Fundrise is opening up its first Pittsburgh property to crowdfunding. But their new approach is more akin to traditional financing.
Fundrise, one of the biggest and earliest online platforms to crowdfund real estate, announced that it’s adding a Pittsburgh building to its portfolio. The Ace Hotel Pittsburgh, a boutique hotel in the gentrifying East Liberty neighborhood, has received $2.3 million in funding from Fundrise.
When Fundrise started it touted opportunities for people to invest in local real estate, appealing to people to help finance projects in their neighborhoods, while making some profit, to boot. Want to see a restaurant open in that empty building on your corner? Put down some cash, do your part to make your neighborhood thrive.
The idea took off. Not only have direct real estate investments been historically lucrative (and unavailable to a majority of people), but there is renewed interest in investing in cities. (Keystone Crossroads previously reported that another real estate crowdfunding site based in Pittsburgh is attempting to focus specifically on “transformative” urban projects.)
Under the crowdfunding model, Ace Hotel would have been a perfect fit — a smart, posh development in a changing neighborhood that could have attracted some of the new money moving into the area and offered up a restaurant and social space in exchange.
But that’s no longer the model under which Fundrise operates.
Some brief history: Real estate crowdfunding has only been legal for a few years. To sell securities, like stocks, companies have to register them with the Securities and Exchange Commission. Under an exception called Regulation D, companies could skip SEC registration, but the offer could only be made available to wealthy investors — people with a net worth of $1 million not counting their primary home, or $200,000 annual income for the past two years ($300,000 for a couple) — and could not be advertised. The JOBS Act of 2012 allowed the advertising of Regulation D deals, and real estate crowdfunding was born.
But deals under regulation D, which excluded the majority of the population (because of wealth and income requirements), weren’t exactly crowdfunding. They didn’t fit into what is generally a democratic concept: allowing anyone with disposable income to put money into anything they choose. Unsatisfied, Fundrise dug up another little-used exception called Regulation A. Regulation A allowed a purer form of crowdfunding, but it was unsustainable – too long to execute, too expensive, unscalable.
The JOBS Act updated that rule to something called Regulation A+. Initially, Fundrise didn’t think Regulation A+ would be very useful when it came to real estate. But by tweaking the way it operates, the company has since changed its mind.
Here’s what changed: instead of offering people the opportunity to invest in a specific project, Fundrise now sells shares in a diversified real estate investment trust, something it calls its e-REIT. You can’t choose the specific projects your investment funds, and the properties are scattered around the U.S. It’s similar to a traditional REIT or real estate mutual fund. As one industry news site, The Real Deal, put it, “real estate crowdfunding is becoming more and more like the traditional finance industry it set out to disrupt.”
But Fundrise CEO, Ben Miller, said “we have democratized investing into commercial real estate. The way we do it and the way that is feasible under the regulation is to invest into mini-portfolios of a handful of real estate deals … [Investors] want to invest in something they’re connected to but also want to be able to be diversified.” He added that Fundrise’s e-REIT has lower fees than traditional real estate investment opportunities, and there’s more transparency about where the money is going.
Nick Orsborn, who lives in Pittsburgh, started investing in the e-REIT a couple of week ago. He said he explored other options, like REITs and mutual funds, but settled on Fundrise because it provides more information about where his money is going. His current portfolio has four properties — only the Ace Hotel is in the city — and he has access to profiles of each. He didn’t know Ace Hotel would be in his portfolio when he signed up. “That was just sort of a nice surprise after I’d already invested,” Orsborn said.
All this may change who invests and why: Is it neighbors who want to see a project come to life, or just people with some extra cash from around the country? But it doesn’t change the fact that there’s a new funding source for Pittsburgh real estate. Fundrise is planning to invest another $20 million into Pittsburgh buildings in the next 12 to 24 months. It has assembled a dedicated team to scout projects in the city. Fundrise has also invested about $5 million in Philadelphia, in neighborhoods like Brewerytown.