About eight months ago, I wrote about the underlying forces that determine what retail businesses go into which locations. I also noted a couple of unconventional approaches to tenant selection, including a Washington, D.C. development team that was polling the neighborhood for tenant ideas. I was intrigued by the unconventional approach, but dubious about whether it would yield helpful results.
I was wrong. Through their neighborhood interaction, Dan and Ben Miller identified a potential tenant who will move to the Millers’ building, expanding a successful business that is now located a block away. And the neighborhood seems very happy with the result.
Of even greater potential importance, it seems that neighborhood involvement in tenant selection wasn’t the only cutting-edge task in which the brothers were engaged. In an Atlantic Cities article by Emily Badger, she describes how the Millers decided to seek investment from their neighbors rather than going to traditional lenders.
It turns out that securing neighborhood investment is difficult option. For generally good reasons, the Securities and Exchange Commission (SEC) limits investment in real estate deals to people who have established their expertise in real estate or to people who have a first-hand familiarity with the developers. The prohibitions prevent unsophisticated developers from being bilked by unscrupulous developers. But they also prevent unconventional ideas such as neighborhood investment.
The Millers choose to search for ways around the prohibition. It was a memorable adventure that included a Goldman-Sachs attorney asking, in response to the Millers saying that they wanted to seek investment from the small folks, "Why would you want to do that?"
Eventually, the Millers found a little-used provision that allowed non-accredited investors to buy into a real estate project. But the trade-off was an extensive and costly review by the SEC. It was a route that the Millers took and eventually completed.
The article by Badger is long, but worth the read, especially if you have an interest in how money affects the development of our communities.
In past blog posts, I’ve noted that decisions affecting communities are disproportionately in the hands of lenders who have little stake in the communities and whose decisions are based almost exclusively on financial return-on-investment. What the Miller brothers have done is to shine a light on an alternative course, one that would allow more of us to help direct the key decisions in our towns.
However, as noted by Badger, the mere fact that the Millers found a path doesn’t open up that path to others. There are at least two major tripping points. For one, the Millers probably spent more getting the neighborhood investment option approved than they can possibly recapture from the value of the neighborhood dollars. It would have been cheaper and easier to secure the funds from conventional lenders and to put a more conventional business into the vacant space. The Millers pursued neighborhood investment not because it was a financially prudent thing to do, but because they wanted to prove that it could be done.
Another tripping point is that the Millers seem to be particularly benevolent investors. If a path to easier approval for neighbor investment can be found, it would likely soon be used by developers without the altruism of the Millers who will do exactly as the SEC fears, scam unsophisticated investors.
I’m thrilled by what the Millers managed to accomplish. But it’s only one feeble shot in the effort to take community investment away from those who do not understand our communities as well as we do.
Follow-Ups and Schedule Notes
StrongTowns: In an outstanding example of serendipity, only a short time after publishing my post on StrongTowns, a pair of links (1 and 2) appeared in an email. They are interviews by Ken Rose of Chuck Marohn, the founder of StrongTowns. Being consumed by pre-Thanksgiving writing tasks, I haven’t yet finished both. (I lack the teenage ability to write with one part of my brain while listening with another. Actually, I suspect that teenagers lack it also, but they’re better at pretending.) As far as I’ve listened, the interviews are great and I recommend them highly.
Petaluma Urban Chat: The next Petaluma Urban Chat will be Tuesday, December 11, 5:30pm at Aqus Café. I wrote the date incorrectly in a couple of places, but have now confirmed and reconfirmed that December 11 is correct. At this meeting, we’ll begin discussing the StrongTowns Curbside Chat booklet that can be found here .
As always, your questions or comments will be appreciated. Please comment below or email me. And thanks for reading. - Dave Alden (firstname.lastname@example.org)
Dave Alden is a Registered Civil Engineer. He has worked on energy and land-use projects in California, Oregon, and Washington. He was also the president of a minor league baseball team for two seasons. He lives on the west side of Petaluma with his wife and three dogs. The blog that he writes can be found at http://northbaydesignkit.blogspot.com. He can also be followed on Facebook, LinkedIn, and Twitter.