Today's guest is Ben Miller, co-founder of Fundrise.com. Fundrise is changing the way real estate development happens by putting power back in the hands of local residents. Fundrise is a crowdsourcing platform for funding real estate developments. Instead of developments being funded by large, heavily capitalized institutional investors, Fundrise allows boutique investors to get part of the action by investing as little as $100 to a development project. Fundrise gives individuals the ability to invest directly in local properties without the unnecessary fees and middlemen of conventional real estate equity finance. With Fundrise, people now have the power to earn financial returns while building the city they want to live in.
In this interview we discuss:
- Why architects often fail at developing their own projects
- How the thinking of developers differs from that of architects
- How Fundrise is changing the future of real estate investing
- The future of architecture and crowdsourcing
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Show Notes:
- Visit Fundrise at Fundrise.com
Interview Transcript and Members Only Resources:
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Enoch: Hey, everyone. Welcome to Business of Architecture TV. Today we have Ben Miller with us. He’s the managing partner of WestMill Capital Partners. He is a co-manager of Popularise. He is also a co-founder of Fundrise, which is a crowdsourcing platform for real estate investments and developments.
So, welcome to the program, Ben.
Ben: Thanks a lot for having me.
Enoch: Yeah. So, could you just tell us a little bit about your background, sort of, the path you came to get to where you at right now so people can get an idea of who you are?
Ben: Yeah. Everything we’re doing comes directly out of our experience. Our experience is we have a capital or financial background, worked in real estate private equity, and I’ve worked in venture capital. So, I’ve worked a lot on the capital side of the business.
Then, in around 2003 and 2005, I really got in to the real estate business, real estate development. The kind of development we were doing is, sort of, a large-scale, mix-use, complex projects usually at half a million square feet to a million square feet. There was a small project of $60 million and a large project at $350 million. So, there they had a lot of the public-private interaction, there was huge institutional capital partners – AFL CIO, MassMutual, GMAC Commercial which was the General Motors’ financial arm. It got sold to Goldman Sachs and KKR in the mid-2000s.
So, that kind of real estate development with a retail event, which is consumer-centric, part of real estate industry is where I’ve actually cut my teeth. Then in 2009, I think it is, I started a small real estate company with my brother buying small-scale neighborhood real estate. It cut me out of the 2008 recession. We all felt that the institutional capital partner, the institutional money really didn’t get it. The evidence was the complete collapse of the financial markets.
But, anybody who has institutional partner can speak to the kind of frustration in trying to build a product that’s more about authenticity, local – maybe it’s too small for them. Institutional capital is often about large-scale. Essentially everything we’ve been doing since the 2008 recession has been a sort of counterpoint to all the things I was doing and developing up until the 2008 recession when, basically, the Emperor’s clothes presented themselves to the globe really, not just national collapse.
Enoch: How many other, I guess, mid-size type of developers are there that are pursuing the kind of projects that you’re doing?
Ben: Oh, my God. Thousands and thousands of people. I think that any developer who is independent, let’s say, under the age of fifty… It’s not an age thing, but usually if you’re younger you’re not the same scale and doing urban projects. Urban could be downtown Sanford Maine, or urban could be in New York City. But, when you’re building in that kind of smart growth contextual environment, it takes a different skill set than building in a cornfield.
I’ve done both. I’ve planned projects that are large-scale, essentially suburban projects. Look at suburban projects too even when you’re building in, basically, the middle of nowhere where there’s no real historic context. They want to make it feel like it’s urban – the density. Maybe there are tens and thousands of developers like me doing similar type projects around the country.
Enoch: Okay. So, you started to purchase these smaller properties in these emerging neighborhoods. You were doing this with what funds?
Ben: A lot of the personal funds, and a few from friends and families, a handful of some high net-worth individuals who were investing with me. We’re buying like properties that were $1 million dollars to $5 million per acquisition.
Enoch: Okay. We’re these cash purchases?
Ben: No. Cash purchases are pretty unusual in real estate. Usually, you have financing, debt financing when you buy a property. Unless you’re buying land or highly distressed property, usually it’s 65% debt more or less.
Enoch: Okay. So, you’re talking about 45% equity. You would come to the project with 45%, and you would be able to acquire the 65%. I’m sorry. I mean, 35% – 35/65 in financing?
Ben: Yeah. Actually, in some ways your math is right because you always have to overcapitalize a deal.
Enoch: Okay.
Ben: You have interest reserve, and you have to have working capital, and things like that. So, you actually end up with bringing more equity than just the acquisition cost to buy development deal.
Enoch: Now, you did something innovative with Popularise. You’re getting these smaller-scale developments and then Popularise happens. Tell me about that process and tell us what is Popularise?
