IN THE MIDDLE OF THE 2008 RECESSION I. REMEMBER WONDERING HOW ARE THEY GOING TO CLEAN UP THIS MESS. WHO'S GOING TO REFORM THE FINANCIAL SYSTEM THAT'S BROKEN. AND LITTLE DID I KNOW THAT IT WAS ACTUALLY GOING TO BE ALL OF US.
IT WASN'T JUST GOING TO BE FEDERAL POLICY TOP-DOWN. BUT ACTUALLY TECHNOLOGY BOTTOM-UP AND IT'S CALLED. EQUITY CROWDFUNDING AND WHAT IT LETS YOU DO IS INVEST DIRECTLY INTO BUSINESSES AND BUILDINGS IN YOUR CITY AND FUNDAMENTALLY CHANGES THE POWER DYNAMICS OF WHAT GETS BUILT AND WHO BUILT IT.
THE STORY STARTS WITH ME LEAVING A BIG REAL ESTATE DEVELOPMENT COMPANY AND STARTING A SMALL NEIGHBORHOOD DEVELOPMENT COMPANY WITH MY BROTHER.
WE WANTED TO WORK IN THE NEIGHBORHOODS THAT WE LIVED IN RENOVATE VACANT BUILDINGS DOWN THE STREET FROM US OPEN NEW RESTAURANTS AND RETAIL IN NEGLECTED PARTS OF THE CITY, THAT PEOPLE REALLY HADN'T GIVEN MUCH LOVE TO SINCE THE 60'S. AND WE SAW ALL OF OUR FRIENDS MOVING INTO THESE AREAS IT WAS A GENERATIONAL SHIFT OF WHERE PEOPLE WANT TO LIVE AND WE WANTED TO BE PART OF THAT.
WHEN WE WERE BUYING OUR FIRST PROPERTY IN H STREET NORTHEAST WHICH IS LIKE THE BROOKLYN OF WASHINGTON DC, I REMEMBER GOING ACROSS TOWN OR UP TO NEW YORK TO MEET WITH WEALTHY INVESTMENT ADVISORS OR INVESTMENT COMPANIES WHO LOOKED AT ME CROSSWAYS,
WELL I TOLD THEM WHAT WE WERE GOING TO DO AND MORE IMPORTANTLY WHERE WE WERE GOING TO DO IT. MOST OF THEM HAD NEVER BEEN TO H STREET NORTHEAST. SOME OF THEM HAD NEVER HEARD OF IT. AND SO IT FELT VERY LIKE A JUXTAPOSITION RIGHT.
WHY WOULD YOU BE RAISING MONEY FOR PEOPLE WHO DIDN'T CARE ABOUT THIS NEIGHBORHOOD.
AND THE OTHER HAND EVERYBODY IN THE NEIGHBORHOOD WAS VERY EXCITED ABOUT WHAT WE WERE DOING, IT WAS OBVIOUS WHAT WAS HAPPENING TO ANYBODY WHO LIVED THERE AND THE OPPORTUNITY THAT WE SAW THE VISION WE HAD WAS THE VISION EVERYONE ELSE HAD WHO LIVED IN THAT SAME AREA AND SO ON.
ONE HAND YOU HAVE A COMMUNITY A CUSTOMER A RESIDENT WHO'S EXCITED ABOUT WHAT WE WERE DOING.
OTHER HAND YOU HAD SORT OF TYPICAL MONEY SOURCES THAT DIDN'T KNOW WHAT WE WERE TALKING ABOUT.
AND IT MADE US REALIZE THAT MOST PEOPLE DON'T KNOW HOW COMMERCIAL REAL ESTATE OWNED AND FUNDED.
SO LET ME ASK YOU A QUESTION TO PICTURE YOURSELF IN YOUR CITY OR YOUR NEIGHBORHOOD AND THERE'S BUILDINGS ALL AROUND YOU; WHO OWNS YOUR ENVIRONMENT. WHO PROFITS FROM THE PLACES YOU GO TO. WHO BUILDS YOUR CITY. THE SHORT ANSWER, IS: NOT YOU, AND NOT PROBABLY NOT ANYBODY YOU KNOW.
