The sharing economy has come to mean many things over the past 6 years of this lagging economy. In some cases it means the splitting of car costs so that two people, otherwise unable to afford a car, could afford one. In the case of Bikeshare it means public investment in reusable transportation which is incrementally paid for by users. In the case of Uber it means a different kind of cab company run by individuals who want to make some money on the side.
Then there is Fundrise which seeks to bring normal investors into the fold of the lucrative world of mixed use and commercial development, projects that often have better returns than even the best stock holdings. It’s not hard to imagine how well this can pay off, considering apartment leasing activity has never been hotter, and even in expensive to build areas the principal pay back period can often sneak in under a decade.
So far the Fundrise company has been successful funding smaller infill projects ranging from hundreds of thousands to a couple million dollars in crowd funding, but could the model scale to higher density construction? We thought we’d take a quick case study to see if it’s possible.
Case Study
An apartment developer seeks to purchase and develop an already zoned parcel with a new 12-story residential building, 210,000 square feet of floor space, and 160 units averaging 900 square feet in rentable space. The rest of the build out will be common space and structural parking. Construction costs are anticipated at $400 per square feet including the land acquisition of 1 acre, for a total cost of $84 million.
The developer will pay for $42 million and retain 50% equity in the project, the remainder will be crowd funded with a $42 million goal.
Return on Investment
With 160 units averaging between a 1br and 2br in size in the DC submarket, one could expect an annual revenue of $4.8 million assuming an average rent of $2500. Costs would be around $1.5 million per year between taxes, maintenance, and operations. Net profit would be $3.3 million per year.
That would mean this project would have a 25 year pay back on principal and an approximate 3% return on investment.
Crowd Funding
In order to be green lit the project needs $42 million. For a project of this scale a minimum investment price of $10,000 would be likely. That is significantly different than most projects on Fundrise but still remains within the realm of possible small investors. If all investments were of the minimum variety it would take 4,200 investors to make this project a go.
Let’s assume that a project of this scale would pull in a few larger investors, say 20, investing $500,000 individually, leaving $32 million to go.
Let’s assume that the remainder of the project were funded by an average smaller investment of $20,000. It would take 1,600 investors of this size, a significant population considering most projects so far are in the hundreds of investors for shares in the $100s of dollars not tens of thousands.
In order to garner this kind of attention, it is likely that the investment would require a high return on investment, which 3% simply does not provide.
Summary
Unfortunately, it seems crowd sourced development funding does have some limitations in terms of larger scale residential projects. Increasing the amount of units via higher density would reduce the impacts of annual operation costs, as well as improving the ratio of common space to rentable space, but increasing the unit count would also increase the overall cost of the project, requiring even more high-end investors for an already difficult to fund project.
While a 25 year principal return would still keep long term apartment managers interested, it is too long for most small investors. For now the concept seems more appropriate for retail applications where the construction cost to revenue returned allows for shorter time frames and higher returns on investment.