Rethink Real Estate. For Good.

Impact

Mobility is pretty pedestrian.

Gabe Klein has invested his life and career in all facets of urban mobility, both as an entrepreneur and within the halls of city government. Now a consultant and advocate for positive urban change, Gabe co-created Cityfi, in 2016, to help cities adapt to new technologies, sustainability issues and growth using public-private partnerships and market-based ideas.

Growing up in the 1970s during the energy crisis, Gabe remembers the rationing of fuel and how it inspired his father to get into the bicycle business. He worked for his family’s company until he went to college and saw first-hand the opportunity to rethink the way people get around in urban areas. Hired by ZipCar in 2002, just as it was getting started, Gabe helped to grow that early mobility company dramatically during its formative years. He served as the director of the District of Columbia Department of Transportation (2008-10), and as commissioner of the Chicago Department of Transportation (2011-13), where he helped create two of the first bike share programs in the U.S., and worked on issues such as bus rapid transit, infrastructure projects and cycling and pedestrian plans, to name a few. He even started an electric-powered, organic food truck chain called On The Fly.

Gabe is also the co-author, with David Vega Barachowitz, of Start-Up City: Inspiring Private and Public Entrepreneurship, Getting Projects Done, and Having Fun (2015).

A huge fan of challenging the status quo, Gabe says one of his mottos is “if somebody is not calling you crazy, then you’re not working hard enough.”

Insights and Inspirations

  • Our biggest problems can be solved through an exchange of ideas between the public and private sectors.
  • Reallocation of urban space away from cars is critical for urban mobility. The majority of urban trips are less than one to three miles, and there’s a big market there.
  • We need more rebels, people pushing the envelope, even when we don’t agree with them.

Information and Links

  • You can buy Gabe’s book at Island Press or on Amazon.
  • Watch Gabe’s TEDx talk: Cars Almost Killed Our Cities, But Here’s How We Can Bring Them Back.
Read the podcast transcript here

Eve Picker: [00:00:14] Hi there. Thanks so much for joining me today for the latest episode of Impact Real Estate Investing.

[00:00:21] Today’s guest is Gabe Klein. Gabe has invested his life and career in all facets of urban mobility, both as an entrepreneur and within halls of city government. That’s made for a very interesting point of view, from Zipcar to bike sharing to transportation commissioner to book and now to Cityfi, Gabe has left a mark on mobility in this country.

[00:00:50] So, listen in and be sure to go to EvePicker.com to find out more about Gabe on the show notes page for this episode. And be sure to sign up for my newsletter so you can access information about impact real estate investing and get the latest news about the exciting projects on my crowdfunding platform, Small Change.

Eve: [00:01:18] Hello, Gabe. Thanks so much for joining me today.

Gabe Klein: [00:01:20] Thanks for having me, Eve.

Eve: [00:01:22] So, you’ve done so much, I really don’t know where to begin. Zipcar. Bike sharing. Transportation commissioner. A book called ‘Startup City.’ And my personal favorite, On The Fly, your own electric-powered, organic, food truck chain.

Gabe: [00:01:37] That’s correct.

Eve: [00:01:39] And, of course, now you wrap that all up in your company called Cityfi. I’m wondering how you got there and why transportation issues matter so much to you.

Gabe: [00:01:50] Yeah. Well, you know, I grew up in the 1970s, actually, as a kid, and 80s, but I grew up during the energy crisis, and I remember the rationing of fuel and it inspired my dad to get into the bicycle business. And so from the age of, like, five years old, six years old, I was always around bicycles. We had skateboards and we had mopeds in the stores. And we used these things at home, too. And my dad actually commuted by bike, many days. And so I grew up looking at these quote unquote alternative modes of transportation, actually as normal ways of getting around. And, by the way, we lived in a rural area. So, we would commute all the way from our rural home into the local town on these busy roads. And so, as I got older and I was, so, you know, in the bicycle business, even post-college, I realized that in urban areas there was this huge opportunity to rethink the way people got around. And I had moved to Washington, D.C., in the mid 90s, and, you know, our major arterials were speedways. People were doing 65, 70 miles an hour …

Eve: [00:03:04] Oh, yeah.

Gabe: [00:03:04] … completely out of control. And yet, we had all these people moving back to our cities. So, I met Robin Chase, and that was around 2002, and she hired me as an executive at Zipcar, and I helped build that business, and it was really instrumental in me understanding the relationship between public and private sector, and how important the public sector was in empowering small businesses like ours, and tying them in to the existing infrastructure in the city, in the space, in, you know, in terms of giving us parking spaces, in terms of tying us into the transit system. And it was really the key to our success, I think. And so, ever since then, I’ve been really focused on, you know, how do we do good, make money and enhance the lives of people in our urban areas.

Eve: [00:03:59] From those early beginnings, because things have changed a lot since Zipcar, right? Zipcar has waned a little bit because other things have popped up instead. What is the mobility landscape look like to you in the U.S. today by comparison?

Gabe: [00:04:13] Yeah, well, look, I think businesses always need to evolve, right? I mean, look at Amazon. It started out as a bookstore out of a garage, right? So, I think that there’s been a lot of evolution related to the technology that we have in our hands. The GPS technology that allows us to geolocate where things are. Solar and electrification. Obviously, the backbone of it all, the enhanced cell phone networks. And that’s what’s really powered the transformation in mobility. At the same time, what we find is we have all these new modes, and they’re really exciting, and it’s actually gotten a lot of people on bikes, which I love.

Eve: [00:04:50] Yes.

Gabe: [00:04:50] Right? But on the other hand, things are pretty pedestrian. And what I mean by that is, like, there’s a basic way that we’ve been getting around for a couple 100,000 years. You know, we’ve been walking, we’ve been riding the horse. Then we start riding bikes, taking streetcars. And fundamentally, you have a sort of geometry problem, and you have, sort of, movement of people and the geometry of how you move them, and it’s really about volumetrics. And so, in a dense urban area, you can only move so many people so quickly. And so it becomes about bigger things. It’s about, like, what creates a healthy city, what creates a safe city, creates an equitable city, or town, by the way, it doesn’t have to be a big city. And so, you know, my time in government was really instrumental in seeing that the levers that we had that could really change the quality of life for people. And now we’re talking about things like universal basic mobility. We’re having conversations in the public square about, you know, because mobility and transportation are so closely tied to land use and real estate, and because so much of people’s income goes to those two things, that if you can create a system where people don’t have to use a very complex transport system, and you don’t have to make a capital investment in the transportation, they can afford to live in a place …

Eve: [00:06:16] Yeh.

Gabe: [00:06:16] … that they want to live and they can do it in a way that they have a higher quality of life, and more access to jobs. And so, that’s …

Eve: [00:06:22] Solving the mobility issue actually makes housing more affordable.

Gabe: [00:06:29] Well, look, if you shed one car like, let’s say you’re a two-car family, you shed a car, that’s 150,000 dollars more real estate you can afford.

Eve: [00:06:36] Yes.

Gabe: [00:06:37] Right?

Eve: [00:06:37] If you’re a worker who needs to get to a job every day and there is, you can walk to pick up your groceries, and there’s a train or bus near you that gets to work, you can shed both the cars.

Gabe: [00:06:50] Right. Right. I mean, look, people say like D.C., San Francisco, Boston, these are the most expensive places to live. However, you know, in D.C., car payments are less than 10 percent of people’s income, right? And you look at a lot of other, like Sunbelt cities, it’s 20, 25, 30 percent. In a low-income neighborhood, over 50 percent. My household? We’ve gotten to, because we have an apartment downstairs, one, two, three, four, five, six, seven people. And there’s one car, …

Eve: [00:07:17] Yeh.

Gabe: [00:07:17]  … you know. And so, actually, our cost of living is relatively low.

Eve: [00:07:23] Yes. Yeah. So, you know, interestingly, I mean, I think about this. So, while technology has been advancing some mobility solutions, we’re really kind of still stuck in how to model the physical landscape, right?

Gabe: [00:07:38] Oh, absolutely. And that’s what I was getting at when I was saying, like some of the problems are very pedestrian. I was trying to be funny, but it’s like, it’s really about the reallocation of space, right? It’s like, you can only move so many people if you allocate all the lanes to cars that carry one or two people, what we call single-occupancy vehicles. And so, there’s a big movement, like, if this technology and these new modes are going to be successful, like scooters, for instance, and shared bicycles, you’ve got to give space to them or people won’t feel safe. And if they don’t feel safe, even for a small portion of the trip, let’s say they’re driving, or riding, excuse me, from home to work, and it’s a five mile trip and there’s two blocks that feel terribly unsafe. That mom may not make that trip, the entire five mile trip, because of those two blocks. And so, it’s really about creating a safe system for people.

Eve: [00:08:28] I know that the public sector is thinking about this. Is the private sector thinking about this? Who’s more advanced in their thinking? Are they talking to each other?

Gabe: [00:08:40] Well, that’s actually why I wrote ‘Startup City.’ When I went into the public sector, I had never worked, I mean, and I came in running the agency, I had never worked in government in my life. And so I had a very different perspective. And I’m really fixated and focused on this exchange of ideas between public and private. Because, to be honest, to solve the climate crisis, our affordability crisis, all the major problems of our time, we’re not going to do it without the two sides working together. Now, government has a very strong arm in terms of regulation and setting the tone, which I think they are going to need to flex. But the more we can work with the private sector, understand the private sector’s, you know, business models, their motivations, their, the outcomes that they’re looking for, and we can inform the regulatory environment and policy, then we can come together and make change a lot more quickly. And to be honest, in the situation we find ourselves in, particularly with climate, we need to move a lot faster.

Eve: [00:09:38] So, do you think that the public sector can somehow be infused with the urgency and energy of a startup?

Gabe: [00:09:47] Well, that’s what I did. I’d like to think I did. I mean, I ran these two agencies as if they were well-funded startups. And, you know, there were some people that thought I was crazy.

Eve: [00:09:59] Ha.

Gabe: [00:09:59] And, you know, one of my mottos is, like, if you’re, if somebody is not calling you crazy, then you’re not working hard enough. You know, like, if somebody doesn’t think that your ideas are a little crazy, then you’re not challenging the status quo enough. And I think the government can work on behalf of taxpayers, move a lot faster, and also, to be honest, be fiscally responsible, and in some cases, share in profits, or losses, with the private sector, which is what we did with some of our bike share programs. I think the private sector needs to be much more open to working for the greater good, taking a long term view versus the short term view. And looking at the long-term sustainability of their business, and sustainability of the planet, and the urban environment that they’re operating in. And if we can get the two thinking alike, and I work with a lot of companies and governments, it is just amazing what they can do and the speed that they can do it in. A lot of it comes down to … tried and true old school relationships, and understanding and trust. And that’s what we try to build.

Eve: [00:11:02] Yes. Yeah. Yeah. So, Then how should equity play into transportation solutions?

Gabe: [00:11:11] Yeah. I mean, there’s so much to talk about here.

Eve: [00:11:14] Yes.

Gabe: [00:11:14] But it’s actually, at the end of the day, and I hate to say something like this as an entrepreneur, but transportation doesn’t make any money. I mean, like how many transportation systems, you know, that consistently make money. Like Pepsi does, right? Almost none. Uber lost almost eight billion dollars last year. There are a couple of transit systems that are profitable because so many people use them, like Hong Kong and Singapore. There are some private sector companies that make money some times, like some of the airlines. But fundamentally, it is not a big moneymaking business. And so, we need to think about the outcomes that we want for our people, We need to think about creating equitable outcomes around all the elements that make up quality of life, or the happiness index, for instance, and then figure out how do we fund transportation to make that work. So, Uber today might be funded by venture capitalists, and long term it may be partially funded by the government …

Eve: [00:12:08] Yes.