AND THAT'S A STRANGE NOTION. BECAUSE A HUNDRED YEARS AGO EVERYTHING THAT YOU INVESTED IN WAS LOCAL. AND NOW NEARLY NOTHING IS AND LOCAL PEOPLE LOCAL FAMILIES USED TO OWN THE LOCAL REAL ESTATE.
PEOPLE WHO WERE INVESTED IN THE COMMUNITY IS TO BE PART OF THE DECISION. PART OF THE DECISION MAKING OF WHAT GOT BUILT. SO HOW DID THIS HAPPEN WELL INTERESTINGLY MUCH OF IT DATES BACK
TO THE LAST FINANCIAL DEBACLE IN THE LATE 1980S IT'S CALLED THE SAVINGS AND LOAN CRISIS. AND SAVINGS AND LOANS CRISIS WAS THE LARGEST REAL ESTATE FAILURE IN HISTORY.
UNITED STATES AT THAT TIME TOTALING FOUR HUNDRED BILLION DOLLARS IN BAD ASSETS WHICH USED TO BE A LOT OF MONEY SO THE PRIVATE CAPITAL MARKETS HAD DRIED UP AND FINANCIAL INNOVATORS THAT PERIOD FIGURED OUT THAT IF THEY GATHER THE REAL ESTATE INTO POOLS THEY COULD ACCESS PUBLIC MARKETS AND PENSION FUNDS AND THESE POOLS CAME TO BE KNOWN AS PRIVATE EQUITY FUNDS AND REAL ESTATE INVESTMENT TRUSTS AND THE IDEA REALLY WORKED SO IN THE EARLY 90S THERE WERE VERY FEW PRIVATE EQUITY FUNDS OR ANY PUBLIC REAL ESTATE INVESTMENT TRUSTS. AND 20 YEARS LATER THEY OWN AND CONTROL ALMOST A TRILLION DOLLARS IN LOCAL REAL ESTATE
AND PEOPLE WONDER WHO MAKES THE DECISIONS AND HOW THINGS GET WHO PROFITS FROM THEM THE ANSWER IS HERE NOW THERE WERE A LOT OF BENEFITS TO THIS RIGHT THAT A LOT MORE CAPITAL CAME INTO THE REAL ESTATE INDUSTRY BUT THERE ARE A LOT OF UNINTENDED CONSEQUENCES WHEN THE INSTITUTIONAL CAPITAL TOOK OVER THIS INDUSTRY WHAT IT DID WAS IT DISCONNECTED THE PEOPLE WHO LIVE THERE. PEOPLE
WHO ARE THE INVESTORS FROM ACTUALLY WHAT THEY'RE INVESTING IN CREATED A LONG TO APPLY CHAIN OF HOW MONEY FLOWED INTO ASSETS AND IT TURNED REAL ESTATE INTO A COMMODITY LIKE A BOND AS OPPOSED TO A PLACE THAT HAS MEANING.
IT HAS A SENSE OF CONNECTION TO PEOPLE WHO LIVE THERE AND SO THIS SORT OF SETS UP BASICALLY WHAT OUR BIG IDEA WAS DAWNED ON US. YOU KNOW
WHAT IF YOU JUST WENT DIRECT WHAT IF YOU MADE THE PEOPLE WHO ARE EXCITED ABOUT WHAT WE WERE DOING, OUR PARTNER.
AND WE RAISED OUR MONEY FROM THE LOCAL RESIDENTS AND NEIGHBORS
WELL THAT WAS EASIER SAID THAN DONE BECAUSE IN 2010 THE REGULATIONS FROM THE PAST 100 YEARS SAID THAT WASN'T POSSIBLE BASICALLY COULDN'T RAISE MONEY FROM EVERYBODY IN ANYBODY WITHOUT GOING PUBLIC LIKE ON THE NEW YORK STOCK EXCHANGE.
LIKE AN IPO WE WENT TO A LAWYER AFTER LAWYER AFTER LAWYER ASKING THEM HOW DO WE RAISE MONEY FROM EVERYBODY ANYBODY NOT JUST WEALTHY ACCREDITED INVESTORS,
BUT ACTUALLY PEOPLE WHO LIVE IN THE NEIGHBORHOOD, WHO COULD INVEST AS LOW $100 AND PEOPLE TOLD US IS BASICALLY IMPRACTICAL INFEASIBLE IMPOSSIBLE.
