It could be offices. You could live there. You could lease it out as an apartment, whatever you want to do. And we got that through our jurisdictions and approved. So, it is a little bit like a live/work unit in form. But what I’ll say on the live/work units is most of the places people have done those, they’ve been residences first and they’ve been financed as a residence and then just have the retail. We’ve designed ours to where they work with the Small Business Administration’s 504 and 7A loan programs where you can get a 25-year business mortgage on that property, and you can live there and work there or lease it out or whatever. So, we just wanted to provide a bunch of flexibility. And so, that was a little bit of a challenge to get people to wrap their head around. And even the market has taken a little bit, but now we’re really starting to see intense demand.

Eve: [00:36:03] Well wow! I’m really impressed. You guys clearly have thought about absolutely everything. I hope I get to see the community when it’s finished. Is there anything else you want to tell me? I feel like we’ve jumped around everywhere. I’m sure I’ve missed a lot.

Scott: [00:36:18] No, I mean, I think the encouragement I would give to other people working in the space, and you’ve had so many great guests on your podcast. I was actually just listening to my my good friend Jonathan Dodson, to his version, I think, take hope in the fact that there are a lot of people working in this direction right now, and it feels like the tide is shifting a little bit. And thanks in part to people like you, Eve, doing these great communications and, like, sharing this because otherwise, how would we know about all these other people working in these other cities in the same area that we are? And so, I think it’s really, really valuable. And people who are feeling alone in this work out there, reach out to the people on those, like, we’ve had great success connecting with other developers. And, I mean, we flew to Oklahoma City to meet Jonathan, you know, kind of on a whim and then have become really good friends. And so, I encourage people, even if you’re working in this area and you have questions to reach out to us. You know, find us on LinkedIn and reach out and we’ll be happy to chat.

Eve: [00:37:20] Well, this has been delightful. Thank you so much for joining me and spending time. And, um, I do want to know how it ends up.

Speaker3: [00:37:27] We hope to have you down to Houston.

Eve: [00:37:28] I’m a little bit jealous.

Scott: [00:37:31] Well, we’ll look forward to that.

Eve: [00:37:40] I hope you enjoyed today’s guest and our deep dive. You can find out more about this episode or others you might have missed on the show notes page at RethinkRealEstateforGood.co. There’s lots to listen to there. Please support this podcast and all the great work my guests do by sharing it with others, posting about it on social media, or leaving a rating and a review. To catch all the latest from me, you can follow me on LinkedIn. Even better, if you’re ready to dabble in some impact investing, head on over to smallchange.co where I spend most of my time. A special thanks to David Allardice for his excellent editing of this podcast and original music. And a big thanks to you for spending your time with me today. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.

Image courtesy of Scott Snodgrass

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Crowdfunding tax credits.

Rich Rogers is an urban planner and attorney in Buffalo, New York. As a principal at Urban Vantage, he focuses on creative problem-solving to help public and private sector projects work from concept into financing and implementation. He frequently interfaces with clients, related professionals, and the public to work collaboratively on public and private sector projects. His work at the firm generally includes preparing financial projections and evaluating the applicability and utility of certain incentive programs for specific projects.

In addition to his role as a principal at Urban Vantage, Rich is a Shareholder at Yots Law Firm P.C., where he concentrates his practice on real estate financing closings, particularly in structuring and preparing documents for projects utilizing Historic and New Market Tax Credit Investments and Qualified Opportunity Zone incentives.

Rich also co-founded Common Owner, a web-based platform designed to attract capital to community and economic development projects while democratizing investment opportunities.  And now he has joined Small Change as a shareholder and member of the team.

Richard decided to pursue Urban Planning while hiking on the Appalachian Trail prior to entering his first year of law school. His motivation to become a planner is largely to protect and provide increased access to natural and scenic resources, which frequently includes researching methods and advocating for suburban sprawl prevention. Richard’s academic work focuses on how to use land use and economic laws and policies to conserve land and promote smart growth-oriented (re)development.

Read the podcast transcript here

Eve Picker: [00:00:05] Hi there. Thanks for joining me on Rethink Real Estate. For Good. I’m Eve Picker and I’m on a mission to make real estate work for everyone. I love real estate. Real estate makes places good or bad, rich, or poor, beautiful, or not. In this show, I’m interviewing the disruptors, those creative thinkers and doers that are shrugging off the status quo in order to build better for everyone.