Gabe: [00:12:09] … for certain types of trips. For low-income people, late at night, hourly workers, when the bus isn’t running, to make it home, you know? So, I think the business models are going to change and shift. We saw this around the turn of the last century where there were so many streetcar systems built by developers, funded by developers, so that people could reach their new streetcar suburbs. And then over time, as the automobile came up and you had such a fractured marketplace, you had the consolidation of them, and then you eventually had the collapse of them, and then they became public sector entities, and then they were killed by the car companies. I mean, it’s a little bit of an oversimplification, but that’s sort of how it went down.

Eve: [00:12:47] Yeh. Pretty correct.

Gabe: [00:12:48] Right? And so, I mean, you know, everything’s cyclical. We’re going to see a lot of interesting high-flying startups. We’re going to see a lot of consolidation. We’re gonna see mobility service systems, where you see, like, Spin scooters and Argo autonomous vehicles, and the bus. And you’re gonna see a lot of public-private partnerships where good actors, that want to share in risk and reward with the government, will be given concessions to operate various types of services. And that’s, I think, how it’s going to shake out in the long term.

Eve: [00:13:21] Yeh, also last week, and I’m trying to remember where this was, I read an article about a town, city, that had done the analysis on what it will cost them to upgrade their fare structure. And they decided it was cheaper just to make it free for people who ride the bus. Where was that?

Gabe: [00:13:39] You’re probably thinking of Kansas City?

Eve: [00:13:40] Yeah.

Gabe: [00:13:41] I have, actually, I was out there a few years ago. One of my partners was the chief innovation officer there. And I went out and met with the city manager, years ago, and he wanted to do this and they finally got it done. And the argument was, look, you know, we’re spending five million dollars a year to recover eight to 10 million dollars of farebox, right?

Eve: [00:14:07] Right.

Gabe: [00:14:07] So, you have a net positive of three or four million. You know, what if we just made it free, how many more people would ride? What kind of friction would we reduce? How many cars we take off the road? How much more equity would we create with low-income people that need to take the bus and maybe a dollar or two every trip is a lot. I think that’s really interesting.

Eve: [00:14:29] I think it’s fascinating, but I’m wondering why it took them so long to come to it, to, you know, to decide to do it. It seems obvious.

Gabe: [00:14:36] This is why we need more rebels, right? In government and in the private sector. Like people are very critical of Elon Musk, particularly in my sort of urban, you know, transportation world. And I get it. And I’m critical of him, too. But at the same time, we need people pushing the envelope, even when we don’t agree with that. Even when we think that some of their ideas are crazy. Because sometimes the application of things – like the Boring Company, for instance, you know, tunneling – the ultimate application may not be what they’re selling today, and it could be very, very useful. And let’s face it, the Second Avenue subway that took 100 years to build in New York. We can do better. So, we need to take disparate ideas, different types of people, put them in the mix, be patient, have some tolerance, and try some things.

Eve: [00:15:24] Yes. So, failure could be a good thing, right?

Gabe: [00:15:27] Absolutely. We …

Eve: [00:15:28] People don’t like failure in the United States. We gotta try, right?

Gabe: [00:15:33] Well, we’re either obsessed with failure and think it’s a good thing, it’s a horrible thing. It comes down to, you know, government risk aversion vs. private sector risk acceptance, right? And we have two very different cultures. And so, when you try to bring the two together to work on things, this is actually one of the big issues that keeps them from understanding each other. One is trying to keep their name out of the paper. One is trying to not get noticed. One is trying to do good for the citizens, look out for the greater good, but not make a big splash, typically. And you have the opposite on the private side. And these are generalizations. Sometimes it’s the opposite. But if you get the two to understand how they can benefit each other, and the value that they each bring, and the leverage they can get out of each other, it’s amazing what could happen.

Eve: [00:16:18] Yeah, so, the interesting thing is what you’re talking about, you know, is that’s really the way I developed my real estate portfolio, in partnership with the city of Pittsburgh, and the Urban Redevelopment Authority. And we both fully understood what we were bringing to the table and how we could help each other. That was in real estate. And I thought that was an amazing opportunity for both of us. And the city understood that, and I understood that. So, it’s kind of puzzling why … why this doesn’t extend to other things, I think.

Gabe: [00:16:49] I agree 100 percent. That’s why people like you, me, and many others are important in pushing that envelope. Pittsburgh is a really interesting city, and we’re doing a lot of work in Pittsburgh right now, trying to create a first-of-its-kind, mobility-as-a-service offering, basically, for the city. So, unlike Lyft and Uber, which are creating their own, like, walled gardens, and I don’t fault them for that, but they’re creating their own sort of systems within their app. We’re saying, how about if you bring best in class providers together?

Eve: [00:17:23] Yes.

Gabe: [00:17:24] From all different walks of life. And then let, aggregate the services in one app, transit app …

Eve: [00:17:29] Right.

Gabe: [00:17:29] … and let people use them, and create a physical installation, right? Near real estate. So, create a physical mobility hub, and there’ll be like 50 of them. So, you get some of that enhancement around real estate like you get from a TOD metro stop, but then also have to be virtual, too. And give the city some level of access to data and some level of control …

Eve: [00:17:55] Right.

Gabe: [00:17:55] … versus being 100 percent private.

Eve: [00:17:58] I actually interviewed Karina Ricks on these little mobility stations. It’s a very exciting program. And, you know, you just led me right into my next question, which was how do you think data can help to formulate better solutions?

Gabe: [00:18:17] Oh yeah. Data is really important. And it’s really evolving and changing. And there’s all kinds of arguments, you know, within our little nerdy world about privacy and, you know, very important topics, but at the end of the day, this idea that data that’s generated by citizens belongs to somebody, is sort of misguided, right? I mean, at the end of the day, it really belongs to the citizen that’s generating that data. And you could argue in some sense that it belongs to nobody. But the data is now being shared a little more widely with cities. So, that cities can plan more effectively for the future. So, that they have a sense of what’s happening on their street. And we’re really moving from an analog system of operational control of how the city signal system works, for instance. We started moving to GPS about 10 years ago, where we started to gather a lot of data from GPS trackers on our buses and our taxis, like in places like Chicago. We could start to estimate for our constituency what congestion was looking like in real time. But now it’s becoming more about operating, than just planning for the future. So, it’s like, how you operate day to day, a very complex system where Waze might have better data than the city does? And so, it’s really interesting how it’s playing out. And the Open Mobility Foundation, which we worked with LA DOT and other consultants on helping to set up, is a really interesting place for a lot of these ideas to germinate, and a lot of the cities to work together and figure out with the private sector, by the way, how to share data, effectively, how to be very respectful and careful about privacy, and how to look at both planning, as well as day to day operating, utilizing these very rich data sets.

Eve: [00:20:12] Can you give me an example of a solution that was crafted from data that you think is fabulous?

Gabe: [00:20:18] Sure, sure. Well, look, scooters have been very controversial, right? Some people love them. some people just despise them. And that goes for politicians as well. So, you know, you go to a place like D.C. or L.A. and you have, you know, very smart, bold leadership. And they see the potential with an electric scooter to displace fossil fuel-powered car trips. So, they want to go big. But they know that you have elderly people that need access to the sidewalks, and disabled people, and children. So, if you don’t have some level of control, then what happens is it doesn’t work. And it ends up, you know, flaming out.

Eve: [00:21:00] We’re rubbing up against the physical landscape again, right?

Gabe: [00:21:03] Exactly.

Eve: [00:21:04] Yeah.

Gabe: [00:21:05] But often people who have not worked in government don’t understand it. They understand it theoretically, they understand the data side, but they don’t actually understand how this plays out politically in a city. And so in a place like L.A., we have council members saying, hey, I don’t want any of these in Brentwood. Right? The ability to geofence, and to then know if, like, not just to say we’re gonna geofence scooters out of this council member’s ward, but we’re actually going to be able to know and validate if the scooter company was able to get people to adhere to that. That’s very important. You know, that’s how L.A. went to 30,000 plus scooters, because the council members …

Eve: [00:21:49] Wow.

Gabe: [00:21:49] … and the people felt comfortable that LA DOT actually had the tools to manage a program that large. In Dallas, where it was a total free for all, they had no data, and they told people to just do whatever they wanted, it was a disaster.

Eve: [00:22:05] Oh, interesting.

Gabe: [00:22:05] And so I think it what … yeah. So, what we’ve learned is that, and the private sector has learned right along with the public sector, is like, oh, we need a common data standard. We need to share data. We need to be more transparent. Or the public and the politicians will rise up and boot us out of here. And so, it’s very much, actually, the folks that are running the DOTs that are trying to help a lot of these new companies be successful.

Eve: [00:22:31] Wow. Is there a current trend in transportation that holds the most hope for you?

Gabe: [00:22:38] When you say trend, do you mean a mode per se or do you mean …

Eve: [00:22:41] I mean a mode or, you know … even like, I’ll give you something that I’ve been reading a lot recently. And one thing that I read that I thought was fascinating was a couple of cities and states taking a look at their very wide roads and very heavily trafficked roads and actually deciding to give them a road diet. I think this is an example in New York State of one of the most heavily trafficked roads, and rather than widening it, they decided to narrow it, which I think is really an interesting trend. Because it opens up space in an unexpected way and it controls traffic in a very different and unexpected way, as well. So, I don’t really know what the outcome will be, but I’ve noticed, I suppose, experiments like that, more and more.

Gabe: [00:23:34] Right, uhm, no, I would say the number one thing I’m excited about is the reallocation of space that we’re finally starting to see on our streets. The closing of Market Street in San Francisco. You know, I put a bike lane down the middle of Pennsylvania Avenue, and, you know, there’s a real movement towards serious reallocations of space, as was as the idea of actually implementing congestion pricing in cities. So, I think that’s a very positive movement. And then, obviously, on the private side, the venture capital investment and efforts in active mobility, you know, and bike share and scooter share, I think these are very positive movements. You know, not to say that all the companies will be successful, but the realization that the majority of urban trips are less than one to three miles and that there’s a big market there, and that cities also want to get people out of cars. So, I think, you know, these are the things that that give me quite a bit of hope.

Eve: [00:24:35] Yeah. And then there’s some fallout that I just personally find very interesting. I had a conversation with someone last week who said, you know, in the next five years, we’re going to be figuring out how to repurpose parking garages. And I thought that was like, that’s really fascinating.

Gabe: [00:24:50] Well, yes. And the important thing is to build them in such a way that they can be repurposed. Flat, right? That the ramps are on the exterior. That you run the ductwork for the electrical and HVAC when you build the garage. So, the smarter people are about what the potential is, the more they can build into their developments, and I have a lot of funny stories about conversations I’ve had with folks over the years that were building buildings and, you know, feeling like I should have been paid for my 15 minute conversation that saved them millions of dollars. Because, I mean, I’m sort of kidding. But, you know, shared parking facilities, not building parking facilities and convincing cities to move more towards parking maximum, shared parking zoning and ordinances, creating mobility wallets to give people access to mobility instead of incenting people to use parking. There’s so many interesting things that we can do and a lot of it comes down to carrots and sticks, both for developers, for cities and for individuals.

Eve: [00:25:53] Right. I’d love to know a little bit more about the sort of you tackled through Cityfi.

Gabe: [00:25:57] Yeah.

Eve: [00:25:57] It’s a great name.

