For urban development that can’t attract traditional financing, crowdfunding jumps in

     Crews work on new construction in the East Liberty neighborhood in Pittsburgh, a rapidly changing area. Early projects in such neighborhoods that may have trouble securing funding from big banks, could benefit from crowdfunding platforms like Small Change, says founder Eve Picker. (Lindsay Lazarski/WHYY)

    Crews work on new construction in the East Liberty neighborhood in Pittsburgh, a rapidly changing area. Early projects in such neighborhoods that may have trouble securing funding from big banks, could benefit from crowdfunding platforms like Small Change, says founder Eve Picker. (Lindsay Lazarski/WHYY)

    Small Change will focus on urban projects with the potential to do good in their communities.

    Eve Picker takes her computer out of her bag and clicks through a mostly empty website of filler text and stock photos. Picker is a Pittsburgh-based developer with a portfolio of complicated projects, but she says this one is probably the most difficult thing she’s ever done. In just a few weeks, the newest real estate crowdfunding platform, Small Change, will launch.

    Real estate is known to be a high-returns, lucrative investment previously open to a very few, very wealthy insiders, and crowdfunding seeks to disrupt that. It’s not the first such platform – Fundrise, for example, has been doing this since 2012 – but the idea is to raise money for urban development that might have a hard time locking down loans otherwise.

    Small Change also touts a particularly urban mission, only taking on development with the potential to make cities better. 

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    But the ‘crowd’ who can take advantage of Small Change – and other, similar platforms – remains pretty small.

    Funding unconventional projects

    Small Change aims to work with projects that can’t secure funding from traditional sources, like national banks. Banks largely support familiar projects with limited risk. The types of projects Small Change wants to target can be hard to assess because they’re unique or sit in neighborhoods banks view as risky for investing.

    There’s potential for a lot of development like that in Pennsylvania’s, where whole cities can seem like precarious bets

    Andrew Rosti works for Charlotte-Mecklenburg Housing Partnership, Inc., a nonprofit that builds affordable housing in Charlotte, North Carolina. He expressed early interest in Small Change to raise money to transform an industrial building in a disinvested Charlotte neighborhood into office and retail space. 

    “In an area where you’re thinking to do economic development work there’s some preconceived notions of what a neighborhood is and there’s also just challenging economics that make it hard to attract capital,” he said.  

    So instead of asking conservative national banks for money, with Small Change, you’d be able to ask anybody: people who love the city, or people who believe in the work of the developer, or neighbors who want to see the community succeed.

    In some ways, if people decide to invest in local projects, it will actually be a return to an older funding model. “Historically, it’s always been that projects were financed by local small banks, and local small banks got their funds from local people. And we’ve gotten away from that,” said Matthew Ciccone, a young Pittsburgh developer who sits on Small Change’s advisory board.

    He said that in addition to funding projects, crowdfunding can teach people how the whole building process works. “People are genuinely and generally interested in how places are developed,” but are often excluded from that process, he said. Crowdfunding can also help instill a sense of ownership, he said. 

    “People always say: Oh, did you see what they built? Did you see what they did over there? No one ever defines who they is,” he said. “It’s never like this is what we did.”  

    Transformative properties

    Picker loves cities and wants to see them succeed. Her portfolio of properties includes a dozen buildings in previously blighted neighborhoods. And the Small Change mission reflects her urbanist leanings. “The primary focus is on transformative projects,” she said. Her team has developed what they call the change index; they score each project for its mobility, sustainability, and economic vitality.

    The change index considers things like nearby bike lanes; public transport routes; accessible commercial corridors; if it’s on a brownfield site; whether it’s using green building practices; if it’s in a mixed use neighborhood; if there’s a park or plaza within a half mile; if it creates jobs or supports local businesses; whether it’s a historically underserved community; whether it activates the street with a porch or outside space. Things like transit-oriented development get bonus points. Each project gets scored on these factors.  

    “Small change is really impact investing,” Picker said. “We’re really only interested in helping developers raise money if their projects are going to make an impact.” 

    Democratizing development, with an asterisk   

    Ciccone sees real estate crowdfunding as democratizing the development process. But while crowdfunding opens up real estate investing to a larger group of people, the ‘crowd’ is limited: only accredited investors can actually put up money. That’s a technical term for a certain level of wealth and income – a net worth of $1 million not counting your primary residence or $200,000 income per year for the past two years ($300,000 for a couple) – that, it turns out, less than 5 percent of people in the U.S. meet. It’s a Securities and Exchange Commission regulation.

    Here’s how it works:

    In order to sell securities – assets like stocks – companies have to register the offer with the SEC. Some exceptions do exist, and one of those is Regulation D. The regulation allows companies to skip registering with the SEC but requires that only accredited investors participate. The idea is if the deal goes bust, accredited investors will have enough of a cushion to weather it. 

    The JOBS Act of 2012 permits, for the first time, that deals put together under Regulation D can be advertised. In other words, you no longer have to “know a guy” to get in on the action; companies can advertise the deals on the internet, hence: real estate crowdfunding sites.

    Another piece of the SEC code, Regulation A, can open up an offering to non-accredited investors. That process takes time, a lot of paperwork, and a lot of money. That hassle doesn’t make much financial sense for smaller projects.

    The JOBS Act did amend Regulation A to something called Regulation A+ to make it more efficient and to increase how much money companies can raise using the exception, but it remains a burdensome process.     

    For now, Small Change will use Regulation D, which means it will be limited to accredited investors only.

    In other words, the five percent instead of the one percent.

    Ciccone said regulations are just behind new technology.

    Small Change will launch later this summer.

















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