FINALLY WE GOT A MEETING WITH ONE OF THE MOST PRESTIGIOUS LAW FIRMS IN THE COUNTRY. THIS FIRM DOES THE WORK FOR MOST OF THE MAJOR TOP INVESTMENT BANKS AND REMEMBER GOING UP TO NEW YORK TO A SKYSCRAPER IN TIMES SQUARE AND WE WENT TO THE TOP OF THE SKYSCRAPERS CONFERENCE ROOM LOOKING OVER NEW YORK HORIZON AND I WAS FEELING VERY POWERFUL AT THAT MOMENT I THINK THAT'S THE INTENTION. SO WE'RE LOOKING OVER THE HORIZON AND I'M TELLING THEM WHAT WE WANT TO DO AND I'M WONDERING HOW THAT HOW DO WE DO IT AND AT THE END OF THE MEETING THERE'S JUST DEAD SILENCE
AND THE GUY SAYS TO ME WHY WOULD YOU WANT TO BOTHER THE LITTLE PEOPLE.
AND I WAS TAKEN ABACK SO I HAD TO RETORT BECAUSE YOU CAN SCREW BY WALL STREET AND HE SAID TO ME WHAT'S YOUR OPINION SO THIS IS THE MIDDLE 2010 RIGHT SO I THOUGHT REALLY IS IT JUST MY OPINION SO SERENDIPITOUSLY
A FEW WEEKS LATER I WAS SITTING WITH A FRIEND WHO WORKED AT THE SECURITIES AND EXCHANGE COMMISSION THE SEC AND I WAS TELLING HIM WHAT WE WANTED TO DO AND HE SAID HEY WHY DIDN'T YOU ASK EARLIER MY FRIEND I KNOW THIS GUY WAS A GURU HE'LL KNOW HE KNOWS EVERYTHING ABOUT THIS TYPE OF STUFF BECAUSE AS POSSIBLE YOU CAN DO IT IF HE SAYS IT'S NOT POSSIBLE YOU CAN AND I THOUGHT A GURU REALLY NOW I FIND OUT.
BUT I GOT NERVOUS AFTER THAT BECAUSE I REALIZED LIKE WHAT IF HE SAID IT WASN'T POSSIBLE SO I GOT A MEETING WITH HIM
WE SAT DOWN AND HE WAS NOT WHAT I EXPECTED HE WAS BIG AND HE WAS WARM HE WAS FRIENDLY AND AFTER TELLING HIM WHAT WE WANTED TO DO HE SAID TO ME
OF COURSE YOU CAN DO THAT I WROTE THOSE REGS IN THE 1990S
SO AWAY WE WENT.
IT STILL WASN'T EASY
BUT NOW THAT YOU HAD A PLAN OF WHAT TO DO IT FELT DIFFERENT WE WERE THE FIRST TIME I GOT THE PHONE WITH SECURITIES REGULATORS AND SAID WE WANTED TO SELL SHARES OF ONE BUILDING ONLINE EVERYBODY AND EVERYBODY AT $100 A UNIT THEY WERE NONPLUSSED BUT THEY WORKED WITH US WE WENT BACK AND FORTH BACK AND FORTH AND FINALLY WE GOT IT CLEARED
TOOK NINE MONTHS AND ULTIMATELY ARE OFFERING WAIT TWELVE POUNDS BUT WE MADE IT HAPPEN. COINCIDENTALLY DURING THAT SAME TIME PERIOD I HAD A BABY THEY WEIGHED 8 POUNDS SO GCVO IT WAS A REAL UNDERTAKING WE COULD PUT IT ON THE INTERNET AND THE FIRST OFFERING RAISED $300,000 175 LOCAL PEOPLE AND THEN WE DID IT AGAIN AND RAISED $350,000 FROM 361 PEOPLE AND THEN WE DID IT AGAIN THE FIRST TIME IT TOOK THREE MONTHS TO RAISE 325 GRAND BY THE THIRD TIME WE HAD THAT MUCH INTEREST IN TWO HOURS AND I THINK THAT'S BECAUSE IT'S INTUITIVE.