Gabe: [00:26:00] Thank you. So, we do a lot of different types of work. I’ll say that about half our work is public sector, mostly cities. And then about half is private sector. And we do some foundation work as well. We’ve been working with the Knight Foundation on autonomous vehicle piloting and outreach, which has been fascinating work. But we do a lot of public-private partnership work. We do a lot of urban planning, around everything from strategic plans for cities, shared mobility plans, curbside management, which is becoming a huge issue with the change in how people move around. And a big opportunity as well. And then, you know, we do a lot with the private sector on go-to-market strategy, and positioning them to be triple bottom line companies that the government will want to do business with. Which means sometimes like a wholesale revamp, not just of how they market themselves, but how they conduct their business, and making sure that sustainability and health and equity and positive outcomes for society are not just talking points in their marketing, but key pillars, north stars of their strategy. And when we’re successful there, I mean, it’s very rewarding. Very … it feels really good to have that kind of impact.

Eve: [00:27:14] So, I think right now, socially responsible real estate is still a minority fraction of what is going on in this country. I’m wondering what you think it will take to kind of move it to the only way to do real estate development, or think about building in cities.

Gabe: [00:27:30] It’ll be a combination of the regulatory environment changing. You know, we’re gonna get away from single-use anything. We’re going to get away from fossil fuel-powered anything. And so, you know, as these are put into a regulatory form, these policies, that will change the way people build. We need more affordable housing. We need more workforce housing. I do think that government leads. I know we have challenges with the finance folks who will say, yeah, I’m not going to finance that if you don’t build two spaces per unit. And this is where government is so important, because obviously if a local government says, look, we’re going to parking maximums for minimums, it’s not like finance companies will say, oh, we’re not going to build in New York City, we’re not going to build in Nashville. They will. And that’s why government’s got to lead. I think, also, the other side of this coin is that once people see what they want, they will buy it. And then once you hit a tipping point …

Eve: [00:28:32] Right.

Gabe: [00:28:34] …. the market sort of takes over and …

Eve: [00:28:36] Kind of like iPhone, right?

Gabe: [00:28:39] Yeh. I mean, look, government used to lead. Government incented Tesla to build electric cars and loaned them a billion dollars, and all of that, right?

Eve: [00:28:47] Right.

Gabe: [00:28:48] But now the reason people are buying Teslas is they’re saving money and they’re really high quality cars. And so people are self-selecting into micro-units or developments without parking that are cheaper, but also maybe closer to the things that they want to experience. And the market is begging for this. We are so … like I was talking to Chris Leinberger the other day and he said we have 40 years of pent up demand for urban, livable, walkable. And so at some point, the next generation of developers are going to come out and say, well, why the hell are we building that?

Eve: [00:29:23] Right. You know, I think that zoning is a really important piece in this. And I was involved in the zoning code rewrite, and it is huge. You know, and every municipality has a different zoning code. When I think about this, it’s overwhelming how you kind of move towards countrywide acceptance and regulatory changes to really make this happen for everyone. It’s a big, big job.

Gabe: [00:29:51] That’s interesting. Yeah, it’ll be interesting to see when when we get a new president, hopefully in November, you know, the tack that they take towards transportation, and, you know, hopefully getting away from the sort of modal silos that we have DOT and thinking much more across HUD and DOT and DOE, which, you know, was attempted last time, but it was never funded. And I would love to see that really happen. I mean, you could almost see collapsing these agencies into one, and … with different divisions internally based around land use type, you know, urban,  suburban, exurban, rural, versus the bimodal stuff and then addressing the energy, you know, around housing and transportation and production.

Eve: [00:30:42] Yeah, yeah, yeah. Well, this has been fascinating, but I want to know what’s next for you.

Gabe: [00:30:48] Yeah. Well, you know, I’m really enjoying my work. I mean, we’ll see if the entire economy just grinds to a halt.

Eve: [00:30:56] For at least a month, right?

Gabe: [00:30:57] Yeah. Maybe we’ll all be living in communes soon and just dancing and eating tofu. But in the in the meantime, I going to continue working with cities, working with companies. I also work with Fontinalis Partners out of Detroit, wonderful firm, and we invest in scalable platforms, you know, often software based, but sometimes hardware based also. So, I really enjoy working with startups. And we do that at Cityfi. But also, obviously, at Fontinalis, there’s a lot of work to not just invest in these companies, but then to help make them successful. And in my personal life, I’m revamping a beach house.

Eve: [00:31:37] Oh, lovely.

Gabe: [00:31:38] Trying to get that done by summer.

Eve: [00:31:41] I’m revamping a tiny little rural cottage. It’s fun. Well, thank you very much, Gabe, it’s been really delightful talking to you. And I can’t wait to see what you do next.

Gabe: [00:31:54] Well, thank you and thanks for thinking of me and I’ll be following your work as well.

Eve: [00:31:58] OK.

Eve: [00:32:02] That was Gabe Klein of Cityfi. Gabe believes a few things adamantly. First, that there is enormous power in collaboration between the private and public sector. Second, that data rules. And third, that over the next few years we’ll see a reallocation towards pedestrians first and automobiles second.

Eve: [00:32:32] You can find out more about impact real estate investing and access, the show notes for today’s episode at my website, EvePicker.com. While you’re there, sign up for my newsletter to find out more about how to make money in real estate while building better cities.

[00:32:50] Thank you so much for spending your time with me today. And thank you, Gabe, for sharing your thoughts with me. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.

Image courtesy of Gabe Klein, Cityfi

Maintaining a place for the community.

When wealthier individuals and organizations move into an urban neighborhood, both the rental and property values as well as the culture and character of the community can change. This process is known as gentrification. While this shift can do good and often results in the revitalization of struggling areas, it can also leave many people in the existing community priced out of their own neighborhood and even worse, displaced. Today, as gentrification takes place in more and more urban areas across the country, many socially conscious developers, investors and urban planners have thankfully become sensitive to the issue. And many of them are looking for ways to maintain a place for existing, lower-income members of communities that are faced with the changes that will inevitably come. One such example of a large project in a rapidly gentrifying community is the Bushwick Generator in the East Williamsburg area of Brooklyn.

Background

Williamsburg, a north Brooklyn neighborhood situated on the waterfront, was historically a manufacturing district. It originally developed due to a boom in industry in the area in the early 1900s. Over the last two decades it has increasingly transformed into a trendy neighborhood, for living, eating, shopping and visiting. And as always, the pressure of development has resulted in spill-over development activities in the adjacent neighborhoods of East Williamsburg and Bushwick which have now also become much sought after areas to live in. This is in part due to the fact that these neighborhoods are well-served by public transit. They are right on the L train, a primary mode of transportation between Brooklyn and Manhattan.

The Bushwick neighborhood itself is a diverse community with a strong Latino and African-American presence along with other immigrants and young creatives. But Bushwick is now beginning to experience the leading edge of gentrification with the arrival of affluent media and tech businesses, along with their employees, into the area. These new businesses threaten to change the neighborhood’s long-standing character and are putting at risk the affordability of the neighborhood for some of its existing residents.

About the Bushwick Generator

The Bushwick Generator is housed is a massive warehouse which was purchased by a developer in 2015. The developer’s goal was to create a “community influenced innovation lab and creative hub.” The Generator has 100,000 square feet of space and is in the process of being developed for commercial, nonprofit and creative tenants, and, most importantly, as a resource for all members of the community.

In 5,000 square feet of now-completed space, Emerick Patterson, one of the leaders of the project, does community outreach and neighborhood work. His primary goal is to offset the effects of ongoing gentrification. As media and tech tenants continue to move into the area around it, the Bushwick Generator offers not only a resource for members of the existing community but also an opportunity for them to impact what goes on in the large spaces around them.

The project is still in its early stages and is exploring how the total space can be used. Yet, at the forefront of this planning process is what members of the neighborhood want, whether that be a place for job training, job readiness, or simply a space to gather and meet. The Bushwick Generator has an open-door policy and works to get as many members of the community through the doors as possible. They regularly host events, working hard to ensure that all events are attended by members of the community. First and foremost, they want to ensure that locals are getting access to knowledge about what is now going on in the neighborhood.

Patterson says that, ideally, these efforts will result in some changes to the ongoing tech influx in the area and that the Generator will enable all members of the community to feel connected, comfortably engaging in area events and confident enough to ask for help when needed.

To learn more about the Bushwick Generator and other projects in the area, listen to the full interview with Emerick Patterson.

Image from Pxhere licensed CC0 Public Domain

First in. Towards growth.

Lance Chimka, who became Director of Allegheny County Economic Development (ACED) in 2018, oversees an agency responsible for business expansion, planning, community and real estate development, and affordable housing projects for the second most populous county in Pennsylvania.  

Born and bred in Pittsburgh, Lance has long been familiar with the changes the region has gone through in its shift from a deeply embedded, industrial economy to one grounded in medical research, higher education and technologies such as robotics and cybersecurity. Soon after taking over at ACED, he noted that the local economy is hitting an important juncture, one in which Pittsburgh and local municipalities need to think beyond “eds and meds,” adding that a decade after the 2008 financial crisis “we’re in an economic expansion, but we’re not seeing some of the growth that other benchmark cities are seeing.”

Lance previously worked within the Pennsylvania Department of Community and Economic Development where he was Regional Director of the Governor’s Action Team, focusing on removing barriers to development, investment and job growth in the 11-county southwestern Pennsylvania region. And prior to working for the state, Lance led community development programs, commercial lending, business attraction and expansion activities for the ACED for a number of years.

Lance is certified as an Economic Development Finance Professional and he served in the U.S. Peace Corps, in Turkmenistan.

Information and Links

  • Lance is really proud of ACED’s partnership with RIDC to help the startup, Fifth Season, build a vertical farm in Braddock, PA. The project was profiled by Fast Company and won a NAIOP light industrial project of the year award.
  • Lance loves Pittsburgh International Airport’s microgrid project – he thinks it is both important and under-rated. Forbes loves it too.
  • And he’s inspired by the tech entrepreneurs that have led Pittsburgh into the forefront of the innovation economy, like Duolingo, MeeterFeeder or Thread.
Read the podcast transcript here

Eve Picker: [00:00:18] Hi there. Thanks so much for joining me today for the latest episode of Impact Real Estate Investing.

[00:00:24] My guest today is Lance Chimka. Lance is the relatively new and extremely energetic director of Allegheny County’s Economic Development Department, in Pittsburgh, Pennsylvania. He has a very contemporary take on what government ought to be doing, and that includes investing in real estate to advance the economy. Lance is building a collaborative team environment, working with developers throughout the county, lending where banks dare not go, always with his eye on economic development growth, and always with the thought of how our region can do better. Learn how Lance and his team are supporting development in a not-quite-market rate environment.

[00:01:11] Be sure to go to EvePicker.com to find out more about Lance on the show notes page for this episode. And be sure to sign up for my newsletter so you can access information about impact real estate investing and get the latest news about the exciting projects on my crowdfunding platform, Small Change.

Eve: [00:01:37] Hi, Lance. I’m really excited for the opportunity to talk to you today.

Lance Chimka: [00:01:41] Pleasure’s all mine, Eve. Thank you. I’m honored that you would have me on.

Eve: [00:01:45] We’re gonna have a great time.

Lance: [00:01:46] Absolutely. We usually do.

Eve: [00:01:48] In a not a lot of time, you’ve gone from being an intern at Allegheny County Economic Development to the organization’s director. And then you did a few odd jobs in-between. And that’s a pretty meteoric rise, wouldn’t you say?

