To 'Address The Ills Of Commercial Development,' These Projects Are Offering Equity To Their Neighbors
After purchasing an aging retail strip center in Downtown Atlanta, a one-time co-living operator is embarking on a new strategy: redeveloping urban real estate and allowing area residents to co-own the project.
The leaders of the company, called The Guild, say they have two goals: creating a project with permanently affordable housing units to help tamp down the neighborhood’s increasing housing costs and giving residents of the neighborhood a chance to participate in the rising property values around them with an investment starting at $10 per month.
“Our mission is to facilitate self-determination,” said Antariksh Tandon, the director of development and design for The Guild. “Not making this out to be a utopian project, it's not to try to come up with a thing that is sort of foolproof, but to come up with a way to address the ills of commercial development."
The Guild is following in the footsteps of a handful of other groups across the country trying to pool small increments of capital from local investors to buy commercial real estate. The overarching goal is to allow historically marginalized communities a chance to participate in wealth creation through real estate, while simultaneously stemming the tide of displacement.
But these new social and cooperative investment vehicles are a relatively untested entrant in the marketplace, focused on an investor class with little-to-no experience owning commercial assets. The handful of groups that are up and running have thus far seen mixed results, according to Urban Institute Senior Fellow Brett Theodos, who authored a 2020 study on the emerging community cooperative real estate model.
“This really is quite new and different, and it's worth acknowledging that real estate is not always a performing asset,” Theodos said. "It has booms and busts as well."
A real estate investment trust that owns a portfolio of rent-controlled apartments in the Echo Park neighborhood of Los Angeles opened for investment during the coronavirus pandemic, offering area residents initial shares for a minimum of $95. The REIT, Neighborhood Investment Co., now has nearly 400 investors, including 128 earning $50K a year or less, according to its annual impact report.
Forty percent of those investors put more money in monthly, said NICO co-founder Max Levine, even though the REIT has yet to pay a dividend. NICO is expected to get current valuations on its three apartment properties by September, Levine said.
“This is a very new model and beyond just NICO, this model of shared-equity models we're in the very early, early days,” he said. “I think the movement towards community wealth … is going to be one of the big stories in the next 10 or 20 years.”
These concepts have yet to convince skeptics in the real estate industry of their staying power.
“I think these groups are too fledgling,” said Rosalie Manansala, the founder of DOT Capital Advisors, an investment consultant. “I think it's too early to tell [success] as far as the groups who are advancing in this space. I don't know of any groups that have gone through a full cycle.”
Manansala, who lives in Echo Park, said she is supportive of NICO, but she’s unlikely to invest in it.
“This is a fairly new concept. I like to study the managers of where I invest. So I think it's too new to test out the waters. I'd like to see a little more track record,” she said.
In San Diego, a nonprofit spent $20M redeveloping an abandoned aerospace factory into a retail project called Market Creek Plaza in the late 1990s, aiming to allow residents or workers within certain ZIP codes to pay a minimum of $200 for shares in the project.
Today, community investors own 20% of Market Creek, according to the website of the Jacobs Foundation, the philanthropic organization that spearheaded and developed the retail center. But those residents aren't being paid returns that are actually generated by the project; as of 2020, the foundation's Jacobs Center for Neighborhood Innovation arm has been paying dividends from its broader fund, according to the Urban Institute.
In the Twin Cities, a collection of local businesses and residents that dubbed itself The NorthEast Investment Cooperative bought a former discount mattress store, spruced it up and leased it to a bicycle repair shop, cooperatively owned craft brewery and a bakery. The organization allows any resident in Minneapolis to buy shares of the project for as little as $500, and the NEIC's board of directors approved a 4% dividend based on profitability.
That project has been labeled a success, producing $20K in profits annually, according to the Urban Institute. The group purchased a second property, but its leasing was slower and its profits much lower: NEIC ultimately leased the space to a home remodeling company and earns about $4K a year, showing any success with the model isn't necessarily easy to replicate, Theodos said.
Despite the risks, advocates say these programs are filling a need; the U.S.' history of systemic segregation and racism has driven a huge wealth gap, driven largely by real estate. The average wealth of a White family in the U.S. was $919K in 2016, $700K more than the average Black family, a disparity that is greater than it was in 1963, according to a survey of consumer finances from the Urban Institute.
Last year’s unrest has given The Guild access to philanthropic organizations that had not been accessible before, said Dani Brockington, the community engagement and programs manager for the organization.
“We thought the process was going to be much slower, even before Covid hit. But it wasn't until last summer that philanthropy decided to fund it,” Brockington said. “It took these external forces to push the people holding the money to act in those ways.”
The model's aim to democratize investing in commercial real estate isn't dissimilar to how the app Robinhood has made investing in the stock market widely accessible, Manansala said.
“We don't view our effort as altruism at all,” said Levine, the co-founder of NICO who has invested in commercial properties for 15 years. "We view this as a new type of capitalism, as stakeholder capitalism."
He said community real estate investing is shifting the concept of fiduciary duties beyond just maximizing profits and offering social and environmental benefits.
“What I hear a lot of is that capitalism is broken and capitalism is evil," Levine said. "What I believe is capitalism is working exactly as it's designed to work."
The Guild’s Tandon said his organization has been upfront with potential investors about the risks inherent in their project. The redevelopment of a 15K SF, 1930s-era commercial building in the Capitol View neighborhood in Southwest Atlanta would see the group build ground-floor retail below two stories of apartments permanently set with affordable rents.
“We will be upfront with them that this is an investment, and like all investments, it is risky,” Brockington said.
The Guild's project would have a long hold time before the community takes full ownership, perhaps 15 years or more, Tandon said. Typical commercial real estate hold times are around five to seven years, but The Guild is attempting to mitigate risk by seeking an agreement from its investors and lenders to guarantee the money residents put into the project at the least, Tandon said. He added that their project will only open to investors once it is stabilized with apartment renters and retailers.
But the ability to invest in the project is more about community building, Brockington said, than the actual returns.
“The central benefit is a collective benefit rather than an individual one,” she said. “If I live in a neighborhood, if I can be where I live and get everything I need, if I can go to a supermarket, get fresh food, my health needs are accounted for, get the medical care I need ... and my community is functioning and firing on all cylinders, and the community is supportive of each other, that's the end goal.”
CORRECTION, JULY 9, 4:30 P.M. ET: A previous version of this article misstated that a property valuation was necessary to issue dividends. This article has been updated.