IMAGINE IF YOU COULD INVEST DOWN THE STREET FROM WHERE YOU LIVE. AND TRANSFORM A BUILDING A YOU CARE ABOUT AND ACTUALLY SEE YOUR MONEY AT WORK AND OWN SOMETHING TANGIBLE
ONE OF OUR INVESTORS MICAH TOLD ME THAT HE INVESTED $100 AND SHOWED THE BUILDING TO HIS MOM AND DAD THAT'S WHAT I'M TALKING ABOUT
I'M DESCRIBING RIGHT NOW IS THE EXCEPTION IT'S NOT THE NORM BUT SOON IT WILL BE BECAUSE CONGRESS AND THE OBAMA ADMINISTRATION PASSED A BIPARTISAN BILL WHICH IS AMAZING THAT WILL MAKE WHAT WE'RE DOING A LOT FASTER A LOT EASIER IT'S CALLED THE JOBS ACT AND IT'S GOING TO FUNDAMENTALLY TRANSFORM HOW FINANCIAL SECTOR WORKS
IT WILL LET TECHNOLOGY GET AT CAPITAL THE WAY IT GOT AT COMMERCE
AND MEDIA WHAT TWITTER AND BLOGS DID TO NEWSPAPERS AND AMAZON.COM TO DE BORDERS BOOKS
MAYBE CROWDFUNDING CAN DO TO WALL STREET RIGHT NOT JUST AN IDEA TO WE'RE DOING IT ACTUALLY
DOWN THE STREET AND THIS IS A BIG PROJECT THEY HAVE ABOUT A MILLION DOLLARS SOFT CIRCLED IN PORTLAND OREGON NOW AND ALSO IN PHILADELPHIA IT'S AMAZING BECAUSE IF YOU THINK ABOUT IT ALL OF A SUDDEN YOU'RE GOING TO HAVE THIS POWER -
YOU'RE GONNA HAVE THIS POWER VEST IN YOUR NEIGHBORHOOD AND BUILD YOUR OWN CITY AND MY QUESTION TO YOU IS WHAT WILL YOU BUILD ARE YOU GOING TO BUILD A BOOKSTORE OR BAKERY A SKYSCRAPER DAYCARE CENTER MAYBE AFFORDABLE HOUSING
ALL OF A SUDDEN THE DYNAMICS CHANGE IT'S A LOT LIKE WHAT WIKIPEDIA DID TO ENCYCLOPEDIAS IF I SAID TO YOU 10 YEARS AGO THAT PEOPLE WOULD WRITE THEIR OWN ENCYCLOPEDIA THEY'LL BUILD THE LARGEST ENCYCLOPEDIA IN THE HISTORY OF MANKIND AND BASICALLY ELIMINATE CYCLE PDS AS WE KNEW THEM
YOU WOULD'VE SAID I'M CRAZY WELL 10 YEARS FROM NOW PEOPLE WILL BE BUILDING THEIR OWN CITIES THE WAY PEOPLE CROWDSOURCE FUNDAMENTALLY IS GOING TO CHANGE HOW CITIES GET BUILT
MAYOR GIULIANI HAS THIS IDEA THAT HE CREDITS TO HELPING REBUILD INNER CITY IN NEW YORK IN 1990S IT'S CALLED THE BROKEN WINDOWS THEORY AND THE THEORY WENT IF YOU FIX THE BROKEN WINDOWS AND YOU CLEAN UP THE SPRAY-PAINT NEIGHBORHOOD WILL LOOK BETTER SO PEOPLE WOULD TREAT IT BETTER SO
WHAT HAPPENS WHEN PEOPLE OWN THEIR NEIGHBORHOOD OWN THEIR CITY HOW WILL THEY TREAT A VENT WHAT IF PEOPLE COULD BUILD THE CITY THEY WANT TO LIVE IN WHAT WOULD IT FEEL LIKE TO LIVE IN THAT CITY
WELL MY BET IS WE'RE ALL GOING TO FIND OUT THANKS.