Lance: [00:02:06] Ah, yeah. I mean, I guess it has been pretty quick. It sometimes didn’t feel that way. But I think the cool thing about that is that whole progression is absolutely vital to some of the stuff I want to get done, now. I wouldn’t have changed that course, at all. Like, understanding kind of the daily struggles of interns in my office absolutely directly informs how I work on efficiency measures here, for example. It’s been incredible and I’ve been really lucky to have incredible mentors along the way that have taught me a lot. That was one of my favorite things about public sector work, is it touches so much, that you’re able to, you’re able to learn.

Eve: [00:02:45] What led you to pursue a life in government service? Was it that first internship that you just liked so much?

Lance: [00:02:52] When I was pursuing an undergrad degree in finance, it was kind of in the boom times, the 2000s, and I didn’t want to take that route. Kinda always been a volunteer at heart, and so I joined the Peace Corps, and that was kind of the start of my real public service. And I just kind of knew, I came back to go to CMU and get a policy degree and just kind of always knew, in my heart of hearts, I would always be in some kind of public servant role. Not necessarily in government work, but that’s the path that I’ve chosen to this day, and it’s been incredibly rewarding.

Eve: [00:03:27] So, that what drives you, yeah. So, for listeners who haven’t connected the dots yet, Lance and I share a hometown, Pittsburgh, and a few decades ago, Pittsburgh was pretty well all but written off. You can listen to my podcast interview with Tom Murphy that I think just went live and you’ll get to hear the turnaround mayor talk about where we were then and what it took to shake that image. And that brings me to a statement that I read, that you made, Lance, which was, “we’re in economic expansion, but we’re not seeing some of the other growth that other benchmark cities are seeing.” And I’m just wondering what you meant by that?

Lance: [00:04:09] Not to, not to recap what you probably talked with Mayor Murphy about, but to get from the doldrums of 1983, which is really the trough of our local economy.

Eve: [00:04:19] It was the bottom, right? Yeah.

Lance: [00:04:21] Yeah. To where we’re at now, has been an amazing transformation, right? It’s been all about diversification and it’s, of a regional economy. And then we, now we have these five primary industry sectors: in financial services, IT, energy, advanced manufacturing and healthcare. And that’s really, really important because in recessionary periods, that diversified economy is very robust, and makes us the darling, and outperform benchmark cities in recessionary periods. However, the problem is that in expansionary economies we lack the kind of exponential growth that some of our other cities experience. It’s just kind of the nature of our economy currently, is slow and steady wins the race, which is fine. I think my goal is on the macro economic end, is to not throw the baby out with the bathwater, keep the diversification, keep the slow, steady growth, but then really experience some of the upside of expansionary times, which we’re in now. And I think the key to that is, and I’m really optimistic about the future of our economy, is across those five industry sectors. You have artificial intelligence, which we are an absolute worldwide hub of, cuts across all of those. And robotics, cuts across three of those, in advanced manufacturing, health care and energy. So, those eight intersection points that I think are the key to experiencing upside growth, and that’s some of the stuff I’m excited to work on.

Eve: [00:05:56] How do you work on that? How do you improve that?

Lance: [00:05:59] Great question. Especially like, how does government do that? The risk profiles associated with investments in startups are probably too, you know, too risky of an investment for governments to be making. And not to mention, we don’t have that skill set. But I think there are a lot of other ways we can invest in the city in a way to encourage that kind of growth. One of those ways is in real estate development, right? If you take something like biotech, right? A lot of times you’ve got companies that need wet lab space. You have extremely long periods to get through clinical trials. You have really expensive buildings that, you know, because of the nature of the beast, you have your non-credit tenants. So, I think when we’re making investments in real estate, we need to incentivize those kind of assets in buildings that aren’t going to happen in the open market. That’s just one example. We lack high-bay space for robotics. Some other specialty real estate that I think the public sector can play a role in: mitigating the risks for developers who have non-credit tenants, and making sure that building stock is available. Speculative development is another thing we’ve classically underperformed on. And in the kind of pace of the current economy, like, people are not waiting around 18 months to build a building, they want turnkey space ready to go. So, we’re working on a number of things to make sure that those types of building stock in speculative development is allowed for. And a lot of that is investment through tax abatements, and direct investment, and site assembly that I do here in this office. So, that’s just one example in real estate. I think you can find other examples in public infrastructure, amenities, recreational space, and being really intentional about how we connect our tech hubs through infrastructure work. Whether that’s public transit, or whether that’s, you know, really compelling a multi-modal streetscape design. Things like that.

Eve: [00:08:03] Quite a lot to think about, isn’t there?

Lance: [00:08:04] Yeah. Yeah. Keeps ’em busy.

Eve: [00:08:06] So, you also served as an advisor on Pittsburgh’s Amazon HQ2 proposal. And I’m wondering in retrospect how you feel about making it to the top 20 list, but not as an Amazon final city pick.

Lance: [00:08:20] Yeah, I mean, I feel great about it, because I think we extracted all the marketing benefit from it without any of the really, really, really painful stuff that might have been associated with it. I am proud of our approach to that. I think it was, hey, here’s a suite of stuff that we, as every Pittsburgher, there’s wide agreement that we need to invest in. And we don’t have a revenue stream to do that. So, let’s take that suite of things we need to invest in and treat this gargantuan investment coming our way as the revenue stream. You know, and I think it helped kind of distill that suite of, that wish list, if you will, for us. And now, ok, we might not have the revenue stream, but at least it helped distill what we want to be as a city, forcing us to go through that process. And I think it was overwhelming positive experience.

Eve: [00:09:13] What’s the top of the list that we should become?

Lance: [00:09:16] I think the two things that kind of rose to the top, given the time in our city and the way things are trending, are people want a really robust public transit network. I think that was clear. People want and are concerned about rapidly appreciating real estate values in some of our residential markets. And that would be exacerbated by a huge investment like that. And so I think it really rallied people around public transit, and around affordable housing. Which I think is a positive thing, you know?

Eve: [00:09:48] Yeah, no, I agree.

Lance: [00:09:50] It’s great that affordable housing is suddenly cool again. You know?

Eve: [00:09:53] Yeah.

Lance: [00:09:54] This is fantastic. People working in this field are like, wow, this great sea change, like, in a really short period of time.

Eve: [00:10:01] Yeah, that’s true. Affordable housing is a really hot button issue now, isn’t it? Everywhere.

Lance: [00:10:06] Yeah, no doubt. And it’s great. And I think ultimately, you know, we did not land that investment. I think predominately it was a numbers game, right? A population numbers game. You’re talking about …

Eve: [00:10:18] Yes.

Lance: [00:10:18] … a gigantic pool of workers, and being a small middle market city was tough for us to absorb that, A., and, you know, the facts that matters are we have zero population growth and a two million metro area, and it went to a place with a 20 million metro area and five percent growth. And a, what a, maybe a 12 million metro area, and like 10 percent growth down in D.C., right?

Eve: [00:10:42] Right.

Lance: [00:10:42] At the end of the day it was all about …

Eve: [00:10:45] The numbers.

Lance: [00:10:46] … you know, the numbers, demographics, bodies, population. And that put a fine point that we need to work on that as well, right? That’s a huge Achilles heel for us is a lack of population growth.

Eve: [00:10:56] It is and it isn’t. I mean, that part of Pittsburgh’s charm is its size. When you talk about what should Pittsburgh become, I think you should also think about what it shouldn’t become, right?

Lance: [00:11:07] Sure.

Eve: [00:11:07] It’s a pretty beautiful and rather unique city. And each city has its own strengths. I don’t know. For me, cities go beyond numbers, but perhaps not for Amazon.

Lance: [00:11:17] Yeah, well, exactly. I think, despite what they would tell you, I think they had to take a very analytic approach to that.

Eve: [00:11:23] Yes.

Lance: [00:11:24] And it’s something that like charm and culture and beauty were probably not heavily weighted …

Eve: [00:11:31] No.

Lance: [00:11:31] … on that algorithm scale, right? So. But I agree with you.

Eve: [00:11:35] Probably mobility and housing stock were right up there.

Lance: [00:11:38] Mm hmm. I imagine.

Eve: [00:11:39] You’ve barely started, but what would you like to accomplish at ACED?

Lance: [00:11:44] Oh, boy, I mean, a lot. So, our two-fold mission is this: one, is the work on the macro economic health of the city, which is really about building a diverse and growing regional economy that’s opportunity rich for everyone to tap into, right? And we addressed some of that already. The other part of our mission is much more neighborhood-based. And that’s, you know, we want to create healthy and vibrant communities. So, all of our investments, and we make those investments in the areas of housing, and industrial and commercial development, infrastructure development, parks and rec, things of that nature, all of our investments are done with that two-fold mission. So, there’s certainly a lot of things I think we can do and be more creative with the tools we have. You know, I’m a big proponent of good government, too, and I think there’s a lot we can do to make the public sector meet the needs of our citizens in a more efficient and customer-friendly way. So, that’s the other kind of side of this that I will work on is, not only mission delivery, but just, you know, government efficiency is a twisted hobby of mine that I like, I like working on.

Eve: [00:12:55] Ha! That’s a really great hobby.

Lance: [00:12:57] Yeah. I mean, everyone needs a hobby.

Eve: [00:12:59] Yeah.

Lance: [00:13:00] And to be more specific, again, I talked about the real estate assets that I think we need to incentivize. A big concern of mine is if you put communities, you can kind of classify them broadly in three buckets. And that’s, there are tons of communities that are thriving, and we need to support them. There are a number of communities that are revitalizing that need special attention. There are a lot of communities, they need stabilization. We need triage. And a lot of that is direct fallout from the 1983 exodus of people with any sort of social mobility leaving the city.

Eve: [00:13:37] Yeah. Yeah.

Lance: [00:13:37] And we have certain areas that, they have zero market. Land value is negative, right? And that presents a whole slew of economic and social problems that go along with that. And we really need to support those communities. At the same time, kind of leaving the development breadcrumbs from areas of high opportunity to establish markets, and you kind of need to string those investments along. It’s going to be a while until I can take the strength of the market that is the Strip District, for now, and pool it across the Allegheny Valley, right? And pool it down into the Mon Valley.

Eve: [00:14:14] Yeah.

Lance: [00:14:14] And in the process establish beachheads in Etna. And I need to establish that beachhead in Etna before I can really get to Tarentum and New Kensington, right? Same thing goes for the Mon Valley. I really need to establish a strong beachhead in Wilkinsburg and Braddock until I can really talk about strength of market in places like Clairton. In the meantime, we need to make sure that we are treating those communities with the respect that they deserve in addressing the blight and disinvestment they’re struggling with, and doing that in a really smart and strategic way.

Eve: [00:14:46] Well, it must be really tough making decisions because you can’t have endless resources, I’m sure. And then you have to decide where to direct those resources. And for people who don’t know who are listening, Pittsburgh was around 700,000 people strong and really lost more than half of its population in the 1980s. And it’s now still hovering just over 300,000. Although family units are smaller now.

Lance: [00:15:16] Yes.

Eve: [00:15:16] It’s still a lot of vacancy, right?

Lance: [00:15:18] Yeah, absolutely. And so, you know, there’s some opportunity there. You know, to some extent, affordable housing price per square foot is a supply demand calculation, right?

Eve: [00:15:27] Yes.

Lance: [00:15:28] The problem is the areas that are close to job centers, well-served by public transit, and have amenities like grocery stores. We’re seeing rapid appreciation there, and obviously, because they’re more desirable places to live. So, we need to make investments to ensure that those are mixed-income communities. And we also have the opportunity, though, that a lot of other cities don’t, to make proactive preservation investments in areas that have naturally occurring affordable housing. And we’re doing both of those things on the housing investment side.

Eve: [00:16:00] Real estate development is a major component of your work.