Eve: [00:00:45] Rich Rogers is an urban planner and attorney in Buffalo, New York. In his practice, he focuses on tax credit financing and on creative problem solving to help public and private sector projects work from concept into financing and implementation. Rich is also a real estate developer with a project in lease up on Buffalo’s Main Street. There he’s put his knowledge to good use, converting a 30,000 square foot historic building into modern retail and affordable housing units, and employing every trick in his book to build his super complicated capital stack, which of course includes tax credits. If that’s not enough, Rich has a crowdfunding platform called Common Owner, focused on real estate and you guessed it, crowdfunding tax credits as well. There’s a lot to learn here. You’ll enjoy listening in.

Eve: [00:01:51] Hi, Rich. I’ve been looking forward to this conversation.

Rich Rogers: [00:01:54] Likewise.

Eve: [00:01:55] So what led you to study both law and urban planning?

Rich: [00:02:00] I think there were a couple things that influenced that decision. When I was an undergrad, I was, in the SUNY Model European Union program, traveled to Exeter and Limerick in Ireland and just kind of saw some really great urbanism right up against some really beautiful countryside and, you know, wanted to learn about that and ways to replicate that, you know, here in the States, hopefully. And then also when I was out hiking the Appalachian Trail, I got really into conservation easements and, you know, similar kind of legal concepts where I really wanted to study both things.

Eve: [00:02:50] Interesting. So, what is your specialty in law today?

Rich: [00:02:55] In real estate development and commercial finance, typically representing developers. But, you know, largely focused on tax credit syndication and the monetization of tax credits. So, that includes historic tax credits, new markets tax credits, Low-Income Housing Tax credits, and kind of other subsidies to help close construction financing.

Eve: [00:03:19] So that kind of really puts you in the, I don’t want to say distressed, but I suppose distressed neighborhood realm, doesn’t it? More often than not, with those types of credits.

Rich: [00:03:30] In many cases, I think, particularly in upstate New York there’s a lot of communities that have, you know, eligible buildings, to undertake historic rehabilitation projects. So, we see, we kind of see it all over the map. And in particularly more recently with higher interest rates and high construction costs probably folks looking at using those types of credits who wouldn’t do so maybe a few years ago, you know, as capital kind of gets tighter.

Eve: [00:04:09] Interesting. Okay. So, I know you have a lot of other things cooking. You’re a very busy person. Tell us about your real estate development projects. I think you have done a few of your own, including renovating your own house. Right?

Rich: [00:04:25] Yeah, that’s right. Right now, so we’re undertaking the rehabilitation of the Monroe Building, we’ve called it. It’s the former Record Theater in Buffalo, New York. Roughly $7 million project, roughly 30,000ft². We have 17 apartments that will be affordable to folks making 80% of area median income. And we have, six commercial spaces that kind of range from 750ft² to 5500ft². We have kind of an exciting mix of tenants in there, including a coffee shop. We have a hair salon, some restaurants, some other stuff. So, it’s been a very exciting process, albeit a bit scary closing on the building just before Covid hit.

Eve: [00:05:21] Oh, yeah, that’s really bad timing. So, and how far along are you with the project now?

Rich: [00:05:28] So we are currently pre-leasing apartments for occupancy March 1st. The first ten apartments should go online next month with the other seven to follow, you know, likely in by April. Mid-April. Some of the commercial spaces are just starting construction. We do have several signed leases. We have a couple more commercial spaces to to lease and finish designing. But that lease up should occur over the next couple months with full occupancy by June, I would say.

Eve: [00:06:05] Oh, that’s really exciting. So aside from Covid, what’s been the most challenging thing about this project for you?

