Communities Investing in Themselves: DPOs for Downtown Revitalization

Communities Investing in Themselves: DPOs for Downtown Revitalization

An Oregon real estate company and CEC client, Guerrilla Development, is focused on “creating inventive and experimental projects that use both hemispheres of the brain.” Coincidentally, earlier this month they have been busy engaging both “hemispheres” of investors: accredited investors (a.k.a. wealthy individuals) and non-accredited investors (a.k.a. the rest of us). They are using one of the newest legal strategies for ventures to “crowdfund” investment capital, Regulation A, through which they are offering $1.5 million of preferred equity in the Fair-Haired Dumbbell, an office building with ground floor retail in Portland, Oregon. The offering is open to residents of California, Oregon, Washington, Massachusetts, Virginia, and the District of Columbia. If you’re curious about Regulation A offerings, check out their campaign video for a great overview:

While the idea of raising capital from the “crowd” is catching on around the country with private enterprises seeking growth capital, the Guerrilla Development offering is different from other offerings in that it is part of a broader trend to use today’s investment crowdfunding tools for economic and community development purposes—specifically, downtown revitalization.

This approach marks a change from the way communities have typically sought funds for their improvement: through applying for state and federal redevelopment grants. This significant departure from the familiar approach presents a number of advantages for community-based ventures. For one, it allows for greater flexibility in the use of funds, which are often tightly regulated by grantmakers to specific types of community development projects. In the grant-driven approach, if the project or program doesn’t jive with the rigorous criteria of the grantmaker, there’s a good chance it will never see the light of day. Secondly, crowdfunding opens up a range of new possibilities for communities self-funding their own development. Now, rather than waiting for the state or federal government coming to the rescue of America’s urban cores and downtowns, communities can be empowered to raise their own capital to get projects done using these new tools.

We are working with other groups that are using Direct Public Offerings, or DPOs, to raise capital for downtown revitalization projects. As an example, one of the groups we are working with intends to raise $4.5 million for a real estate investment fund for the purpose of a major overhaul of downtown Fresno, through the purchase and rehabilitation of a number of properties for retail and other uses. Fresno, California, if you don’t already know, sits in one of the most productive agriculture regions on earth, and yet has some of the highest levels of poverty in California. Decades of disinvestment have led to a ghost town-like status in downtown Fresno, in sharp contrast to the abundant agriculture lands outside of the city. Through the use of a DPO, the group will give Fresno residents a chance to invest in the underlying real estate at the center of the revitalization plan, and be a part of the city’s success.  The arrangement will ensure that the fund will never take on debt (which goes to the safety of the investments) and will be marketed specifically to local investors. Not having just one or two wealthy investors will allow the manager to make decisions based on the need for the revitalization of the area, without the typical shareholder primacy pressures. The offering is also devoid of the typical wiggle room that real estate developers typically add into their offerings that allows them to change the direction of the plan once it is funded.

Another group we’re working with, Our Katahdin, takes a broader approach to downtown revitalization, targeting the Kathadin region of Maine, which includes both small town and rural geographies. Seeing an opportunity to allow Maine residents to invest in the region’s development, this non-profit loan fund will cycle in capital from Maine residents through a DPO, before either loaning it out at a slightly higher interest rate to qualified ventures for their growth and development, or actually purchasing land for the non-profit to develop. In the process, everyone will benefit: Maine entrepreneurs will benefit from the access to capital; Maine investors (of the lending variety) will benefit from a modest return on investment; the region and its communities will benefit from enhanced economic activity; and the non-profit loan fund will benefit from the revenues for making it all happen.

We’re also excited to share that we’re in conversation with another real estate group, a non-profit Community Development Corporation in Rhode Island, which soon plans to pursue an innovative approach to real estate development in the state. Their approach centers on a public-private partnership with local municipalities to co-fund both the DPO and, if all goes according to plan, real estate development projects in Rhode Island’s distressed urban cores. They propose a fundamental rethink of housing development, bringing together spaces for living, co-working, and education, while also focusing on job creation, community revitalization, and “smart” growth in low to middle income neighborhoods. They, too, plan to use a DPO to engage a wide range of community stakeholders—and shareholders—in the success of the project.

We find a lot to like about this new trend toward greater democratization of investment in revitalization. Not only does it serve as a practical way to access capital for impactful projects that can breathe life into towns and urban cores, but it also serves to empower communities to take charge of their futures. When communities invest in themselves through local ventures, everybody wins.

