Fundrise’s First Residential Project: How It Works

by Shilpi Paul

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Fundrise

Last week, we reported that Fundrise had embarked on their first residential project, in partnership with Redbrick Partners. Using their crowdfunding platform, they are in the process of raising capital for the 100-unit project at 3400 Georgia Avenue.

This time, investors can buy into the project at $10,000 per share, a marked increase over their first project, which allowed community members to invest for as little as $100 per share.

At $100 per share, the build-your-community mission seemed attainable, but the $10,000 lower limit has shrunk the pool of potential investors. Additionally, 3400 Georgia Avenue is only open to accredited investors, who must have a certain net worth, rather than the entire community. In this way, the new Fundrise process is more similar to the traditional method of raising capital, albeit via a slick website, rather than being a game-changing crowdfunding mechanism.

UrbanTurf was interested in knowing more about why Fundrise made the change, and how exactly the investment will work.

“We pushed it to what we felt was necessary for other developers to get comfortable with the platform,” Fundrise’s Dan Miller told us. “By real estate standards, $100, and even $1000, is incredibly low. [Investors] wanted to dip their toes in the water and try something at around $10,000.”

On their first few projects, said Miller, the Fundrise founders were the real estate developers, so they were willing to take on the potential hassle of managing so many small investments for the sake of their mission.

The website works the same way for all the projects, Miller told us, allowing investors to look through offering materials, sign documents electronically and transfer funds. Fundrise is also building software that will allow the developers to communicate more easily with investors, by posting updates, tax documents and other materials.

Understandably, investors have been more inquisitive with this project, asking to speak with the developers and to know more about the specifics of the projected return.

Structurally, investors will be investing in an LLC, and will be issued a Schedule K-1 tax document. “In five years, the investors can get their money back, plus the 10 percent annual return,” said Miller. So far, 16 investors have contributed a total of $350,000 via Fundrise, towards a goal of $500,000.

The old model, with lower buy-ins and a broader base of potential investors, is still alive; Miller said Fundrise has a few other projects in the works. But the newer, pricier, and more traditional model will be moving forward as well; next, Fundrise will be working with MRP Realty and Ellis Development Group to raise capital in a similar manner for the much-anticipated 965 Florida Avenue redevelopment.

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See other articles related to: redbrick partners, petworth, fundrise, 3400 georgia avenue

This article originally published at http://dc.urbanturf.com/articles/blog/fundrises_first_residential_project_how_it_works/7664

2 Comments

  1. vahoya said at 5:46 pm on Tuesday October 8, 2013:

    A preferred return of 10% on a subordinated piece of preferred equity with no upside is so far below market for returns.  This is great for the developers, but uninformed investors are not getting appropriate risk-adjusted returns.

    Look at the offering.  This money is going to fund entitlement work (plans, approvals, permits, etc.).  There is still a ton of risk left in the development process before you even start construction and then, depending on the business plan, you have to build the project on budget and rent/sell it according to your proforma.

    There are so many things that could go wrong at this point.  Returns to the investors should be way higher with at least a share of any upside above the promised returns.

    I really hope that people are doing their due diligence.  Again, this is great for the developers, but not a good deal for the investors.

  1. Trelane Patrick said at 9:50 am on Wednesday October 9, 2013:

    Yeah, unless the group is guaranteeing the “10% return” this doesn’t sound like a slam dunk.  As the previous commentor said, it’s great for the developers because now instead of having to use their own money or borrow capitol, they are essentially getting free money.

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