Rich: [00:06:12] Yeah. It has certainly been a challenge. I think, you know, Covid, kind of, the outcomes there, right? Certainly, a spike in, in construction costs have been very, very challenging to deal with. We’ve really great general contractor on the job BRD and they kind of worked with us through various value engineering and different kind of iterations of the project, which is unfortunate. On one hand, you hate to value engineer out some really cool amenities and things like that. But at the same time, you know, you need to get the job done, right? So, construction costs were definitely a challenge. I would also say holding costs. I think folks don’t think about that all of the time. You know, the building had a sprinkler system that had, you know, stay heated so the the pipes don’t burst in the winter. And, you know, so we had the gas on for a time. And we have recently, but also had to do propane the one year which got very expensive. Yeah. So, holding costs are tough. And then, you know, obviously interest rates were a big one. Ultimately, we were able to rate lock with our permanent lender. And that’s what kind of finally got us over the hump into the construction loan closing. So, there were a lot of challenges and factors to kind of tackle.

Eve: [00:07:48] So I gotta ask, how are you financing it? Are there any tax credits in there?

Rich: [00:07:54] There are. So, we have both state and federal historic tax credits which are 40% of the qualified rehabilitation expenditures, which includes, you know, most of your construction costs, certain design costs, architecture, etc. We’re working with Chase Bank to monetize credits, Chase Community Equity. They’ve made an investment in the project. They’ll make additional investments once construction is complete, you know, based on the number of credits that we deliver to them. So, we have a master lease structure, it’s called, with Chase Bank, not to get too technical. But so, you know, that ends up being, you know, roughly 20 to 30% of the capital stack at the end of the day.

Eve: [00:08:50] Significant. Yeah.

Rich: [00:08:51] It really is. But it’s, you know, really a necessary gap filler in places like Buffalo, you know, where the rents perhaps aren’t as strong as some other areas. We also are using what’s called the Small Building Participation Loan program through New York State Homes and Community Renewal. That’s a per unit subsidy for us to keep our rents at 80% of AMI on average. So, I believe we got $50,000 per unit, very low interest subordinate loan that closed simultaneous with the construction financing. I guess what’s nice about that program is when you’re doing one of these rehab projects, you’re kind of stuck with the building envelope you have. Right? And so we have some units that are nicer than others, some that, for example, we have two units that don’t have windows. Um, so the fact.

Eve: [00:09:48] I’ve got a building like that.

Rich: [00:09:51] They’ve actually come out great. I really actually prefer some of those units to some of the other ones.

Eve: [00:09:58] Yeah. We have, we have spectacularly big skylights in our windowless units that are just amazing, yeah.

Rich: [00:10:04] Same thing. And so, you know that worked out well. But I guess my point is that the flexibility with this program, where it’s not that every unit has to be below a certain AMI, some can be up to 120% of AMI, So, a couple thousand dollars per month. And then you can have some others that are far below.

Eve: [00:10:25] AMI, for our listeners, stands for?

Rich: [00:10:27] Area Median Income. So, essentially, yeah, there’s a rental rate based on, you know, how much money you take home per household, right?

Eve: [00:10:42] How much you can afford to pay. Yeah, yeah, yeah. So, this is brain damage, this capital stack.

Rich: [00:10:48] It’s a lot. We have another program that’s a permanent loan program through Empire State Development in New York. And that’s a transit-oriented development loan program called the Better Buffalo Fund. It’s funded from Buffalo Billion. And, you know, that provides low interest financing coterminous with the permanent loan. So, it’s a 30-year term. But where our project is on Main Street in Buffalo it’s directly across from a college and it’s very close, maybe a five-minute walk to two, light rail rapid transit stations, which, we only really have the one line that goes under Main Street in Buffalo. But I think this project really helps support that light rail system and, you know, kind of both ways. I think that’s a huge amenity for our project. And then it’s also on several bus lines. So, it’s definitely very transit-oriented.

Eve: [00:11:47] Fabulous. Okay. If that wasn’t enough, you decided to co-found ma real estate crowdfunding platform called Common Owner. What led you to do that? And that was also during Covid, right?

