After reading my post, the organizers of the City Builder Happy Hour asked me to present my idea for a Neighborhood Real Estate Investment Trust. The following is more or less what I presented on Tuesday night at the happy hour. This market-based approach to “saving” neighborhood buildings was delivered on May Day, not far from the riotous mob of anarchists trashing downtown.
We hear it all the time: “What? That great building with the cool coffee shop just got sold! Damn developers!”
But the truth is that when property changes hands the new owner is making an investment, and an investment is about creating a financial return. Developers aren’t necessarily setting out to destroy existing buildings, but in order to build more housing and make a profit, sometimes they do.
What if all of us pooled our resources to buy real estate and develop it ourselves? Imagine 1200 people in Seattle each contributing $1200 (about the same as buying 1 espresso drink a day for a year) to a Neighborhood Real Estate Investment Trust. That would generate more than a million dollars ($1,440,000) that could be applied to the purchase of that great building with the coffee shop. And if the property is managed well, the funds from operation and increases in equity over time would mean than initial $1000 investment would gradually produce a return, money that could be put back into buying more iconic properties.
In the United States, a Real Estate Investment Trust, or REIT, is a company that owns, and in most cases operates, income-producing real estate. To be a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
What distinguishes REITs is that they have transferable shares. An investor can by a sliver of a project in the form of a share, get a return from dividends paid from increases in equity or profitable operations, and sell the share later at a profit to another investor.
The beauty of a Neighborhood REIT is that it is market-based preservation that would get neighborhoods into the development game. As property owners, average Seattle residents could decide not to build out the site, but keep the building just like it is. But they’d still have to manage it, collecting rents, making repairs, and taking care of overall maintenance. They could choose not to maximize profits, but focus on maintaining use and the existing structure.
There is an example of this in Great Britain called the Ethical Property Company; they buy properties, sell shares, and keep older buildings in use renting them to non-profits and community based groups.
A Neighborhood REIT could allow everyone to invest in dense, walkable, livable, transit oriented communities so we could get all those benefits plus some of the financial ones as well.
Is it financially feasible for an REIT to be used to redevelop the property while, instead of awarding particularly large dividends to its shareholders, directing excess revenue towards ensuring a smooth transition for existing small businesses? I imagine that redeveloping the property but making special considerations to ensure that businesses like Bauhaus stay there could be used as political leverage for more density… could develop into a type of retail-focused incentivized zoning
I would imagine a neighborhood REIT would be able to do whatever they wanted with the property – they would own it. You’d put together a board to make decisions, and probably let your members vote on any large changes in strategy, but you could certainly buy the building, finance a new one, and work with the current owners to make sure they’re happy with the new design.
If the prospectus (or equivalent) says that the fund’s mission is to preserve small-scale businesses (or whatever the wording is), then it can and must do that. That’s how environmentalist, socially-conscious, and Islamic-no-interest stocks work.
A REIT only has to return 90% of its taxable income — which is of course net of all legitimate operating expenses, interest, taxes and depreciation. If a preservation REIT wanted to support the existing businesses it would just keep rents low enough to break even or perhaps even “lose” a portion of the depreciation write-off.
I would love the input of someone with more knowledge of these things, but this looks like it might violate the securities laws by the way that it raises money. There are limitations on how many people you can collect money from without registering with the SEC – unless this is something that could be done under Washington securities laws?
Otherwise, I love the idea!
REITs, like 501(c)(3)’s, get special tax status at a cost of needing to follow strict rules about what they can and cannot do. Foot faults by REITs cause an enormous tax bill and loss of REIT status.
Given that, administrative costs for a public REIT are quite high and would instantly eat through that $1M raised. You could set up a national company to make investments like this (say a TOD neighborhood REIT)and get a similar result.
Very good point.
Administrative overhead on a lot of legal structures has been set up to enable the very wealthy, who can afford the fixed cost of overhead, to pull off all kinds of shenanigans, while the less wealthy, for whom the fixed cost is large, cannot.
I sometimes consider this part of the “full employment program for accountants” which Congress and many state governments seem to be intent on creating with tax law.
“But the truth is that when property changes hands the new owner is making an investment, and an investment is about creating a financial return.”
Not even close, Roger.
Usually when property changes hands in this region it is because an individual or a family wants to live in a particular neighborhood. More specifically, a buyer chooses a lot for the existing residence, or because of the lot’s location so they can rebuild to live there. The primary additional feature buyers focus on are the neighborhood’s existing zoning, and how close highly-valued public and private amenities are.
