Rethink Real Estate. For Good.

Gentrification

Bite-sized investments.

Equity crowdfunding is changing the real estate development landscape. Importantly, beyond raising equity, crowdfunding can help build support within communities that may otherwise hold neutral or even hostile feelings towards the building of a new real estate project. Micro-investments via crowdfunding platforms give community residents and stakeholders the opportunity to participate in and take ownership of the development. And this means that everyone will have an interest in its success.

Developing in underserved neighborhoods is not easy

Since Franklin D. Roosevelt kicked off the New Deal Programs in 1933, federal, state and local governments have tried to find ways in which to deliver high-quality housing to all Americans, not just the privileged few. But while the numerous programs created that support housing have helped over the years, they have not solved the problem. Government-developed housing projects, low-income housing tax credits (LIHTC) and Opportunity Zones have not stemmed the tide of housing insecurity.

Many in the private sector only develop in these under-served communities due to the existence of such programs. This is due to the fact that risk-adjusted returns in many major metros are substantially lower than the return on investment an investor can anticipate from middle to high-end housing, like luxury condos or single-family homes. Making the numbers work is hard enough, and when slim margins are combined with vociferous opposition to a project, it can be hard to convince investors to get behind projects in the places that need them most.

Crowdfunding as a signal

Developers have a bad rap in communities. After years of dealing with bad-faith actors, and after suffering from the effects of gentrification and “revitalization” efforts, many in the communities that need housing the most are not inclined to work with them any longer. It is critical to send the right signals to community members in order to break through years of mistrust. One way is through crowdfunding. Instead of new projects only benefitting developers or investors, crowdfunding can allow those residents to have a direct financial interest in the success of the project.

Bite-size investments and the local community

The vast majority of real estate crowdfunding platforms require that users be accredited investors. In other words, they must be one of the 3% that have net worth of over one-million dollars or a salary of at least $200,000 per year. In 2016, in an effort to democratize investment, the Securities and Exchange Commission released Regulation Crowdfunding, a rule that permits anyone over the age of 18 to invest. Now there are some emerging crowdfunding platforms that employ this rule, like Small Change.

Most socially conscious real estate development projects take place in economically disadvantaged areas, as these are the neighborhoods that need the most help. If development projects are completed without concern for locals, they can end up hurting the people that the impact-investment was supposed to benefit.

Most residents in these areas probably can’t meet the $200k yearly income or one-million dollars net worth requirement for accredited investment. Small-dollar investment crowdfunding platforms allow developers to invite residents of the community they are building in to invest, and share returns with them, rather than faceless investors that live anywhere from San Francisco to Tokyo. Not to mention that crowdfunding provides developers more access to capital from sources other than traditional lenders.

Closing the gap

We all know that private developers cannot solve the housing crisis entirely on their own. There need to be significant structural and regulatory changes made in order to provide substantial decreases in housing insecurity, particularly in the very high cost of living areas on the coasts. However, private developers can make a dent in the housing affordability gap through projects that use local communities as a resource, rather than viewing them as an obstacle to be overcome.

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Small-dollar crowdfunding offers real estate developers a way to turn a group of potentially opposed stakeholders into firm allies with a direct financial interest in the project, in addition to their interest as residents of the local community. With so many obstacles to overcome when creating sustainable low and mixed-income housing, developers need all the help they can get. It’s a win win.

Image courtesy of Small Change

Investors as educators.

Most people have some familiarity with the process of buying real estate, either through popular media or their own experiences purchasing a home. But when you enter the world of commercial property development and investment, there is a “lingua franca” that is unique to the real estate business. While there may be a justifiable need for this “secret language” between real estate professionals, investors, and developers, it can act as a barrier to increasing the pool of people, laymen and experts alike, who are involved in real estate development and investing.

If we make real estate development terminology accessible and understandable to the average investor, we’ll start to raise awareness about real estate development and how to make great and inclusive places. And we’ll help prosocial, environmentally conscious developments reach a more mainstream investor audience. It is much harder to explain a sustainable, inclusive vision for the future if sustainability advocates are not even speaking the same language as investors, This is a way to shift the focus from bottom line to triple bottom line.