Rich: [00:12:03] Yeah. I would say just before Covid. You know, it’s a bit of a process to start a funding portal. If you’re not familiar, obviously you are, but for listeners who aren’t, it takes quite a long time. So, we started that process before Covid and were able to launch, kind of, during Covid, but, you know, essentially with our legal work and also consulting work and my partners’ consulting work, we found a lot of folks struggling to access capital, right? Under kind of traditional means, you know. Perhaps not having the network to raise the capital or, you know, kind of other challenges around that. So, you know, I think just the complexity around some of the rules raising capital or folks not knowing those rules or realizing them. And so, you know, by creating a crowdfunding platform those folks would then be able to access a broader pool of potential investors to help get their projects done, because in many cases, those projects were quite good. You know, they have grant funding, they had tax credits. They looked a lot better on paper than many projects that we did see getting financed all of the time. They just, you know, didn’t have the access to raise the developer equity. And so that’s something that we wanted to address in addition to, in some cases, monetizing tax credits can be very difficult if the project is smaller in nature. And so, using crowdfunding and bringing in additional partners and investors, you know, allows for some structures to spread out those tax credits a bit and, I think, many people would argue kind of the way that Congress intended with some of these programs. So those were the private and primary motivations behind starting Common Owner.

Eve: [00:14:11] So I’m sort of fascinated by the historic tax credit equity twist on your platform. How does it work? Like, what are the types of offerings that are listed and how does this, how do tax credits weave into crowdfunding?

Rich: [00:14:26] Yeah. Yeah, sure. So, typically in a real estate financing that includes tax credits, you have a tax credit investor that will come in and take 99% of the credits. And there’s very specific IRS rules around the way to structure these types of financings. But typically, a bank, an insurance company, a similar entity will come in and they’ll take 99% of the credits and they’ll put in capital during construction.

Eve: [00:15:02] And they’ll be a limited partner, right? They’re not taking control. They’re just a partner for the purpose of those credits. And then they give you a certain number of pennies on the dollar, right? For the credits, and they turn around and get value for that immediately as a credit against their own taxes, right? That’s why they’re interested. Yeah.

Rich: [00:15:30] Yeah. And so. Right. They have the type of income that these credits work really well to offset and, you know, they know, right, how much income they’re going to have. There’s a lot of things that work well for a bank or an insurance company to invest in these types of projects. Banks also get CRA Community Reinvestment Act credits for doing so. But the issue here is that, in many cases, these tax credit investors want to do the, you know, the smallest number of largest projects possible to reduce their due diligence overhead, asset management overhead, and the types of projects that a lot of cities and villages and urban areas really need are not necessarily these massive, you know, redevelopments of old factories or train stations. Right? They’re these kind of mixed use Main Street buildings and that that creates a challenge. Right? Because these more traditional tax credit investors may not want to be bothered with those smaller deals. So

Eve: [00:16:43] It follows the same pattern that all real estate investors follow. They don’t want to be bothered with smaller deals which are…

Rich: [00:16:51] Absolutely.

Eve: [00:16:52] …so important for our cities. Right?

Rich: [00:16:55] Yeah, absolutely. And I think, crowdfunding, I think, broadens the pool of potential investors, right? In general, but also if you have these tax credits, maybe you don’t need to undertake this highly structured, very complicated, you know, kind of financing where an investor comes in for 99%, especially in many states that have state historic tax credit programs like New York. You know, those credits in New York are refundable meaning that if you don’t have tax liability, the state will write you a check for the overpayment of tax. So

Eve: [00:17:36] Oh, wow.

Rich: [00:17:37] Yeah. So, it makes it a lot more user friendly for regular people to then benefit from some of these credits. But your typical, you know, real estate developer, sponsor, managing member kind of person is going to have a lot of losses, right? From depreciation. And won’t necessarily be able to use these credits. So, by bringing in a lot of different investors you can slice the credits more thinly where they can, you know, hopefully more effectively be used. And I think, you know, one thing with crowdfunding is, folks think about it as a, you know, kind of individual non-accredited investors. That’s kind of who it’s for. And I think that that’s a challenge in the industry right now because I think if you look at SEC data, you know, that’s in many cases you still have mostly accredited investors investing in many of these offerings. And I think really when you’re talking about these tax credits, you know, ideally you have a mix of maybe real estate professionals, some individuals, but then also, you know, starting to have, you know, corporations, maybe banks, you know, some other types of investors investing alongside these other folks to kind of, you know, raise more capital for some of these projects.