Lance: [00:16:04] Oh, yeah. I would say most of what we do has a real estate component to it. Now, one of the things we’re trying to get more engaged in, that we traditionally have not, is the workforce development arena. You know, I think one of the big transitions we talked about, like the change in public opinion around affordable housing … the innovation economy has forced site selection to go from a predominately site- and building-centric approach to predominately talent-based approach. And we, I think in the past, in the economic development community, have taken a very hands-off approach saying, hey, there are specialists in workforce development, we’re going to let them do their thing, and we’ll just, we’ll build the stuff, invest in those tangible building products. I don’t think that model works anymore. I think the workforce challenge and the future of work is such an acute need that we really need an all-hands-on-deck approach. And the more resources everyone can leverage, that and, the better. I’m just finalizing my budgets for next year and we’re probably making close to a million dollars in investments in workforce development, which doesn’t have a land and building component to it. And I’m proud of that. And I think that’s something we’ll continue to invest more heavily in. And that’s everything from workforce readiness of teens, to adults with barriers to employment, getting re-educated and prepared for the workforce. You know, we need to attack this from all angles.

Eve: [00:17:33] I was going to ask, is there a rhyme or reason to the projects you become involved in. But I think I’m hearing that your organization, you really play the role as almost a pioneer investor early on when perhaps it’s a little bit uncomfortable for private money to be involved?

Lance: [00:17:51] Oh, no doubt.

Eve: [00:17:52] Yeah.

Lance: [00:17:52] Yeah, absolutely. Our investments, I think, are predominately … well, one, we take first mover investments in site assembly. Right? For example. So, one of my big hypotheses was that people say there is no market, no real estate market in Braddock, right?

Eve: [00:18:14] Mmm Hmm.

Lance: [00:18:14] And I challenge that. I think it’s the fact that the available real estate is not the right kind of real estate. So, for example, we assembled 60 tax-delinquent, single-family structures, demolished them, consolidated them into one five-acre parcel, and worked with a very creative developer on a take-down period that worked for the finances of that kind of constrained market. And they built a 60,000 square foot high-bay light industrial building. It’s probably the first new industrial development in Braddock in, I couldn’t even tell you how long. This is a place that suffered 90 percent of population loss.

Eve: [00:18:52] Yes.

Lance: [00:18:52] Those are the type of things, in that case, we were a first mover and then worked on aggressive land conveyance strategy with the developer. And now the great thing is we have new tax base in Braddock, we new job base in Braddock, and almost more importantly, I have a comp now, I have established that land has value in Braddock.

Eve: [00:19:12] Oh yes, that’s very important.

Lance: [00:19:14] And previously that didn’t exist. So, that’s something we did in 2019. They’re going to take occupancy first quarter of 2020, and, yeah, we’re really proud of that kind of work. So, sometimes our investments are in that realm. Other times were physical investments, either through tax leverage finance or direct investment, and yes, we assume a much higher risk profile than our private sector partners.

Eve: [00:19:35] And have you been able to convince some banks to come along on the ride with you?

Lance: [00:19:39] Yeah. And I think as long as you understand their underwriting criteria, and their approach, they’re great partners. You just have to understand what their sweet spot is and work around it. We underwrite our investments in a very similar way that banks do, on the risk end. The difference being, one, we’re willing to assume more risk. And two, on the return end we think much more broadly about returns. It’s not just about debt coverage ratio. It’s about tax base expansion. It isn’t necessarily going to pay us, but is a return to the project because it’s a mission-based return.

Eve: [00:20:16] It’s a return to the region, right? As well.

Lance: [00:20:17] Exactly. We love working with banks and traditional funders. And we have the ability to be more flexible to allow them to meet their underwriting goals and and still participate in the project.

Eve: [00:20:28] What sort of projects do you hope to see more of? I mean, if things go really well and your investments pay off in the way you want them to. What sort of projects are you hoping to see arise independently in the next five years, let’s say?

Lance: [00:20:42] Yeah, I think if we do a couple of projects like that, that light industrial building in Braddock then … that’s the goal, is that you would then establish a market and I can then start making similar investments in Duquesne and McKeesport. And like I said, you just pull that market down to maybe less centrally located areas. So, yeah, more spec buildings, more high-bay light industrial for robotics industry, more wet lab for biotech and life sciences. You know, hopefully, some of our development community starts to realize that you can stand in Lawrenceville in 40 dollar square foot space and look across the river at 15 dollar square foot space. And …

Eve: [00:21:19] Yes.

Lance: [00:21:21] … start to recognize that arbitrage opportunity. Because these communities, they’re fantastic, unique, beautiful places. They are open to development. They are, you know, they’re wonderful places to do work. And they’re right adjacent to the urban core. So, you know, rethink your idea of proximity and let’s do some great projects in some of these communities that are maybe overlooked in a lot of cases.

Eve: [00:21:47] And then most importantly, it’s pretty fun to be at the leading edge, right?

Lance: [00:21:51] I think so! Sometimes, you know, that’s when you don’t have a comp and the bank starts to get real nervous …

Eve: [00:21:58] I know, I know.

Lance: [00:21:58] … that’s when, you know, they don’t find it as much fun as I do. But yeah. I mean, that’s part of the fun, is there’s additional challenge there, but it can be really, really rewarding if you pull something off.

Eve: [00:22:08] I agree. Totally agree. Yeah. We’ve also talked about how to empower people in these communities to be part of the change, the rapid change that’s occurring in cities like Pittsburgh. And I am wondering why you think that’s important?

Lance: [00:22:23] One of the big challenges we face as a society is disproportionate allocation of not only income, if you look at wealth, right? It becomes even more staggeringly problematic. So, we’re not trying to establish markets for, just because, just for tax base, right? Hopefully, the idea is then, by establishing market you can assist in families building wealth, right? And we want people to be able to participate in the benefits of these hopefully catalytic investments we’re making. How best to do that is a challenge. You know, obviously, it’s easy when you have homeownership, high levels of homeownership, because that’s, you know, your biggest asset that appreciates with change in real estate market.

Eve: [00:23:17] Yeah.

Lance: [00:23:17] If people have that asset and they want to cash out and participate in that upside return, well, great. You know, that’s building equity, that’s building wealth. And hopefully that’s life changing for the family that chooses to do that. I think the problem, because when people are very culturally, emotionally and kind of societally invested, but don’t have that asset to participate in the appreciation, how to plug those people in to our changing communities and make sure that they participate. And that’s where, you know, lots of novel ideas that I think we’ve been talking about, about microlending, and, you know, equity returns back to neighborhoods, start to become really, really compelling for that kind of segment of society and something that I really want to learn more about, and try and institute some really progressive things on that front.

Eve: [00:24:10] I’ve been talking to some people over the last year who also believe that making a space for those people, like a physical space, is really important. And they do that in different ways. Like maybe a community space or … there’s a developer that I know who very purposefully will create retail space and then look for someone in the neighborhood to fill it and really help them build their business into that space. And that, I suppose that’s another very concrete way to involve community and make them feel like they belong, right?

Lance: [00:24:47] Yeah. No, absolutely. Absolutely. And, you know, maybe that’s a, you know, a silver lining on the challenges to retail real estate now is that mixed-use buildings are kind of hoping that’s a break even spot? Right?

Eve: [00:25:01] Yeah.

Lance: [00:25:02] And so what you have is then, is a really affordable commercial …

Eve: [00:25:05] Right.

Lance: [00:25:05] … property for people to move into. You know, locally-owned, sole proprietorship businesses that provide a higher return back to the, to the owner.

Eve: [00:25:17] Yeah, yeah.

Lance: [00:25:17] Hopefully we can continue that.

Eve: [00:25:19] Yeah. And so, like, I have to ask, what’s, you know, your background? You mentioned a little bit about it, but what did you study? What got you to this place?

Lance: [00:25:29] Yeah. I grew up in Pittsburgh, to a … I was the youngest of four.

Eve: [00:25:35] You were the baby.

Lance: [00:25:36] I was the baby and I probably act like it too much. But, you know, my first education was growing up in incredibly hilarious and brilliant family. So, you know, my parents were really hardworking, great people. I went to a mix of public and Catholic schools when I was a kid. I studied finance in Washington, D.C., The Catholic University of America. Went overseas and lived in Turkmenistan for three years, which was arguably the most educative of all of my educational experience. And I came back to CMU to get a policy degree with the intention of going back to do more international development work, because I found it just fascinating. But really fell back in love with my hometown, recognized that there were parts of my city that were in as much need or possibly greater need than what we consider to be some of the, you know, the most poverty stricken places on earth. And that didn’t sit great with me. Yeah, all of those different educational life experiences, it kind of like, let me down this path. And, you know, people, like I said I have had great work mentors that have given me chances to work on stuff. I’ve just been incredibly lucky.

Eve: [00:26:51] I have a feeling it’s not just luck, but we can go with that.

Lance: [00:26:53] I think it’s mostly luck. It’s mostly luck. But yeah, like I say, it goes back to my parents. I do work hard at it because I love it. It never quite feels like work, you know. Some days it does.

Eve: [00:27:04] Yes.

Lance: [00:27:05] Most of the time it doesn’t.

Eve: [00:27:06] That’s great. And do you think on the whole, socially responsible real estate is necessary in today’s development landscape. Outside of the work you do, like everyday developers? What do you think that should look like?

Lance: [00:27:20] There’s crappy real estate development and there’s good real estate development, right?

Eve: [00:27:23] Yes.

Lance: [00:27:24] I think good real estate development is about placemaking, and placemaking is about integration into the community. Not just, you know, from a contextual design standpoint, but from a ‘community needs’ standpoint. And I think enlightened developers get that. Enlightened developers know that incorporating that kind of philosophy in the development usually leads to higher returns, too. So, I think it can be done well and it can be done profitably, right?

Eve: [00:27:52] Right.

Lance: [00:27:52] It just requires a kind of a philosophy, a mindset, and the ability to listen to people a little bit more. But in the end, they have a much better project to show for it.

Eve: [00:28:03] Creating something that’s responsible isn’t really swallowing a bitter pill, right?

Lance: [00:28:09] No, definitely not. Especially when you have your friendly local government economic development person to help you along the way and hopefully chip in where necessary.

Eve: [00:28:20] And are there any current trends in real estate that you think are interesting or most important to the future of our cities?

Lance: [00:28:28] Well, I mean, I think it’s interesting, you know, being the hub of technology that we are. I think the design considerations around places like parking garages, for example, I think are really interesting. Because the rate of technological change is forcing people to consider the fact that this structure could achieve obsolescence in five, 10 years.

Eve: [00:28:52] Yeah.

Lance: [00:28:52] Which, what previously was considered a 50 year asset. So, I find that inherently fascinating.

Eve: [00:28:58] It is fascinating, isn’t it? I just start thinking about, well, what could you do with a parking garage?

Lance: [00:29:04] Yeah, right.

Eve: [00:29:04] How many housing units could you put into those little slots?

Lance: [00:29:08] Precisely. And are they going to be livable, you know?

Eve: [00:29:10] Yeah.

Lance: [00:29:10] And how do you remediate the oil afterward? You know?

Eve: [00:29:12] That’s right.

Lance: [00:29:12] It’s a … it’s a really interesting thing. So, you see people spec-ing in higher ceiling heights than they would have previously. Flat floor plates. All these different design considerations that I find fascinating. And even more fascinating because we’re on the bleeding edge of all of the autonomous vehicle technology that is going to lead to obsolescence of those buildings. So, yeah, I mean, that’s one that I find fascinating. What else?

Eve: [00:29:39] I’m watching zoning changes across the country, and across the world. I’m pretty fascinated to see how quickly that’s going to move along. When you have cities, you know, basically outlawing single family homes. That’s quite a statement.