A Call for Systemic Impact

A Call for Systemic Impact

Foundations, Families and Funds can play a very important role in helping to redirect capitalism toward a more fair and just application, while also finding the right social enterprises to support.

By playing a more comprehensive role in the creation and support of Community Capital Markets, these funding sources can build impact into a systemic approach. In addition to investments they make into the social enterprises either directly or through other intermediaries, they can also facilitate opportunities for the 90% of households that are prevented from participating in the private capital markets by investing in the structures that form alternative capital markets open to everyone.

We are better informed today than ever before about the rapidly expanding wealth and income gaps. Many recent studies show the top 10% of U.S. households now have over 75% of all the wealth in America. The next 24% of American households make up almost all the rest of all the wealth, leaving the bottom 40% with 0% wealth, and the bottom 60% with a whopping 3%! And the gap is growing fast, not shrinking, which portends many new challenges to our society.

Clearly we need to think about whether the current approaches are working, and if not, shift the paradigm.

As economists like Thomas Piketty have thoughtfully surmised, this growing gap will not improve without either government intervention or opportunities similar to what the wealthy have had – i.e. the same chances to invest and to begin to grow some wealth of their own. For anyone out there who follows the current dysfunctional state of our government, I would not hold out much hope for the first option anytime soon.

Regardless of the causes, our current state of affairs seems to point toward us having to right this very serious problem ourselves, and right it we must.

In the U.S., our government actually limits 90% of households from having any access to the private capital markets, leaving their investment options only in either the public capital markets, or alternatives that I’ve written about here, via Direct Public Offerings, or perhaps through the new state and federal crowdfunding options.

The irony is that, in the interests of protecting the 90%, only the very wealthy 10% continue growing their wealth. They have access to opportunities that far surpass anything found in the public capital markets. The 10%er’s may also use the public capital markets to hedge, speculate, or even arbitrage if they like, but their real wealth generation comes mostly from those private markets. But neither of these kinds of markets helps us to form the systemic structure we need to build healthier communities.

Which leads me back to how Foundations, Families and Funds can help.

The list of impact investors is growing every day, and we will all continue to work toward better identification of who is truly acting as a social enterprise, e.g. companies building business models to tackle some of the most difficult and seemingly intractable social and environmental problems, including climate change, poverty, water, energy and real estate, etc.

I refer to the entrepreneurs above as our new community of social enterprises, which includes those with a clearly defined mission, who are focusing on achieving impact at scale for all stakeholders (workers, customers, community, environment), but who also understand the importance of connecting via deep impact into their local populations. These kinds of entrepreneurs place a high degree of importance on the generation of mission aligned revenues (from clients or others who’s mission is aligned), and tracking/publicly reporting on their impact on a regular basis (transparency).

It’s encouraging to know that many investing organizations are now looking to make real impact via their investments by seeking out these entrepreneurs, even if we’re still in the nascent stages of trying to square that with the goal of getting back “market rate returns.” Leslie Christian just posted a great blog on this conflict here.

However, supporting those entrepreneurs with an investment is only one of two key components we need to have a healthy Community Capital Market. Focus also needs to be provided to the 90% of households so they can participate as well, even if half or more of them currently have no wealth to employ as investments into a market. These households need opportunity, which they are now starting to see with the alternative investment vehicles mentioned above, but even more important, they need experience, education and understanding in terms of what it means to be an impact investor – one that may not need those “market based returns,” whatever that means.

We need a whole system approach in place for community investors and community entrepreneurs to be able to find each other, which is what a Community Capital Market can be.

10 years ago, my good friend Don Shaffer (now at RSF Social Finance) and I embarked on a project to develop Local Stock Exchanges. I wrote about the need for these in several publications and even took a position at the Boston Stock Exchange to mirror a national exchange at a local level. But looking back, there is one critical element I got wrong. We don’t need to replicate the public capital markets with a lively secondary trading component that fosters speculation and arbitrage (using the need for liquidity to justify the madness they have become). We need a much more simple system in place that allows for the efficient transfer of individual’s savings into socially responsible companies, allowing for modest healthy returns, and some reasonable offerings of an exit if necessary. We need to power it with the right tools, education and mentors to help guide the ones that have not had access until now. We also need to reconsider what a capital market needs to be today, and not fall for the trap of manic returns and unlimited growth.

Foundations, Families and Funds can get behind this new kind of capital market by funding the system that can facilitate the Impact we need, and if they desire, they can also play a member-based role in how we operate it – much like exchanges used to be structured, before they turned into the same shareholder primacy driven entities that list on them today.