Eve: [00:19:04] So instead of a 99% like financial institution, tax credit investor, you could replace that with a crowd of people who own, or get their little pro rata share of however much they invest towards a tax credit which they may be able to use. Yeah.

Rich: [00:19:23] Right. Yeah. So right, you could, I mean there’s all sorts of ways to structure it, right? You could follow that more traditional model of the 99%. And then typically what happens in that type of a structure is after the five-year recapture period for the tax credits, the interest flip, right? So, the investor will take all of, or 99% of the credits for the first five years. And then the investor flips down to some lower amount, maybe 5 or 10% of the interest and in some cases will exit the transaction, right? So, here you might think of, if you’re raising equity anyway, perhaps you’re going to, you know, syndicate 30% of the interest in the deal to investors. You know, maybe instead you sell, you know, 50 or 60%. Those folks, along with the cash flow they would get, you know, may also get some tax credits. And that that can sometimes be a better, you know, or a way…

Eve: [00:20:27] You could also say that you, the developer, keep some of the credits for yourself. So maybe, you know, you keep 40% flow to you and the other 60%. So, there’s lots of ways to skin the cat, basically.

Rich: [00:20:40] Absolutely, absolutely. But it can be a bit more straightforward, I think, than some of these really complicated structures, you know, with hundreds of documents and hundreds of pages of projections and, you know, everything like that, you know, looking more like a more traditional partnership.

Eve: [00:21:03] Interesting. Okay. So, have how many historic tax credit deals have you had on your site and have they been successful?

Rich: [00:21:11] We only have a handful that I would say are really, you know, raising equity for the tax credits. And there’s a couple ongoing right now that you could check out if you go to the site. We haven’t had one fully closed that’s that type of offering, in terms of a regulation crowdfunding offering. We have had several deals closed that, you know…

Eve: [00:21:43] Just plain old crowdfunding.

Rich: [00:21:46] Yeah. Which might have a, right, plain old crowdfunding, but also, some Reg D deals on the platform that have closed that have a tax credit investor, right. A separate tax credit investor, this more traditional method, where the capital that’s being raised is more for that developer equity piece.

Eve: [00:22:10] Interesting. Okay. So, what do you think are the most challenging, the most significant challenges facing less experienced real estate developers?

Rich: [00:22:23] Yeah, I think there’s a lot. I think you know, in my mind maybe several years ago, it was mostly this, this equity piece. And obviously that’s a really significant challenge and problem. But I actually think a really big challenge is guarantees, right? And liquidity and net worth and balance sheet, you know, for folks especially who are starting out, who might, you know, not have a really strong balance sheet, maybe they have a lot of student loan debt or mortgage debt or, you know, something else. Right? Being able to close one of these loans is challenging, right? You’re going to need a partner not only to invest capital, but to also, you know, sign a guarantee and, you know, kind of be recourse on some of the financing. And that can be very, very challenging, especially, you know, for someone starting out to, you know, not only identify that type of partner, but negotiate a deal that still makes it worthwhile to do all of this work and be the general partner in the deal, right? You know, especially with some of these deals and, you know, some of these, I guess tertiary markets, you could say, you know, they’re already very thin from a cash flow perspective. And so, by the time you bring in a partner and dice it up, you know, for the guarantee, and then you also raise your equity, you need you need to really make sure there’s something left for you at the end of the day. And I think that can be a very significant challenge, especially once you get into these deals and perhaps you own the building, and now you’re committed. And, you know, it can be enormously stressful. But yeah, I think that…

Eve: [00:24:19] Also in sort of distressed markets where or softer markets where the returns aren’t as high, but construction costs are probably the same or close to the same. You know, this is why all those little bits of funky funding that you talked about become so important. Because there’s got to be something left for investors, right?

Rich: [00:24:44] Exactly, right. You know I think these subsidies are very important to essentially create a market where one doesn’t necessarily exist, right? In a lot of these geographies. So, but, you know, it doesn’t always quite get there, right? Especially in the, you know, this type of interest rate environment that we’ve seen. So, it’s challenging.