Lance: [00:29:53] Yes. I think Pittsburgh in particular is being very progressive in some ways with, you know, allowing for accessory dwelling units, which I know you’re probably an advocate for, and …

Eve: [00:30:05] Yeah.

Lance: [00:30:06] … and, you know, what they’ve done with the RIV district, for example, and ensuring access to the waterfront, I think is some really good things. However, in some city neighborhoods, and this gets even more acutely problematic when you move out to maybe smaller municipal governments that haven’t updated their zoning and code in a while. The thing that I find problematic is if you ask the average 10 people on the street what the vision for new development their community would look like? And then you show them what current zoning allows for, they would be horrified, right?

Eve: [00:30:40] Yes, yeah, I think that’s true in most places.

Lance: [00:30:43] It’s a huge disconnect and it’s worrisome to me.

Eve: [00:30:47] Yeah, I mean, how do, you know, it’s really expensive updating a zoning code. I’ve been involved in that. It’s a really big deal.

Lance: [00:30:53] It is. And when you multiply that by 130 municipalities with wide, varying levels of, kind of, capacity. It’s … yeah, it’s really a daunting task.

Eve: [00:31:05] Yeah. And one sign-off question, then. Given all of the possibilities, what comes next for ACED, and for you?

Lance: [00:31:14] I am very project focused. And I believe that markets are built one great project at a time and I try not to let the enormity of the challenges, you know, get me down, right? It’s just one good project at a time. We’re focused on that every day, and we’re focused on being innovative and creative every day. And there are a ton of innovative and creative people in Pittsburgh that we need to partner with and work with to solve these problems. Like I said, it’s all hands on deck.

Eve: [00:31:48] Well, thank you very much. I really enjoyed that conversation. I can’t wait to see what you do next.

Lance: [00:31:52] Awesome. Thank you so much, Eve.

Eve: [00:31:54] That was Lance Chimka. Lance is embracing his role as the head of an economic development department with energy. Our conversation reflects the way that Lance thinks. Broad and diverse ideas to get at very particular economic problems. Lance is focused on growth, first and foremost. Making sure that Pittsburgh’s growth matches other cities. But at the same time, he wants to make sure that no one is left behind. So, he thinks a lot about how to empower communities in the path of rapid change, and how to change the disproportionate allocation of wealth. I’ll be interested to see the impact that Lance’s leadership will have.

Eve: [00:32:46] You can find out more about impact real estate investing and access the show notes for today’s episode at my website, EvePicker.com. While you’re there, sign up for my newsletter to find out more about how to make money in real estate while building better cities.

[00:33:12] Thank you so much for spending your time with me today. And thank you, Lance, for sharing your thoughts with me. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.

Image courtesy of Lance Chimka

Public space. The heart of the city.

There are numerous factors that city planners, politicians, developers and designers consider when planning cities; from infrastructure to transit to the creation of residential, commercial and retail space, all to draw new businesses and residents. But often the last thing to be considered, and yet perhaps the most critical component in any city neighborhood, is public space. Parks, plazas, walking and bike paths and even wide, strollable sidewalks all play an integral role in connecting communities and giving people a sense of belonging.

In a recent podcast interview with Eve, former Pittsburgh Mayor, Tom Murphy, reflected on some of his administration’s big wins in revitalizing the city of Pittsburgh, as well as some missed opportunities. In his post-mayoral career, Mayor Murphy regrets not putting public space front and center.

Turnaround mayor

Tom Murphy served as Pittsburgh’s major from 1994 to 2006, a turbulent and transformative time for the city. He took over the reins of the city when it was decimated by a loss of the steel industry and out-migration of over 50% of its population. During his tenure Tom created a $60 million development fund to jump-start development in abandoned neighborhoods, built two new waterfront stadiums, and developed many miles of river trails. At the end of his tenure, he had presided over a remarkable urban comeback story, and the city has been transformed in a myriad of ways.

At the heart of Murphy’s plan to revive Pittsburgh was the purchase of 1,500 acres of land for new development. This gave the city a chance to create effective public-private partnerships with developers to restore struggling parts of the city, all the while luring new businesses to the region and encouraging others to stay and grow.    

Planning for public spaces

Murphy strongly believes that a sense of “place is everything,” and can have a huge impact on the quality of peoples’ lives. He notes that in addition to the large-scale developments his administration sponsored, they were also able to also rebuild all of the city’s 100 or so neighborhood parks, both small and large, all while involving the local communities. But he is quick to add, that although their instinct was right, they should have gone further, expanding the city’s park system instead of just rebuilding it. Some neighborhoods that have long lacked communal gathering places would have benefitted from the creation of wonderful new plazas.

Reflecting on his experiences in Pittsburgh, and as a frequent visitor to cities all over the world in his role as a Senior Fellow at the Urban Land Institute, Tom has come to believe that an even a stronger sense of community can be encouraged through the use of public space, whether it’s a playground or a park. He wonders how you can thoughtfully connect people in a neighborhood so that they feel a sense of belonging to the place. He believes that “if people feel rooted in their neighborhood, … they’re willing to put up with a lot of problems if they see themselves and others committed to wanting to making it better.”    

Getting communities invested

Public spaces are crucial for building successful cities. They help to bring communities together and invest people in their neighborhoods, regardless of background or income. Amidst lucrative development plans, it can be easy to overlook the importance of public space, but as Murphy notes, city government and local communities can and should work in partnership with developers to make sure public space is at the forefront of every new development and planning project.      

Listen to the full interview with Tom Murphy to hear more about his vision for public spaces and the role that public space plays in building better cities.      

Artlumiere light projections ’09 courtesy of Jonathan Greene

Democratizing investment. A huge step forward.

Mark Roderick describes himself as a very “boring” corporate and securities lawyer, but he’s not. Since the JOBS Act of 2012, Mark has spent all of his time in the investment crowdfunding space. Today he is one of the leading crowdfunding and fintech lawyers in the United States. Mark writes a widely-read blog, which offers a wealth of legal and practical information for portals and issuers. He also speaks at crowdfunding events across the country, and represents industry participants across the country and around the world.

Most recently Mark launched a new firm, Lex Nova Law, a boutique corporate law firm representing crowdfunding, fintech, startups, blockchain and cryptocurrency along with more traditional legal sectors.

Along with the rest of us in the crowdfunding industry, Mark applauds the SEC for its proposed upgrades to all of the online offerings: Rule 504, Rule 506(b), Rule 506(c), Regulation A, and Regulation CF. In this podcast we focussed on Regulation CF, which promises to turn into the little engine that could when these changes take effect.

“These proposals are great for the Crowdfunding industry and for American capitalism. They’re not about Wall Street. They’re about small companies and ordinary American investors, where jobs and ideas come from” says Mark.

The proposals and the reasoning behind them take up 351 pages. You can find an SEC summary here, or the full text here. Some of the key highlights for Regulation CF include much expanded investment limits for both accredited and non-accredited investors, and an increase in the maximum amount an issuer can raise in any one year from $1.07 to $5 million.

Insights and Inspirations

  • Mark believes the latest round of changes to the crowdfunding rules will bring some fundamental changes to the industry including higher quality deals.
  • As the deals get better, so will the industry grow, and more investors join in.
  • He expects to see changes in the physical landscape in just 5 years as these rules begin to have a far-reaching effect.

Information and Links

  • Read the entire 351 pages of proposed changes to the online crowdfunding rules here and a more digestible summary here.
  • Mark’s investment crowdfunding blog provides a wealth of information for those in the industry.
Read the podcast transcript here

Eve Picker: [00:00:08] Hi there. Thanks so much for joining me today for the latest episode of Impact Real Estate Investing.

[00:00:14] My guest today is Mark Roderick, founder of Lex Nova Law and one of the top online crowdfunding experts in the country. I asked Mark to join me today to discuss the very exciting changes proposed by the Securities and Exchange Commission to regulation crowdfunding. In case you haven’t heard of it, regulation crowdfunding, or Reg CF, is the securities regulation that is really the first step taken by the S.E.C. towards democratizing investment. The additional changes proposed will give this regulation real legs.

[00:00:57] Be sure to go to EvePicker.com to find out more about Mark on the show notes page for this episode. And be sure to sign up for my newsletter, so you can access information about impact real estate investing and get the latest news about the exciting projects on my crowdfunding platform, Small Change.

Eve: [00:01:18] Hello, Mark, it’s delightful having you on my show.

Mark Roderick: [00:01:21] Well, thank you very much. It is delightful sort of being there.

Eve: [00:01:25] Very good.

Mark: [00:01:26] Virtually.

Eve: [00:01:25] Just sort of. Yeah. Okay. Today, we’re going to talk about raising equity online, which is a pretty wonky subject, but you and I like it. And raising equity online is also known as equity or investment crowdfunding. You said these proposals are great for the crowdfunding industry and for American capitalism. They’re not about Wall Street. They’re about small companies and ordinary American investors, where jobs and ideas come from. And you were referring to some proposed changes to equity online raising funds. And according to the S.E.C., a majority of entrepreneurs and emerging businesses raise capital using an exempt offering framework under the Securities Act. And they raise everything from seed capital for new businesses, to funding growth on the path to an initial public offering, and, also, raise equity for real estate. So, I wanted to talk about the rule changes and why you think they’re so great.

Mark: [00:02:35] Well, okay. Big question and a big, big topic. I mean, maybe I’ll just start at the granular level and then kind of work backwards. If you are in or around the existing industry, And I’m going to call it the Title 3 industry or the Reg CF industry, as opposed to what we might call the Rule 506(c) accredited investor industry. The accredited investor industry in real estate is super-healthy. People are raising a lot of money and platforms are profitable and all kinds of wonderful things are going on. In contrast, the Reg CF world, the industry, it’s sort of, you know, like when you cross the railroad tracks and crossed into the less affluent part of town. It’s a very, almost, I don’t want to get too hyperbolic, but, you know, it’s a little bit of a desolate landscape.

Eve: [00:03:41] Oh yes.

Mark: [00:03:41] It’s very difficult to make money for funding portals, and it’s a vicious cycle as opposed to a virtuous cycle. So, it’s hard to make money. Very small companies with very limited resources are applying because of the limits – we can only raise up to a million dollars a year, and in real estate, in particular, that’s not very much money. And that leads the portals, the funding portals, too many of them, not yours, I should say, but too many of them have adapted to that situation. You know, you’re trying to squeeze money out of people who don’t have any money and have led to a lot of shortcuts, and what I called gimmicks, and that is a vicious cycle because investors, who are not dumb, see that, they see that’s what’s going on. You know, they just ignore the entire industry. And that means that high quality companies are that much less likely to try to use Reg CF. And it has been a vicious cycle.

Eve: [00:04:46] Just backing up one minute. I think some of our listeners maybe not familiar with Reg CF or regulation crowd-funding. So, I just feel like I need to fill in a little bit. Regulation crowdfunding and other online crowdfunding rules grew out of the Jobs Act of 2012, and the intent was really to move online crowdfunding for donations to crowdfunding for investment, right? And so regulation crowdfunding is the rule that lets anyone over the age of 18 invest, but really kind of limits how much they can invest, and how much the company raising money can raise. Those limits, I think, have been the real stumbling block, right?

Mark: [00:05:31] Yeah.

Eve: [00:05:32] So, this has translated into smaller offerings, just like you said, which these funding platforms, which are very heavily regulated to use that rule, it means that they can’t make a lot of money. And that’s kind of where you left off, right?

Mark: [00:05:50] That is exactly right.

Eve: [00:05:52] The new rules, which you seemed very excited about last week, I think, will make some big changes in that landscape.

