ImpactAlpha, Dec. 4, 2019 – Real estate shapes our cities and neighborhoods. And capital shapes real estate.
A new model that enables local residents to buy into hyperlocal property portfolios could start to reshape real estate capital, and thus the drivers of community wealth. In Los Angeles, Nico, which calls itself a “neighborhood investment company,” is on a mission to localize wealth creation and broaden access to neighborhood equity.
Nico already has acquired three rent-stabilized apartment complexes in L.A.’s Echo Park neighborhood. The properties will be transferred to what the Los Angeles-based startup calls the first “neighborhood REIT,” or real estate investment trust, early next year. The REIT will acquire, renovate and manage additional income-producing properties in Echo Park.
“It’s an opportunity for radically more local people to become financial stakeholders in their neighborhoods,” says Nico cofounder Max Levine. He sees the neighborhood REIT as a middle ground between renting and home ownership that can let people acquire real estate, and wealth, incrementally.
“Housing is so broken,” Levine says. Home ownership is a key driver of wealth, yet rising prices have put it out of reach for many Americans. In cities across the country, the percentage of households that are renting is up sharply, creating a growing population of vulnerable renters at risk of displacement. At the same time, the profit maximizing logic of real estate investing often means that what gets built and how existing buildings are managed is often at odds with community needs and desires.
Levine hopes Nico can help reframe the role of capital for communities, so that they see it as “something helping to grow an asset base under a long-term stewardship model, rather than as an extractive model.”
In Echo Park, like many neighborhoods around the country, civic pride is high but incomes and home ownership rates are low. The Echo Park Neighborhood REIT will be structured as a public-benefit corporation and managed for the long term health of the community. Individuals will be able to invest as little as $100 and own a share of the income produced by the real estate portfolio as well as its underlying value.
To execute on its vision, Nico has closed on a $3.5 million seed round led by New York-based Collaborative Fund. Also investing: Sidewalk Labs, the “smart city” arm of tech giant Alphabet, parent of Google.
Nico’s neighborhood REITs could “usher in a whole new class of folks who can get access to real estate,” Collaborative Fund’s Craig Shapiro told ImpactAlpha. “There is a large segment of the population who cannot afford to put down a big down payment and thus never get access to real estate assets, which for most people can be their largest asset.”
Nico is among the innovative models bubbling up to reshape the real estate industry and create more broad-based ownership. The most promising take a thoughtful, community-level approach, rather than one-off properties, and are guided, and even governed, by communities themselves.
In the San Francisco Bay area, an acute affordable housing shortage means critical workers like teachers and first responders often cannot afford to live near where they work. Landed, a four-year old venture with backing from the Chan Zuckerberg Initiative and other foundations, helps teachers buy homes by providing half the down payment in exchange for a share of the future appreciation of the home. It is one of a number of startups pursuing such “shared appreciation” models to make home ownership more accessible.
In Oakland, the East Bay Permanent Real Estate Cooperative is raising money from community members and others to acquire and develop properties and take them off the speculative market by placing them in a land trust. EBPREC, as its known, sees its role evolving into that of a facilitator, providing technical assistance, templates, and expertise as well as capital aggregation. The goal: to create a widespread network of community-owned real estate and politically engaged residents.
In Baltimore, a new social enterprise called StreetWell is working on an “impact real estate portfolio.” Working with local partners, StreetWell will acquire properties in the area, hire individuals “striving to overcome barriers” to renovate them, and turn over ownership to the workers and the community.
And in Philadelphia, real estate developer Shift Capital and local nonprofit Impact Services are experimenting with a new concept called a “neighborhood trust.” The Kensington Corridor Trust will buy up property in the distressed North Philly neighborhood of Kensington and hold it in a trust for the long-term benefit of the community.
For now, Nico is alone among the community upstarts in using the REIT model, a common real estate investment vehicle that has rarely been applied to local communities. Both Levine and co-founder John Chaffetz say they are taking what they’ve learned in conventional real estate to create a new model that aligns investment with the long term sustainability of communities.
As a public benefit corporation under California law, the Echo Park REIT bakes the interests of local residents, community organizations, and small businesses into its charter. “Stakeholders” including tenants, local shareholders and community organizations, will guide its priorities. The REIT will assess its impact across five areas, including financial inclusion and wealth creation, distributed power and stakeholder alignment, environment and quality of life, neighborhood diversity and stability, and a strong local economy.
According to its website, Nico may conduct a public offering under Regulation A of the Jumpstart Our Business Startups, or JOBS, Act, which allows companies to raise up to $50 million from the public. In addition, Nico has raised roughly $28 million in real estate debt and equity capital from a mix of mission aligned and traditional investors, including Fannie Mae, to acquire properties.
The REIT may sell properties if it deems that to be in it and its stakeholders’ interests, but “ideally we want to be a long-term holder and owner of a mix of different property types representative of what’s going on in the community,” says Levine.
The same challenges that exist in Echo Park— housing prices that outpace incomes, low home ownership rates, and risk of displacement—are playing out in neighborhoods across the country. Nico eventually hopes to expand into other markets as well.
“We want to bring this structure and this mode of co-creation and co-stewardship with communities to more places over time,” says Levine. “It feels like this is a moment in time that is screaming for some new solutions.”