Eve: [00:25:12] So how do you think increasing interest rates are affecting developers in Rust Belt cities like Buffalo and Pittsburgh and…

Rich: [00:25:21] Yeah. I mean, I think it’s been a tough situation, right? Because I think a lot of people didn’t see it coming, obviously. And, you know, it’s made it harder to get deals done. You know, I think I mentioned we were fortunate enough to rate lock on our deal at a good time with our permanent lender, and that ultimately allowed us to get it closed. But, you know, I’ve seen folks who didn’t rate lock who, you know, never ended up closing their deal, right? As rates really climbed up. So that’s a challenge on the front end. But then also, you know, if you did a deal five years ago or ten years ago and that interest rate, resets right at the end of of that loan term, you can get in a, you know, a really bad situation, right?

Eve: [00:26:11] That’s one that I’m actually in. Yeah. I’m smiling because I really want to cry. We have a building which actually reset in mid-January. And fortunately, the upper interest rate was capped, or we would have been paying an additional 1%. So, and fortunately also at this point there are no prepayment penalties. So, if the rates go down we can we can go shopping. But still it’s another $2,000 a month that we have to pay on a building that’s limped its way through Covid, and we’ve had to discount rents and I. That part has brought us to our knees, you know, it’s been, it’s really tough. Yeah.

Rich: [00:26:59] Yeah. It’s really a bad situation, I think, for a lot of folks, especially in some of these deals where they don’t necessarily cash flow well. And, you know, at least in New York State, typically we’ll see these tax abatement programs for real property taxes that burn off in many cases simultaneous with these rate resets, right? So, you know.

Eve: [00:27:24] It’s really hard, it’s really hard. Yeah.

Rich: [00:27:28] So it’s yeah, it’s challenging, but I think that the interest rates have really brought many deals to a halt. I guess the as I mentioned earlier, the interesting counterpoint is, you know, projects that might not have, you know, been looking for tax credits or other subsidies, historically, you know, now might need them to make the numbers work. And some of these, you know, other markets that, you know, perhaps a bit more, stronger rents and things like that as rates go up, you know, those folks start to, to kind of seek these types of subsidies and alternative financing methods.

Eve: [00:28:09] So tell me then, how tax credits, not just historic tax credits, but maybe New Market and I don’t know what else is out there, how tax credits can move the needle for closing construction financing.

Rich: [00:28:23] Yeah. So, in many cases, you can, you know, reduce debt. So here in New York State, we have a brownfield tax credit program which is, again, a refundable tax credit. It’s based on, you know, cleaning up a historically, you know, contaminated site and essentially get a percentage of the overall construction cost that’s capped at either 3 or 6 times the site clean-up costs. Right? So, and there’s all sorts of adjustments. But at the end of the day, you know, that refund can sometimes be a source for the construction lender to pay down their construction loan. Right? So, when that refund comes in on the brownfield tax credit, you could make pay down to convert your financing or, you know, there’s some bridge loan products that folks are able to tap into. Some of the other subsidy programs, you know, New Markets Tax Credits is a very complicated program, but it does generate a nice subsidy if you can kind of get through the brain damage. You know, again, essentially, you’re reducing, you’re really reducing debt, right? And reducing leverage on the product, on the project, bringing in equity that doesn’t necessarily expect a traditional return, let’s say, on capital, which, you know, allows you to fill these gaps in your capital stack and get through construction financing, right? Because you need less debt on the project if you’re able to kind of raise capital by using these tax credits.

Eve: [00:30:09] And then there’s also opportunity zones, which are also another incentive for some investors. Yeah, so tax credits can be really huge, I think. But perhaps not, as you said, for small or non-accredited investors. So, it’s a slightly different market, right?

Rich: [00:30:28] Yeah. It depends, I think to really use the federal tax credits in particular, you have to have the right, you know, tax profile. You know, anyone who’s thinking about planning and trying to use tax credits should really have a long chat with their tax professionals just to make sure that they can use the credits. There’s all sorts of rules around that. And, which again, is creating this more limited market for tax credit, you know, monetization, right? So, but, you know, it varies, right? There’s things like, you know, the real estate professional election, if you’re a real estate professional to, you know, you may be able to use credits in a way that other folks can’t. So, it largely just depends on your tax profile. But that varies so dramatically from person to person, right? So definitely talk to your accountant.

Eve: [00:31:28] Yes. So, back to crowdfunding. What do you think are the biggest challenges for developers who try to crowdfund capital?