Mark: [00:06:01] Yeah. They will make a couple changes that are, I think, taken together, just gonna be very, very important and are really going to, to continue that bad metaphor I was using, really revitalize the Regulation CF neighborhood. These are the two most significant changes. As you said in your overview, Regulation CF or Title 3 – those are interchangeable names for the same set of rules – limit very severely how much each investor can invest. And the idea here was to protect widows and orphans from all the shady entrepreneurs out there. But even if the widow or orphan wants to invest his or her entire net worth into a questionable company, the Reg CF rules won’t allow that. To the contrary, they allow only very small investments. And that means that when you’re trying to raise money in Regulation CF, you have to find lots of investors, because each of them can only contribute a very small amount. And, you know, that’s hard. Marketing is hard.

Eve: [00:07:21] It’s very hard.

Mark: [00:07:22] It is also inconsistent with other S.E.C. rules, which in general allow accredited investors to invest as much as they want. One of the fundamental concepts in U.S. securities laws since the 1930s has been that rich people can take care of themselves. They don’t need the government to protect them. And so the term ‘accredited investor’ is sort of a stand-in for rich people. All of the other S.E.C. rules, really, allow accredited investors to make bad decisions, you know. An accredited investor can invest his or her entire network in a single deal. And people have noted, since the outset of regulation crowdfunding, that the regulation crowdfunding restrictions are inconsistent with that general concept. So, one of the changes just made by the S.E.C., or proposed, is that, what do you know, accredited investors will no longer be subject to those severe limits. In fact, they won’t be subject to any limits. So, now if you can attract some accredited investors, you know, you can get people to write big checks. So, that’s an important change. Really important change.

Eve: [00:08:40] Yeah. Yeah. I mean, I’ll give one example that has impacted us. We have quite a few account holders or investors who are accredited by definition based on their net worth. And they have very healthy networks, but they’re retired and they own their houses and their income is maybe below 100,000. And under the regulation crowdfunding Reg CF rules, one of these investors was limited to investing 4,000 a year under Reg CF. But as an accredited investor, she can invest however much she wants. That’s how weirdly bad the rule is right now.

Mark: [00:09:20] Yeah. And just to take that one person, I don’t know how much of a check that person might write, but let’s say it’s, you know, 25 or 50,000 dollars, which is not an unusual investment in the Rule 506(c) world. So ..

Eve: [00:09:34]  Yeah.

Mark: [00:09:35] … she goes from even conservatively …

Eve: [00:09:38] She couldn’t be bothered investing 4,000. She might be interested in 15,000 or 20 or 25 but not …

Mark: [00:09:44] Yeah.

Eve: [00:09:44] Yeah.

Mark: [00:09:45] So, it doesn’t take many of her, you know, the difference between four and say, even conservatively, 25. Those numbers add up quickly. That change in itself was significant. But, in addition, the second change is they’ve raised the limit from a million dollars to five million dollars. And that means bigger companies, companies with more revenue, more products, more services, more scale. Bigger companies can now start using Reg CF. Yeah, I mean, you know, Eve, that a million dollars is not very much in the real estate world. Five million dollars really is a lot. Lots and lots and lots of deals are done with equity of two or three or four million dollars. So, it vastly expands the number of ticket holders who are allowed to attend this event. And then, when you put those two together, you know, now we can do a three million dollar raise where we can raise as much as we want from accredited investors. That, suddenly, becomes an extremely viable business. And that’s the point that funding portals will now be able to make money. In fact, they’ll be able to make significant amounts of money. You know, that’s like, again, going back to that metaphor, that is pouring a lot of money into that neighborhood. And you’re going to see, in my view, just a fundamental change. You’re going to walk through the streets and say, oh, that used to be a dilapidated building. It looks nice now. And so on and so forth. And you’re going to see better business practices from the portals. I believe you’re going to see much higher quality offerings on those portals. In fact, you’re going to see websites that were formerly only in the Rule 506(c) world who had shunned Regulation CF. You’re going to see those companies getting their portal licenses and saying, hey, we can now expand our investor clientele at very little cost. You know, we’ve been marketing only to Rule 506(c) accredited investors. Now we can market to everyone. Why not?

Eve: [00:12:10] Maybe the answer, response to why not, is the regulation that is attached to, being a funding portal, and not to 506(c).

Mark: [00:12:20] Yes. I mean, it’s certainly an impediment. I mean, you’ve been living in this world for the last five years and the regulation can make you pull your hair out. But the business opportunity, it seems to me, is … the landscape just changed completely in my view, you know, I … within the last three weeks before these proposals came out someone called me, a company, you know, we want to be a funding portal. And I tell them, because I try to be very straightforward with anyone, you know, you’re not going to make any money. It’s a funding portal.

Eve: [00:12:55] Right.

Mark: [00:12:55] You know, you want to go, have to expand, vertically integrate. But it’s a very, very difficult business. And that was advice I’ve given in the last two weeks. You know, I’ve had people contact me since the proposals, and it’s totally different advice. This is a real opportunity.

Eve: [00:13:13] Yeah, yeah, yeah. Interesting.

Mark: [00:13:14] I mean, how do you see it affecting your business? You’re in the business.

Eve: [00:13:19] The thing you haven’t touched on yet is, there’s a couple of things that really matter to me. And one is, yes, the fact that accredited investors can invest whatever they want really matters, because I no longer have to offer side-by-side offerings which are very complicated and time-consuming. So, by a side-by-side offering, I mean a Reg CF plus a 506(c), at the same time. So, that can go away. I think the fact that the investor limits have been turned upside down is huge. The fact that now an investor can invest the greater of their net worth or income is absolutely enormous for my crowd. And then I think the single purpose entity rule, which we haven’t talked about yet, is huge. Until now, if you’re going to use a regulation crowdfunding offering type, your investors must invest into the actual deal, which is often not the way that real estate deals work. So, being able to collect a group of investors in a single purpose entity to invest into a project, or a series of projects, is a very big deal. And I’ve been talking to one institutional developer who was really pulling his hair out and trying to figure out how to make Reg CF work for the community he’s interested in using it for, and that particular change makes the whole thing possible. There’s more, I’m sure, testing the waters. I mean, we haven’t talked about all these things, Mark. So, the marketing rules around Reg CF are stifling. And so I want to learn more about what does it mean now to be permitted to have a demo day or to test the waters to, you know, just show the deal before you actually register it with the S.E.C.? I think all of those things really matter.

Mark: [00:15:13] Yeah. There are some other important changes, including, as you say, this so-called testing the waters. We used to have this ridiculous rule, really, that subjected, you know, these tiny Title 3 issuers to more stringent rules, you know, then the largest companies. It was crazy.

Eve: [00:15:35] Yeah.

Mark: [00:15:36] If you were talking, some developer was trying to create this little project, you know, you had to tell that person, you can’t even whisper that you are considering a Title 3 [offering] … You can’t tell anyone, you know, don’t tell your wife. And it was just this ridiculously restrictive rule. So, that is now going to be swept away. And basically, for all intents and purposes, Title 3 companies, issuers are going to be like everyone else. Yeah, you can talk to people about it. You can’t take their money. But that’s an important change for sure. The demo days. Meaning when you’re local science center has a demo day you are now actually allowed to … to attend. It was crazy that you couldn’t attend before. We should mention that they’ve taken some things away. Many Title 3 issuers, the security that they were offering, as you know, were called SAFEs – Simple Agreement for Future Equity. Very popular. The S.E.C. has been convinced by someone that that is not an appropriate instrument for a small company to issue. So, they’re going to absolutely get rid of them. Another very popular instrument – revenue sharing notes. It isn’t clear from the proposals, but it sure looks like they’re getting rid of revenue sharing notes or at least want to.

Eve: [00:17:04] Interesting.

Mark: [00:17:05] You know what the lord giveth, the lord taketh away. I know there’s going to be, during the public comment period, there’s going to be a lot of people complaining about those two things. We did take a couple steps backward, but I think we took about 10 steps forward, so, on the whole, they have made the market much more robust. Yeah, I think it’s very exciting, I, you know this is a world that, you know, you and I have both drank the Kool-Aid a long time ago. This is about providing capital for lots of people whose access to capital has hitherto been restricted. And it’s also about providing investment opportunities to ordinary Americans that have hitherto been reserved for the ultra-wealthy.

Eve: [00:17:55] Yeah.

Mark: [00:17:55] And that’s why my blog post said, you know, this is not about Wall Street. It is actually about undermining Wall Street. It is about a sort of direct to the people, democratic American capitalism. And I think this is a really good step in the right direction. I don’t see any down side personally.

Eve: [00:18:17] Yeah, so you think the number of funding portals is going to explode?

Mark: [00:18:20] I do.

Eve: [00:18:21] It’s about 50 now, right?

Mark: [00:18:23] Something like that, yeah.

Eve: [00:18:24] And in real estate?

Mark: [00:18:26] I do. I think you’re going to have some competitors, which is good. Yeah, I think there are going to be real estate funding portals, I even think, Eve, I think that the big real estate, the Rule 506(c) sites, I think they’re going to consider very seriously having subsidiaries that are funding portals.

Eve: [00:18:47] Interesting.

Mark: [00:18:48] I think it’s a natural to expand their customer base. You know, I’ve always said that portals are like retail stores. And I read a blog post once, saying a portal is like DSW. And DSW doesn’t limit the kinds of shoes that it sells, and it wants every kind of customer to walk in the door, right? And even, you know, a brand like Mercedes Benz, they don’t sell only a 100,000 dollar cars, you know, they sell a 35,000 dollars car. Why? Why do they do that? It’s not to make money from selling a 35,000 dollar car. It’s to get people into the showroom.

Eve: [00:19:33] Yes.

Mark: [00:19:33] And expand their demographic customer base. And I think that’s the natural route for portals as well. We want to accredited investors. We want non-accredited investors. We want everyone, right? I mean, that’s always make sense to me.

Eve: [00:19:46] Right. Right right, right. So, can you think of some examples of projects that you saw in the past that if they went live now, would do so much better? Or is that too hard a question?

Mark: [00:19:57] You’re, I mean, you’re the one who would know that.

Eve: [00:19:58] We have an offering live right now, which was just so complicated to put together, a side-by-side offering. And, you know, an opportunity zone fund offering. They really needed a single-purpose entity for the opportunity zone fund investors. And, of course, we couldn’t use it for Reg CF, so the Reg CF investors missed out on the opportunity zone, tax discounts. And, you know, thinking about how that would be put together under the new rules, it would be so easy.

Mark: [00:20:31] Yeah.

Eve: [00:20:31] I spent months putting it together.

Mark: [00:20:35] I mean, probably every project you’ve ever had on your platform.

Eve: [00:20:38] Yes.

Mark: [00:20:39] You would’ve had the ability to pitch it to accredited investors. Simultaneously. And you would have been legally been earning commissions on all of those transactions.

Eve: [00:20:50] Yes. Yeah. That’s a really big problem.

Mark: [00:20:53] I mean, your life would have been very different.

Eve: [00:20:54] Well, I can’t go back five years, can I?

Mark: [00:20:57] No.

Eve: [00:20:58] So, what about the whole ‘not being able to talk about the terms of the deal’? Like that’s been another really huge stumbling block when you do advertise Reg CF offering, you’re not permitted to talk about the teems. You can’t say, you know, the offering is nine percent preferred return. You’re not permitted to say that. You’re not even permitted to say the minimum investment amount. Whereas with a 506(c) offering, you can say all of that. Is that going to change?