Remember, it takes convincing a pretty diverse group of people to successfully push a sustainable project forward. Not only do the numbers have to make sense to lenders or investors, but local municipalities or counties must also be convinced. The ability to speak the same language as the people who determine whether or not your project proceeds is critical. No matter how financially beneficial the investment, or how sustainable the project, if you can’t sell it to local authorities your capital will evaporate with costly studies, complaints and revisions.

Sell the benefits of revitalization

Words like “displacement” and “gentrification” have entered the national conversation around housing development. In many places, chatter relating to these issues is driving the discussion, and almost always in a manner that portrays property development as incompatible with the goals of a more equitable and verdant society. When entering into a new community, developers must work to challenge this notion. The best way to do that is through education. Create a dialogue with the local community to alert them to the potential benefits of new commercial/residential spaces. Remember that dialogue goes two ways and that residents have a wealth of information to share about how developers and investors can make the project truly sustainable, in an economic or an environmental sense.

Triple bottom line

When making your case, hitting on the “triple bottom line” goals of sustainability, environmental stewardship, and economic justice will address many local concerns. There is an old adage in the sales community: “sell, not tell.” This truism should be adopted when selling anything, from an automobile to a development plan. Instead of just telling the community how your vision will hit these triple bottom goals, get into specifics. Sell them on the benefits of sustainable development, and how their day to day lives are likely to improve once construction begins.

This dialogue can also act as a phenomenal way to raise capital for a project. After all, you are reaching groups of people who understand the realities on the ground and have a vested interest in making sure that property lifts their neighborhood, rather than pulling it down. Combining your community outreach efforts with a crowdfunding campaign can help build up support among local residents and help get your project off the ground.

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Historically, top-down efforts have not had much success in alleviating the housing problems we face today as a society. Conversely, grassroots, community-based projects have seen and continue to see success in cities across the country. If your goal is to create better communities, it is imperative that the community you wish to improve is kept in the loop, consulted, and shown respect.

Image, Empty Desks, from Pixnio

Create, don’t destroy.

The term “blight removal” conjures up images of construction cranes knocking down homes, displacement, and gentrification. But blight can take many forms and its removal has many remedies. Preservation of seemingly dilapidated structures can invigorate and reinforce a community’s value and sense of place.

Historic preservation

Instead of knocking down older buildings with neighborhood character, nowadays many developers are working on revamping those spaces and giving them new life. Fully renovating a vacant or underutilized historic building can add to and preserve the fabric of a place while providing opportunity for new development.

Rehabilitation of dilapidated structures is equally as effective for commercial, residential, and mixed-uses, and is particularly well suited to historic areas that have fallen on rough times, such as New Orleans’ Seventh Ward, parts of East Oakland or many of Detroit’s neighborhoods outside of the urban core.

By focusing on forlorn properties, investors can increase their returns while also improving the general character and quality of the area. Additionally, rather than displacing existing tenants, seeking out and improving vacant property creates more housing than existed before, without significantly altering the character of the neighborhood. This strategy preserves community charm and while still increasing the housing available.

Commercial benefits

One lesson that should be ingrained in every developer’s mind is the failure of purely residential communities. In study after study, mixed-use neighborhoods consistently show benefits in resident economic activity, safety and crime, and lowered carbon footprint. Commercial activity allows residents to work and to live in the same area, reducing local congestion, and transportation costs like cars.

Affordable set-asides

Mixed-use development is a step toward creating complete communities; creating neighborhoods for a variety of income levels is even better. These strategies can go a long way towards creating quality, affordable neighborhoods. When addressing de-blighting initiatives, locals often worry about being displaced due to increasing property values and commensurate rents in the area. Setting aside a portion of units specifically for those who are lower on the income scale can help alleviate many of those concerns. Updating zoning constraints that allow for more mixed-use development is an essential component too.

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The old paradigm of development is…old. Blight removal should be thought of in the context of building communities up with the assets already in place. Building functional, thriving communities simply requires it.

Image of building in Bridgeport, CT, courtesy of Small Change,

The balancing act.

Modern community development is a balancing act

For most of the history of urban development, community input was rare. Top down design and planning prescriptions, like those of “urban renewal” were how communities were made. These days, planners and developers need to be far more agile and responsive to create communities. Working in tandem with the local community is an absolute necessity.