Rich: [00:31:37] Yeah, I think there’s a few, right. I think, you know, especially for folks who haven’t raised capital before, I think it’s just a lot harder than people think, right? At the end of the day, it’s really kind of sales, right? You’re selling your project in terms of pitching it to investors and, you know, that’s challenging, especially if you don’t really have the personality where you love sales. That that can be really hard. I think understanding the rules and complexities around crowdfunding and kind of the advertising regulations and prohibitions and stuff, it can be a challenge, right? I think especially for folks who, you know, the rest of the capital stack in many ways is more straightforward, right? Even if you’re going out and getting grant funding, right? And, you know, certainly applying for a construction loan, you know, none of that is all that complicated. Tax credits may be more complicated, but then you get into this capital raising piece that is really very hard work.

Eve: [00:32:57] It’s very hard work. I agree with you.

Rich: [00:32:59] Yeah. And so I think a lot of folks underestimate it.

Eve: [00:33:03] Yeah. Whether you crowdfund it or not, it’s hard work. It’s just different work. Right?

Rich: [00:33:08] Right. And so, kind of understanding those nuances and challenges. And then I think again, you know, being realistic in your anticipations of how much an investor is going to invest. Right? I think what I’ve seen a lot of is folks, you know, kind of have their list and they think that’s going to be sufficient. And then investors will come in and maybe they’re investing half or a third of what they anticipated. And that can leave you in a really tough spot, right? I think there’s definitely this, you know, build it and they will come kind of mentality for some folks. And that’s just not the case. Right? There’s not just people out there waiting to invest in your project in general. Right? You need to really build and cultivate those relationships. So, it’s hard. And especially in this environment.

Eve: [00:34:09] I think it works best when you have developers who understand that it’s just not a one-off thing, that crowdfunding offers them an opportunity to gradually build a group of investors who will follow them from project to project. And that is not just one project. It’s a series of projects. And I think those developers who get that really do best, and they sort of come up with a marketing strategy first with the first project, and they figure out what works for them and what doesn’t. And it can be wildly different for different people depending on where your network lives. Does it live on social media or the local coffee shop? You know, very, very different. So, I don’t know, I think, I wish people understood that instead of sort of believing, it’s just as you said, you just build it and they will come because it really doesn’t work that way. It’s really…

Rich: [00:35:10] Yeah, I agree. I also think that, you know, in some cases, I think folks who are, you know, really new or inexperienced or, you know, developing real estate, don’t realize that they’re selling securities and that they’re even, you know…

Eve: [00:35:30] And that was the other question I had for you.

Rich: [00:35:30] These rules, yeah.

Eve: [00:35:33] And then they have to follow the rules when they have these investors and they, you know, they need to do what they offered to do. You know, they need to follow through, you know. So

Rich: [00:35:45] Yeah, exactly. And so I think that’s a big challenge, telling people that they have to follow all these rules. And, you know, folks can sometimes get pretty defensive about that if they’re really confident that they’re right. And so, I think for that reason and, you know, it’s still fairly new, right? And I think, you know, I certainly thought that the crowdfunding, the equity crowdfunding space would take off faster than it has. But I think, you know, when you combine the fact that some people in real estate don’t realize that they’re selling securities when they’re raising capital and, that, you know, this is, you had this really long period with no changes to the securities laws, right? I think there’s still a lot of absorption that’s still kind of starting to happen. I do think, you know, over the last five years, there has been, you know, a broader swath of the population that’s hearing about crowdfunding and excited about it but I think there’s still, you know, we’re kind of scraping the tip of the iceberg, so to speak.

Eve: [00:36:53] Yeah, I agree. Are there any warts to the regulation crowdfunding rule that really irritate you? I have some!

Rich: [00:37:03] Yeah. I mean. I think, you know, the audited financial requirements. And I think they have made some good changes over time in terms of a lot of the rules that have bothered me. But, you know, just the cost of the financial statement audits.