Ben: Okay. So, anybody who’s ever planned or built a project will know this moment. The moment is when you have a plan on the table, and you are thinking about what your consumer wants. It might be a resident, it might be a shopper, or could be a worker, but you basically try to plan what it looks like, what the layout is, what the design; maybe you’re trying to figure out what the tenant should be. You’re trying to plan a real estate project, and planning a real estate project is a lot of work that goes in to a deal before it’s actually delivered. Usually it’s a handful of people around a table. Maybe it’s five people or three people talking about what people want.
So, we were sitting around the room one day talking about a project in real estate, a retail building. We were talking about what the neighborhood wanted. My brother will say, he wanted to be a like a cool New York, Bohemian restaurant. I thought he was completely off base. I thought you know everybody want a pizza place. So, a neighborhood pizza place. Another guy thought it should be like a fried chicken place of all places. He was completely wrong. I can’t remember exactly how we got there. Basically, it was like, “We’re sitting here debating what people want, why don’t we ask them? Why are we trying to sort of guess at it?”
Crowd sourcing is when you basically put a question or a task to the crowd and say like, “Help us figure this question out,” “Help us do this work.” Wikipedia is a crowdsourced encyclopedia where the crowd is writing the encyclopedia. So, basically we asked people by putting a big sign up on the building – it was a two or three storey sign, huge, black – that said, “What would you build here?” in big letters.
We started a website called Popularise. The website, Popularise, basically let’s you ask the crowd what they want, or some questions. Part of I think what makes it really work is because we ask the question very visually. We post a picture of a space, we post picture of a layout, we post picture of the design, and people respond with pictures. So, if they said they wanted a cheesecake factory, they would post “Cheesecake Factory” rather than just writing text. That’s not very compelling. You can communicate, not to be cliché, but you can communicate a lot more with a picture than you can with words.
That was basically the inspiration. It’s a pretty simple question to ask, “If you want to know what people want, why don’t you ask them?
Enoch: I mean, and you’re basically speaking to your future market. It sounds brilliant.
Ben: I mean…
Enoch: Maybe?
Ben: It’s pretty simple. I would say it’s pretty simple. If you’re going to do a development deal, especially if you’re going to change your neighborhood, any time you’re going to engage with people and affect them, it’s always a good idea to have them part of the process. Because, then, you learn, you get more buy in.
We found lots of large-scale developments: Skanska, Forest City – if you know these companies – [Unintelligible 00:10:12] Simon Property Group. Big, big, big companies wanting to understand what their customer wants. Actually, it’s not just an interceptor survey. It’s not like you’re asking them. They’re part of the process of figuring out the question. That’s very different than like a multiple choice, ABC, or focus group. Focus Group is part of it, but not really in a decision-making process, it’s more like data. This is much more of a partnership, and it’s been pretty successful.
Enoch: For the first project, when you did that first Popularise project where to reach out to the community, was it difficult to get buy in? Was it difficult to put forth their opinions and engage them?
Ben: No. not at all.
Enoch: How did you engage them? Was it just the sign or what other outreach did you do to get [Unintelligible 00:11:05] job there about what you were doing?
Ben: Signage is important because you always want to do offline and online. But, it’s also about blogs, local blogs, local newspaper, maybe the neighborhood newspaper. There’s lots of online: Twitter, Facebook – Facebook’s huge – you have maybe a Listserve. You really, really want to get it in to the community that you want to talk to.
Enoch: Okay. So, say I’m a developer and I want to get my message out there of a product I’m doing. I want to use Popularise. What’s my first step to get that message out there? What would you do as a number one step to start getting the message out?
Ben: Yeah. Usually there are marketing departments, your developer will know who the community’s leaders are, who the biggest voices are, the local blogs. If you don’t know who the local blogs are, who the local, kind of, influencers, then you should go back and do some homework because it’s like most people know that stuff.
You can go to the press. The local press will usually want to cover this story of, kind of, what people want. It’s like inherently what press is about – talking about what people are interested in. That’s what Popularise is about. That’s just to get started. Once you get started, it shares through social media, Facebook, and it self-perpetuates for a while.
Enoch: Sure. Okay. As I mentioned [Unintelligible 00:12:52] I know a bunch of architects who are currently doing developments and are developing themselves. But, then there are a lot of other architects out there that have done just Architecture design for a long time. Then, they get more engaged in the process because they see those properties that are overlooked by the institutional investors, and they want to get in to it.
So, as we were talking, you mentioned that for a person like yourself who has been doing this for ten years or longer, it’s pretty easy for you to eyeball a project when you see it and figure out if it’s going to work financially. Could you walk us through that process of the things, maybe the top three things you look at when you’re evaluating a piece of property thinking about purchasing it?