It’s only the quick-buck artists — the churn and burn developers — who buy properties to “create a financial return”.
Why individuals invest is property is fairly different than why businesses invest in property. There is a difference between buying to live and buying as an investment.
Thanks for that observation, Capt. Obvious.
The point here is once you add a rail station into a neighborhood you create a incentives clash between current residents (who purchased there for one set of reasons) and the developers who want to buy lots to raze existing structures and build as cheaply as possible to max out the lots’ three-dimensional “envelope” allowed under the regs.
You’re welcome. Please stick to one alias.
Have you heard of “commercial properties”, “Whelp”? Your analysis does not apply to the “cool coffee shop” described above, which was there to “create a financial return” already….
I just posted here and suggest that Roger do a real world model to see if the $1,440,000 would purchase the Melrose Building.
Seer
http://citycomfortsblog.typepad.com/cities/2012/05/we-love-our-neighborhood-so-much-we-bought-it.html
Buildings are extremely expensive. There’s a reason most of them are, basically, owned by banks (mortgaged).
Very few people can actually afford to buy a building, and most of those can only afford to buy a very tiny one. Even if you pool a lot of people’s money together, you’re still going to have trouble actually getting enough together to buy a large building, unless you’ve got some very rich people in the pool.
While conceptually appealing, this scheme would violate both federal and state securities laws — at least until the “crowdfunding” regulations make their way through the SEC sometime later this year (at the soonest). Until then, it’s just a dream.
Do you have any ideas for how to structure this so it wouldn’t?
Limited Liability Partnership? Co-op? (I’m not sure what WA’s co-op laws are). There’s lots of different possible legal structures.
Or, hell, while thinking outside the box, we could have this thing where all the local people elect a board which decides what to do with the property, and the property is “owned” by this board, and we could call the board a “government”….
;-) in case that wasn’t clear.
LION in Port Townsend does something like this. Ask them how to set up a purchase entity that is crowdsourced.
Cool idea but would it actually tend towards increasing density or protecting what’s there?
Nah, it is a kind of SWPL effort. We love density until it hits our “oh-so-hip” coffeehouse.
The issue is not density. Nobody is objecting to building apartments above the coffeehouse. The issue is about preserving the coffeehouse in the same location or nearby, and that requires some kind of rent concession or something. The Bauhaus is the only coffeeshop in the few blocks around it: it defines the neighborhood and is famous. Even the developers realize that eliminating quirky shops destroys one of the marketing appeals of the neighborhood; they have to be careful to avoid killing the goose that lays the golden eggs. The Bauhouse could survive in a nearby location, maybe. The Last Exit lost its mojo when it moved from Brooklyn & 40th, and disappeared a few years later. Bimbo’s and the Bus Stop survive in new locations but I don’t know whether they’re as popular. The Cha-Cha and Kincora are gone: maybe not a fundamental loss in themselves, but it would be a bigger loss if the Bauhaus disappeared too.
A few people want to preserve the one-story building, but I don’t think it’s anything special and it’s a space-waster. In any case, the new building could incorporate or replicate the facade on the first floor.
That’s an interesting question. On one hand, neighborhoods would have almost absolute power to save low-rise buildings they love. On the other, maybe this would change politics so that there are fewer roadblocks to tear down lowrise buildings most people don’t care much about.
Yes, what if 50% wanted low density and 50% high density. Then what?
Wouldn’t this just remove the argument one level?
What if half the people want low density, and the other half want high density?
Nevermind…what KevinR said above.
“Wanting” isn’t good enough under this system. You’d need to put your money where your mouth is. Don’t want a big building next to you, even though the site is zoned for it? Get together with your neighbors and buy it, and keep it the way it is.
The problem with that idea is quite simply that you end up with “one dollar one vote” control. Which, honestly, sometimes seems to be what we already have in the US, so I suppose it doesn’t make things anything worse. But we used to have this “one person one vote” idea…
…I’m very fond of co-ops as a governance structure.
The high density folks can live on the upper floors
This entire thing is free-market apologist horseshit, Roger.
The whole point of preservationism is that it recognizes the intangible value of a historic structure or use. It deems the maintenance of a scarce resource — and nothing is scarcer in Seattle than real urban placemaking — worthwhile enough to balance it against competing desires for growth, for property rights, and for profit.
