Crowdfunding comes to real estate, and pays off

May 11, 2015 |

When Ben Miller decided to use crowdfunding as a means to rehabilitate a beaten-down building in one of Washington, D.C.’s transitional neighborhoods, he didn’t really know crowdfunding was a thing, That’s because it wasn’t, at least not in real estate, yet.

But Miller and his brother Dan were raised in both a real estate family and in the social generation. Their goal—to give everyone the opportunity to invest in commercial real estate—was just intuitive to them. Previously, commercial real estate was a playground for large-scale investors only.

“We didn’t know it would become a movement, and that the movement would be our business,” said Ben Miller, standing in the finished project—an open, modern/industrial-style space called Maketto. “We raised $350,000 from 175 people at $100 a share, and now the industry will do a billion dollars a year, and we’re doing a project a week and raising probably half a million dollars a day.”

Fundrise is an online crowdfunding platform offering individual investors a chance to buy shares in a commercial real estate project. The returns come from both rental stream and the appreciation of the property itself.

That was what was so enticing about the first project on H Street, a transitional neighborhood just east of D.C’s Union Station. Not only was the neighborhood on the verge of big growth, but it also begged for an anchor destination to get the ball rolling.

When you first walk into Maketto, it’s not immediately clear what the place is—and that is literally by design. It is a bar, a designer coffee house, a bakery, a retail clothing and sneaker shop, and a restaurant with a James Beard-nominated chef. Independent vendors all feed off each other, literally, under one roof. By sharing the space, the rent is cheaper, and therefore the profit greater.

“The whole idea was to do something different, to do something that the neighborhood wanted, so the space is both a restaurant and high fashion, it has a cafe,” Miller said. “It’s called Maketto meant to be a communal market, and the people invested in this project not only own a piece of the real estate but also a piece of the restaurants.”

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Miller may call it a market, but really it is a floor plan for the future: A social network of retail and restaurant on three levels, with communal seating everywhere (even in the chef’s kitchen), and open-air spaces on the roof. It is what the millennials moving into this now-trendy new neighborhood expect.

“The point is to get people in there from the minute you wake up in the morning for your coffee through your nighttime cocktail and to meet people while you’re there. It invites you to chat,” said Gina Schaefer, one of the “crowd” investors in the project.

Schaefer and her husband own 10 hardware stores in the District and in Baltimore, but they lease all their properties. Owning real estate was way beyond their means until Fundrise approached them with the crowdfunding platform. They bought into it, investing $10,000 in the project. Last year, they received their first dividend check.

“I think for us it was just being part of the sharing community and the movement, and even if it was just a piece, to say that we owned something,” Schaefer said. “We never in a million years would be able to afford to own a property in Washington, along H Street, where everything is starting to grow.”

On a sunny Friday, midmorning, Maketto was already humming.

Toward the back of the main floor, just past the well-stocked bar which, for now, is spread with an array of breakfast pastries, one patron sits alone, wired up to a conference call. She is sipping something from Vigilante Coffee, a vendor that has set up shop on the second floor. At a longer, communal table upstairs, two suited patrons appear to be in the midst of an interview.

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Just past them, across the first roof garden where a young man sits reading on his laptop, you can see workers in the glass-enclosed kitchen preparing for the lunch crowd. On the outdoor third-roof level, a group of young women is hashing out a business plan over laptops, something that involves dancing. All this as an older couple walks into the front of the main floor, tempted by pastries on the bar, but stopping to browse the $100 shoelaces.

For Christopher Vigilante (that’s his mother’s maiden name actually), it was the opportunity to share in something bigger than his tiny coffee company.

“For business, it helps create a lifestyle brand. Folks that typically want to drink a high-end coffee can understand what really fine cuisine can be like, can also appreciate fine clothing, a shirt that might cost you a few extra dollars but will last you 10 years—these folks all kind of run in similar circles,” said Vigilante, standing behind three glass spheres of bubbling brews, heated by Bunsen burners. “I think when you have the synergy of all these businesses, you get that lifestyle brand.”

A brand that is solidly Millennial—shared—right down to the funding.

“A hundred companies have followed us into this space,” said Miller, who has grown his crowdfunding company Fundrise from three to 30 employees. Fundrise recently raised $35 million for its technology platform, and Miller said he is hiring an employee a week.

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Fundrise began raising money for the H Street property in 2012. Back then, Miller talked about how they had to work through an arduous process with the Securities and Exchange Commission in order to make this first-of-its-kind online equity offering for a real estate property happen.

Now Fundrise is crowdfunding projects across the country. ( Tweet This )

Maketto is very nearly a visual manifestation of the philosophy behind its fundraising; put simply, a social structure grown out of social financing.

“You can tell when you interact with customers, who maybe put in that first hundred dollars to get this project off the ground, that they feel connected to the space in a different way than say any other coffee bar,” Vigilante said .

As such, it is already transforming the neighborhood around it.

“We’ve created an anchor down this side of H Street, so it’s drawing more people here,” said Miller of the neighborhood, which, along with several new restaurants and fitness studios, will soon be home to a Whole Foods and more than 1,000 new apartment units. “It’s probably the coolest project tin the whole city, and that’s making it a destination. The real estate growth from this neighborhood has been sensational.”

Miller estimates that the building itself has appreciated between 50 and 100 percent since the crowd brought it back to life. For the neighborhood, its contribution appears, so far, invaluable.