Mark: [00:21:27] Not yet. It wouldn’t surprise me if it changed in the future. So, yeah, you’re gonna be stuck with those same advertising limitations. Now, I will just say that you can say those things.

Eve: [00:21:41] Yes, but that’s all you can say, right?

Mark: [00:21:42] But that’s all you can say.

Eve: [00:21:44] Yeah.

Mark: [00:21:45] And you can say a lot. You know, you can say come invest in this fabulous multi-family project in Downtown Pittsburgh, and it’s 72-percent leased and it’s gorgeous and it’s environmentally friendly. You can go on and on and on and say all those things.

Eve: [00:22:04] You can’t say “it’s gorgeous” because it’s in adjective, right?

Mark: [00:22:07] Ok, well, now I think, I can, I think you can say “gorgeous.”

Eve: [00:22:11] No, I can’t.

Mark: [00:22:13] The only thing you can’t say is …

Eve: [00:22:15] I got my knuckles rapped for saying “bold.” Yeah.

Mark: [00:22:20] You just can’t say, and by the way, we’re raising two million dollars for that project. You know? You can talk about the project until you’re blue in the face.

Eve: [00:22:29] Yeah. Well, that’s been pretty good for us because we want to talk about the projects, but still it is a stumbling block. I think people sit up and pay attention when you say you can invest as little as 1,000 dollars and they’re looking at an ad talking about a great project, but they don’t really know. It’s a question of will they click through? Right? It’s definitely a stumbling block.

Mark: [00:22:50] Yes. And it will continue to be.

Eve: [00:22:53] Yes. Ok. So, I want to just shift gears a little bit. We’re doing this a bit backwards. But how did you become an S.E.C. crowdfunding expert, and why?

Mark: [00:23:04] Actually, Eve, I think our stories are in some ways, similar. So, I mean, I’ve always been a boring corporate lawyer. And in being a boring corporate lawyer, I’ve represented entrepreneurs my whole career. And when you represent entrepreneurs, one of the things you spend a lot of time doing is helping them raise capital. Entrepreneurs are always looking for capital, and raising capital used to be, you know, really, really hard. It’s still really hard, but it used to be, before the crowdfunding rules, a lot harder, as as you know. And when I saw the Jobs Act on the horizon, this must happen back in like 2011, which is amazing, of course, how quickly time flies.

Eve: [00:23:50] Yes.

Mark: [00:23:51] But I said, wow, you mean you’re going to be able to use the Internet to raise money? This is huge. It’s transformative. It’s disruptive. It’s fantastic. And I drank the Kool-Aid right away and thought this would just be a great thing for the American economy. And I said, it’s going to be fun and I want to be involved with it. So, I immediately decided that that’s what I was going to do. So, I learned all about it and started writing this blog and started speaking about it in public. And I’m so enthusiastic about it, and the rest is history. So, that’s my story, which in some ways is probably similar to yours, right?

Eve: [00:24:33] Yes.

Mark: [00:24:34] You saw it and you said, aha!

Eve: [00:24:36] Yes. But not enough of us yet. Right. Still a pretty small industry.

Mark: [00:24:41] Still a pretty small industry, but it is growing, you know. People are raising, we talked about five million being a pretty good real estate deal, you know, people are raising 15 million now. And that, when, you know, when you and I got into this industry, the concept of being able to raise 15 million dollars for a deal online was unthinkable.

Eve: [00:25:06] Yes.

Mark: [00:25:06] You know, people were raising 250,000 dollars to do a fix and flip. The industry is now funding from very significant deals. And because entrepreneurs are always looking for capital, you know, the entrepreneurs of the world are really paying attention.

Eve: [00:25:26] Yes. Yeah.

Mark: [00:25:27] I’m a pretty good barometer because I am pretty well-known in the industry and I will, so when I say my phone has sort of been ringing off the hook, that’s a pretty good industry barometer.

Eve: [00:25:40] It is. Yeah.

Mark: [00:25:41] You know, it probably means lots of peoples’ phones have been ringing off the hook. And this latest change really has gotten people’s attention.

Eve: [00:25:49] Yes. Well, it should.

Mark: [00:25:52] So, I think in 2020, I really think the industry, those of us who survive the coronavirus, anyway …

Eve: [00:26:01] Oh, that’s depressing.

Mark: [00:26:02] Yeh, and I … then are going to, you know, really see a significant uptick.

Eve: [00:26:10] Yes. So, I have to ask the next round of improvements that the S.E.C. makes, what do you want to see on that list?

Mark: [00:26:17] So, I get asked that question a lot and I never have a ready answer because I’ve been doing this, you know, I’ve been practicing law for so long. I have learned not to think about possible legislative or regulatory changes because they are so rare and so unpredictable, you know. There are two things you never want to see being made. One is sausage and the other is law. I just focus on the world that I have, that I’m in, rather than on how it might be improved.

Eve: [00:26:57] I get it. The thing I think about is of regulatory burden, which is enormous for small companies. Really enormous.

Mark: [00:27:05] And how would you address that?

Eve: [00:27:08] For a small company that’s never done something like this before. As a member of FINRA, not only are you following, you know, the regulation crowdfunding rules, but you’re also following FINRA’s rules, which require many, many, many things, like WURM compliance of emails and evidencing and things I never knew existed. It’s very time consuming to learn at all, and it’s time consuming to keep it up and to do it properly. And I have a feeling that many platforms are not doing it properly because it’s just too hard. So, I think that really needs to be addressed in one way or another. You know, I don’t know what a full-blown broker/dealer compliance book looks like. I’m sure it’s worse. But in some ways I feel like FINRA wasn’t ready to handle these smaller companies, they’ve never done anything like it before. The compliance is … huge. And, you know, we’re surveilled every quarter, and they said, well, every word. And that that’s their job. So they have to, I’m not saying they shouldn’t, but it’s all required, and it’s a lot.

Mark: [00:28:19] Yeah. And I mean, maybe I would say the next significant change maybe should be from FINRA rather than from the S.E.C..

Eve: [00:28:31] Yes, possibly.

Mark: [00:28:32] I completely agree with you that FINRA didn’t know how to deal with this and they started off with a light touch, you know. The first funding portals that I represented that, they were easy to get approved. And then FINRA just didn’t know what to do. And, you know, the easy answer is from a regulatory point of view was always to make it more difficult. And so we’ve ended up in this kind of crazy situation where funding portals, small, small organizations, are subject to the same regulatory treatment as, you know, as Morgan Stanley. And it it is clearly not a good fit.

Eve: [00:29:16] That’s right. Although I have to say that they’re trying, and in their communications with Small Change, at least, the tone is more about helping us be aware of what we’re supposed to do. So, it’s not a bad tone, but still, the regulatory burden is there. In a sense, I think FINRA got lumped with this without anyone much thinking about the consequences. Does that make sense?

Mark: [00:29:39] Yes. I mean, I’m not attacking FINRA, because, as you say, they’re just doing their job. No one told them, you know, you should act differently with the respect that this particular species of FINRA member, as you know, I mean, these days we’re submitting policies and procedures to FINRA that are, you know, 75 pages long …

Eve: [00:30:03] Oh, wow.

Mark: [00:30:03] … could be a two person company where, you know.

Eve: [00:30:07] Yeah.

Mark: [00:30:07] The policies and procedures amount to the two people saying this is how we’re going to regulate ourselves. You know, there’s no one else to regulate. There’s no one to supervise.

Eve: [00:30:17] Yeah, no, no. I know. It’s a shame.

Mark: [00:30:21] It’s almost been an absurdity, but there you go.

Eve: [00:30:25] So, yeah. Let’s root for FINRA making the next change or, something happening that permits for FINRA to make the next change, because I’m not sure they’re fully in control of that themselves. I don’t really, I don’t really know. But, you know, we we pay a lot of money to a company called Smarsh to archive all our emails, all our websites, everything, so that they’re all WURM compliant. That’s a big burden for a tiny company.

Mark: [00:30:52] Well, there you go.

Eve: [00:30:52] We also pay a lot for insurance, which is crazy expensive. I have a feeling that many funding portals don’t …

Mark: [00:31:00] Just don’t do it. Yeah.

Eve: [00:31:01]  … pay for insurance, because they can’t afford it. I like to sleep at night.

Mark: [00:31:05] I guess, what from the FCC, you know, rule 204, which is that burdensome advertising rule that you were alluding to earlier. That does seem a little too harsh. The idea of it, the theory of regulation crowdfunding is that every investor should have access to exactly the same information at all time.

Eve: [00:31:29] That’s right. Yep.

Mark: [00:31:31] And so that’s why they don’t let you freely advertise. They want all attention to get focused back to the funding portal.

Eve: [00:31:39] Right.

Mark: [00:31:40] Which is supposed to be the sole source of the information. And so, yeah, I totally understand that. I’m not going to say there’s no reason for the rule. I think maybe this is an example of ideology, sort of, getting the better of practicality. The rule is just impractical. And …

Eve: [00:32:02] Yes. Yeah.

Mark: [00:32:04] The ideological purity of it I think is outweighed by the burden that it places on, again, on very, very small companies.

Eve: [00:32:13] We’ve ended this on a bad note.

Mark: [00:32:15] Yeah, but well we’re sort of searching for ways that maybe in five years from now, maybe the S.E.C. will make the rules even better.

Eve: [00:32:26] Yeah.

Mark: [00:32:26] But these little rules, you know, again, we’re dealing with tiny companies and you know, big companies have the resources to hire lawyers, like me, or even have their own in-house lawyers. But these are tiny companies. So, a lot of these rules, as you know, in your position as a funding portal end up just being tripping points, you know, traps for the unwary.

Eve: [00:32:50] Yes.

Mark: [00:32:51] Yes, we could do with fewer of them. But on a positive note, again, 2020 is going to be a very, very good year.

Eve: [00:33:00] Yes, it is. And final question, what’s next for you?

Mark: [00:33:06] What’s next for me is, you know, I’ve just started a new law firm, Lex Nova Law. Super exciting, fun, high tech, really cool, hiring more people, training more people to learn about these rules. And part of my job in the crowdfunding industry is to educate people. So, I love being on the forefront of education. And another part of my job, I think, is to make the industry better. And that means more compliant, but also more efficient. The Internet, which is what crowdfunding is all about, it requires efficiency, right? It is …

Eve: [00:33:54] Yes.

Mark: [00:33:55] It is a tough taskmaster. You know, Amazon. You try to compete with Amazon in retail, man, you find out how efficient they are. So, lawyers, the key kind of friction points in the syndication world, in the capital formation world. You know, lawyers have to become more efficient. And I work on that all the time and try to work with industry leaders to make the crowdfunding industry better for investors, in part by making it more efficient. So, that’s the answer your question

Eve: [00:33:55] Great. Well, I’ve had the privilege of working with you on that. And I agree. Efficiency really matters. Thank you so much for joining me. And I also can’t wait to see what the year holds.

Mark: [00:34:42] Thank you so much.

Eve: [00:34:44] Okay.

Mark: [00:34:44] Have a great day out in sunny Pittsburgh.

Eve: [00:34:51] That was Mark Roderick. We got into the weeds together about the proposed improvements to regulation crowdfunding. He and I both understand what these changes will mean to capital formation. As Mark said, these proposals are great for the crowdfunding industry and for American capitalism. They’re not about Wall Street. They’re about small companies and ordinary American investors, where jobs and ideas come from. You can find out more about impact real estate investing and access to the show notes for today’s episode at my website, EvePicker.com. While you’re there, sign up for my newsletter to find out more about how to make money in real estate while building better cities. Thank you so much for spending your time with me today. And thank you, Mark, for sharing your thoughts with me. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.

Image courtesy of Mark Roderick