Your proposal would eradicate that balance, and reinforce the primacy of discrete-dollar value of all things. It also won’t work — $1,440,000 wouldn’t buy you the facade of the Melrose Building, never mind the whole block. And even if you were to raise the many more millions at which the combined historic properties are likely assessed, any deep-pocketed developed would simply raise its bid.
Cities make value judgments all the time that infringe upon free-market purity and affect the physical forms that evolve within them. They demand parking or they prohibit it. They require setbacks or they require window frontage. The subsidize street parking or they build good transit. They set fire codes.
Preservationism is no more intrusive than any of these. And cities with strong preservationist instincts — forged in times of threats to their heritage or as a response to actual acute losses are infinitely (if intangibly) wealthier for it.
I wonder what you think of my idea, which I floated a while back, to replace the “building as of right” and “zoning” concept with a straight-up system of permissions, having to go through an elected board, for all building. The idea would be that it would actually be easier to change things because you’re not asking for something special (a “zoning variance”) — everyone has to ask permission — but that it would still be just as hard to do really unpopular things (because the board would worry about being thrown out).
We already have local government comprehensive plans and all that; having the primary question be “does this particular scheme conform with our plan and do people like it?” might be more transparent, politically, than all this wittering about zoning and height limits and setbacks and minimum requirements and maximum requirements and so on.
Metro has to get permission from the King County Council for both ordinary and extraordinary things, and what happens is that *none* of them get approved.
Fundamentally, I don’t see why my right to stop you from building something should take precedence over your right to build. In special cases (such as historical preservation or public safety), sure. But if you own the land, why should you need someone’s permission to use it?
Well, what is land ownership but a license from the government anyway?
Ithaca, NY lost three of the most historic buildings in town to build a PARKING GARAGE back in the 50s. The preservationist movement got into such high gear after that atrocity that it went into overdrive, preserving rotting wooden buildings with bad foundations and little visual or artistic merit. (In the meantime, new modern buildings went in in places where no buildings should have been built: floodplains, farms, etc.) I think some balance has slowly been restored over the years.
There’s a tendency to swing back and forth to extremes and to always be fighting the last battle. My conservative instincts desire something smoother and less disruptive, but I don’t really see how to change the political environment; Ithaca’s actually far better than average in terms of having smart politicians who can think long term, and yet it happens here too.
I think it’s a great idea. Even if the city changes their rules regarding zoning and preservation, there will still be buildings that fall through the gaps.
The SEC has 270 days from its April 5 enactment to make the rules for the crowdfunding portion of the Jumpstart Our Business Startups Act. It will probably take longer for Roger to get this off the ground, so he might as well keep at it. Talking to the folks at LION in Port Townsend would probably be a good place to start.
Well despite the fact that neighborhood REIT would just stick to only repair and collecting the rent. However, the major pro of this investment could be the worth of that building or property. That would surely be consider as a long term investment and obviously a significant amount of return.
It’s called a land trust. Homestead Community Land Trust (a private, non-profit) does it for low-income housing. Presumably another one could be set up for small-business-incubator retail under the guise of “economic development.”
The reason there are not more of these is because buying a building or the land under it is very expensive. It’s easier for the city to do the cheap thing: Use the blunt force of law in the form of TERRIBLE zoning or preservation acts to demand that the property do this or that. Meanwhile no actual money to pay for any of it leaves the building functional or physically obsolete or otherwise distorts the market.
What about a more formal system of local improvement districts? If a LID can pay for the South Lake Union Streetcar, could one pay for other neighborhood improvements or preservation? Imagine if every neighborhood (after first voting to authorize a LID) got to vote every 2-3 years to decide what to do with their LID funds. Maybe Lake City votes for more sidewalks (infrastructure). Capitol Hill votes to buy and preserve the Bauhaus building (preservation). Downtown votes to add more police patrols (public safety). It’s hyper local control for those neighborhoods that want it! (Just be sure that it’s small amounts of play money for the neighborhoods and not a replacement for the general fund.)
Before I left Seattle I wanted to explore the idea of non-profit preservation land trusts or LIDs. Maybe even try to start one. Now I’m in NYC, just trying to make a quick buck so that when I return I can just be the guy buying the Bauhaus building outright and doing whatever the eff I see fit. NYC breeds cynicism.
More information on Homestead here: http://www.homesteadclt.org/about-homestead/community-land-trusts