Eve: [00:37:26] The financial statements. Yeah. So, I think what’s most upsetting about those, for, again for our listeners, is that there’s a financial review or an audit required if you want to raise more than $125,000. And that was, you know, I suppose that this rule was really intended for small businesses that were already operational. So, sharing financials makes sense. But in real estate, you typically have a brand-new inception entity that has done nothing. And often it’s formed right before the property is purchased. So now you’re spending money on a financial review or an audit of a whole bunch of zeros, and you can’t get out of it. It’s a regulation, right? It’s just, it’s very silly. And even for a small business, that’s a pretty high bar. You know, that’s a very high bar and I’m not sure that anyone looks at them.

Rich: [00:38:24] Yeah, except for us. Right. I think most investors. Well, it’s a bit hard to say, but, you know, also there’s a lot of rules and regulations around forward-looking statements and not being able to have these types of projections essentially, which is ironic because, as an attorney, you know, closing these tax credit deals, the projections really drive the deal, right? You have this set of 70-page projections and everyone spends hours and hours and hours poring over them, from the investor to the lender to the developer and all of their counsel, right?

Eve: [00:39:08] But it doesn’t mean that you can’t present a cash flow picture and an operational budget. You just can’t project an internal rate of return. You could, you can show investors how much free cash there is. You can show people exactly what the project is going to do, but you can’t, and an experienced investor is looking for internal rate of return, they’ll have to figure it out themselves. Right? That’s…

Rich: [00:39:36] Right. And I guess my point being is that, you know, on some of these other deals with these, granted, more institutional types of investors, that’s a specific, that rate of return is a really material thing that everyone is commenting on and adjusting the deal terms to accommodate, right? So, you definitely have a different kind of framework there. So that’s a challenge. I think the advertising, you know, rules and, you know, the way that these offerings can be marketed, I think could just maybe be a bit more clear for some of the issuers and the folks trying to raise capital, I think they’re a little confusing as well. And so then, folks, you know, don’t want to do something wrong. So they’re very scared about it. So, yeah.

Eve: [00:40:34] But Rich, we still love this rule, right?

Rich: [00:40:37] Yeah. No, I mean, I think the way it opens up, you know, access to investors is absolutely transformative and really important. Right?

Eve: [00:40:48] It is, it is.

Rich: [00:40:48] Even, you know, in spite of all the challenges that we’ve been discussing for much of the call, I think it’s really important. And I do think, you know, the thing that maybe gives me the most hope is that many of the changes that were subsequently made to the rule, I do think were really helpful in terms of, you know, the accredited investors and the special purpose entities and, and all sorts of changes. So, I think that there is, I’m cautiously optimistic about the future of the rule.

Eve: [00:41:25] We hope it will go mainstream, right? Okay. So, uh, just to finish up, what’s next for you?

Rich: [00:41:35] So, I have one more real estate development.

Eve: [00:41:40] This is a loaded question, too, right?

Rich: [00:41:45] Yeah, I have one more real estate development project, and then I am done developing real estate. I will be retiring from that aspect of my life. But, I’m actually looking forward to joining the Small Change team with some of my colleagues and really excited about working with you, Eve and your team, moving forward.

Eve: [00:42:10] And we’re very excited too. We think together we’ll be stronger, bigger, more mainstream, maybe.

Rich: [00:42:18] Hopefully.

Eve: [00:42:19] Well, thank you very much, Rich. And I actually can’t wait to see your project in Buffalo. I’ve got to go up and take a look.

Rich: [00:42:28] Yeah, it’s really exciting.

Eve: [00:42:29] It sounds fabulous.

Rich: [00:42:30] Yeah, it’s a beautiful building.

Eve: [00:42:35] Thank you very much for joining us.

Rich: [00:42:38] Thanks Eve.

Eve: [00:42:47] I hope you enjoyed today’s guest and our deep dive. You can find out more about this episode or others you might have missed on the show notes page at RethinkRealEstateforGood.co. There’s lots to listen to there. Please support this podcast and all the great work my guests do by sharing it with others, posting about it on social media, or leaving a rating and a review. To catch all the latest from me, you can follow me on LinkedIn. Even better, if you’re ready to dabble in some impact investing, head on over to smallchange.co where I spend most of my time. A special thanks to David Allardice for his excellent editing of this podcast and original music. And a big thanks to you for spending your time with me today. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.

Image courtesy of Richard Rogers