Ben: Yeah. I would say architects who are thinking about buying a property, going in to the development business themselves, go work for a developer first. I don’t know how many architects I know who’ve really lost a lot of money by thinking Architecture is the key to development. It’s just one piece of it and there are a lot of other pieces. So, you could go find a developer, invest as a partner, maybe a junior partner, invest with them and watch the process, get in to it.
Ultimately the only way we would learn is by doing. It’s better to learn by doing with a partner who has done it before, before you go do it yourself on your own as somebody who don’t have experience yet. Maybe [Unintelligible 00:14:24] but I would definitely say a good way to start.
In terms of real estate, underwriting real estate, the top three is: The first thing is what you just said. It’s all about having a great location and saying, “This is a great location.” If you know the neighborhood, you know what a great location is because it’s maybe between great real estate or it’s on a great transportation infrastructure, whatever it is. Obviously it’s location-based. But, it’s amazing how often people, when you really want to do a deal will sacrifice location in order to get a deal done. That’s a huge mistake.
Enoch: Okay.
Ben: Because a great location will a lot of times solve mistakes that happen, because there are always big mistakes in development.
The second, obviously, is price. Real estate is a value event. If you’re going to buy real estate less than the cost to build it, less than replacement cost… So, if costs you $500 to build a new building and you can buy an old building that exists, and is maybe in decent shape for $300… There should be a lot of value in what you purchase. To get a good price though, it takes a lot of hustle, knocking a lot of doors where somebody decides they want to sell and you know the hidden value. Because maybe as an architect you know there’s extra space in the building where they could design it slightly bigger. You’re buying more than they realize or whatever it is. So, obviously, price is definitely number two.
Usually, I say my number three is really quality entrepreneur – sponsor. The best idea will not succeed if it does not have a good leader. The worse ideas, well, leaders can just make great things happen. But, if you’re the sponsor, you usually think you’re great. Maybe if you really are great you’ll think about all your flaws too and try to manage them.
Those are usually my three: sponsorship, location, and price.
Enoch: Okay, good. When you say “Sponsorship,” what is that? Who is that person?
Ben: It’s the CEO of a real estate company that’s called the sponsor.
Enoch: So, if an architect is looking to get in to development, they would want to partner with a developer and that person would be the sponsor. Is that how it works?
Ben: Yeah. It’s tough. It’s hard. A lot of developers are difficult people. It’s a personality type that, usually, they have very strong point of view. They are taking a lot of risks. So, it could be hard to find a good partner in any space, really. The reason why you want to do that and why you want to have a partner, you want to have to do exactly that – just find somebody to take the lead – because in real estate you almost always have to personally guarantee the debt. You have to, basically, take personal recourse on both the original funding of the debt, completion guarantees, making sure, basically, whatever you say is going to happen actually happens – gets opened – environmental indemnities, Bad Boy guarantees. There’s a lot.
It’s like Mark Zuckerberg not guaranteeing any of the debt. I don’t know if Facebook has debt, but I know issue debt. Tim Cook is not guaranteeing the debt of Apple, right? In real estate, that’s the norm. You don’t want to do that if you know what you’re doing because, man, real estate development always goes wrong. It’s not the norm for things to work out. Maybe later people will pretend that everything worked out, but there’s always things going wrong. So, you want to have really deep pockets, you want to have a lot of expertise. You don’t to take the personal guarantees till you know what you’re doing.
Enoch: Right. You said you’ve said you’ve seen some architects get involved in development. Are there any common mistakes you see people with that kind of background when they start developing?
Ben: Yeah. I mean, it’s tough because everybody is a product of their experience. So, if you’re an architect you’re really trained to think about design, think about the architecture. That’s, obviously, a critical part of development, but it’s only one piece of it. As an architect, especially as you get older, you become a hammer – you’re trained to be an architectural hammer. A lot of times that’s really not the problem. A lot of times it’s about leasability. Can you lease this space? You have to be a great sales person if you’re going to try to lease this space. Design, especially when you’re doing new development, it may be that you’re selling the dream.
So, a typical mistake architects make is overspending on design. I get it. I get why. You see a great design, and you feel like that’s why the product succeeded. It’s definitely the case sometimes, but other times it’s just one piece of it. If you’re an architect is try to figure out, maybe for your first project, how to basically make architecture not matter.
Enoch: Yeah.
Ben:[Don’t 00:20:07] on it. Just try to almost like handicap yourself. If you’re a boxer and you always lead with the left, tie the left hand behind your back and try to work on your right because your right arm’s weak. If you’re left arm’s strong, everyone knows your left arm’s strong, people will know what you’re going to do and it’s going to, basically, be a disadvantage.[/DAP]