What residents want

Gentrification has become a loaded term, and rightly so. But it is a common misconception that existing residents of gentrifying neighborhoods do not understand or want the myriad benefits that come with rising economic tides. They want their communities to grow, and flourish- but they want to be able to enjoy the benefits of that renaissance, and not be displaced. Most people welcome newcomers, but they want to feel that newcomers respect the area and that new commercial businesses and housing developments serve all the people in that community.

Adding balance

Developers need to balance the needs and wants of locals with the march of progress. They have a financial responsibility to attract new residents who wish to join those communities, but sustainable development means targeting more than one social and economic strata. Instead of markedly altering the character of the community, developers should work to integrate their projects into the fabric of that community on its terms.

Include treasured local businesses

A community’s character does not only come from residents. Commercial spaces and businesses like restaurants, barbershops, local watering holes, and many other establishments define an area just as much as the people that live in the neighborhood.

Developers should make efforts to ensure that treasured local businesses are allowed to continue operations. A popular option for this route is to offer them below-market rent for a specified period. This will keep the best features of the neighborhood in place, building a sense of community and goodwill between neighborhood anchors and new tenants and developments.

Mixed-income considerations

Studies have consistently shown that mixed-income neighborhoods offer a plethora of social, economic and educational benefits. But it takes work to maintain that mix. In certain communities, people live on fixed or limited incomes. If these residents are unable to share in the collective progress of the neighborhood, they will likely oppose any new development. One way to do well and do right is to set aside a certain percentage of units in up and coming neighborhoods for low-income residents, or to explore bottom-up financing options like equity crowdfunding, which allow residents to invest direct in community projects.  

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The choices developers make have a real impact on the daily lives of neighborhood residents. The most successful developers in the social impact space find a healthy balance between generating returns and ensuring that all residents benefit from a rising tide.

Image of building in River Terrace, DC, courtesy of Small Change.

Taking the best path forward.

Nowadays, you can’t throw a stone without hitting a “socially conscious” or “socially responsible” residential development project. Let’s assume for a second that most of the firms involved in these projects are genuinely interested in making a difference while making a profit. The question remains: why aren’t we seeing a substantive change in the amount and type of affordable housing available? The quick answer is that many developers are not taking into account how their projects will function in the real world.

Housing is a complex and multifaceted sector. Market conditions and governance factors change from state to state, county to county, and even city to city. Developers can have the best intentions in the world, and the best game plan, but if local authorities or stakeholders are not on board, their project may be dead on arrival. There are significant market forces working against affordable housing. Since housing is an investment for homeowners and commercial property owners, they have a vested interest in stopping new affordable housing from being built.

It may seem that developers working to bring to market affordable housing projects have the deck stacked against them. But with the right mindset and vision going into a project, there is precedent for success.  That precedent requires moving beyond traditional ways of thinking and employing place- and use-based framework to their developments.

Place-based responsibility

When selecting a site to erect community-conscious or low-income housing, it is essential to show respect for the local community, and how that development will affect the day to day lives of the people in the area. Many of the problems associated with low-income housing, like blight, crime rate increases, traffic and density issues, and a whole host of other problems come about as a result of poor planning and not staying true to place-based responsibility. In order to dodge these issues, a focus on the neighborhood as a whole, rather than your little piece, will pay big dividends later on.

Use-based responsibility

Use-based responsibility touches on some of the same areas as place-based, but with a crucial difference: it looks towards how the residents and community will interact with the development on a level that exceeds simply doing what you can to ensure the units are filled. Rather than just creating a sequence of buildings, the goal should be to create eminently livable communities, where the space compliments the way residents live, rather than residents having to adapt to the space.

Determining the best path forward

To ensure that your project is aligned with place and use based responsibility, it is imperative that you somehow engage the community. This can be through educational campaigns, public meetings, or any other means of two-way communication between stakeholders and developers. Going further, crowdfunding platforms have allowed developers to solicit investments from people in the very same communities in which they hope to make a difference. Nothing gets people on board like having a direct financial incentive in a project.

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Even the best intentions can result in disaster without proper follow-through. They say smart people learn from their mistakes, and smarter people learn from the mistakes of others. The socially responsible development sector is no longer in its infancy, and there is a wealth of data out there to help new developers avoid the mistakes of the past. Recognizing your responsibility as an investor or developer is the first step toward building a profitable, socially conscious property portfolio.

Image by Eve Picker