211 Jonathan Tate, Architect Developer
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The Investor Acquisition System
From Architect to Developer
Jonathan Tate runs a small architectural practice in New Orleans, Louisiana that prides itself on its experimental approach and its contemporary aesthetic. He has been practicing for 20 years now and has always been interested in housing and so that has been the undercurrent of his practice. He focuses on residential projects across the spectrum whether it is private clients or for a single family house or a multi-family project for affordable housing, and integrates his designs while keep an eye on urban scale issues and urban environments.
The last thing Jonathan ever imagined himself to be was as a developer. He often saw friction between what development and architectural agendas. The first thing that gets compromised often in that process is the architectural agenda and he enjoys the challenge of trying to exercise an architectural agenda while also addressing the developer's imperatives. This approach afforded him an appreciation from the consulting side of things of what the pressures were and what the general parameters are around development.
Affordable Housing Market Gap
Two to three years before embarking on the first regulation crowd fund deal on the SmallChange website, Jonathan found himself increasingly aware of the conundrum of housing in New Orleans. He saw an increase in housing prices and a sort of inversion that created the consequence where people were, and are continuing to get pushed out to the periphery as the cost of housing in the city and adjacent to downtown was getting exorbitantly expensive. Historic parts of New Orleans are simply unattainable at any decent price point. Jonathan saw that nobody was addressing this problem, certainly the cost aspect of housing, but also with by taking a closer look at the type of housing that was available. Mostly what he was seeing was renovations of existing housing stock or, if new, then simply a recreation of existing housing stock by manufacturing new homes to look old. Nobody was really offering sort of middle market custom design or contemporary design housing.
Jonathan saw a gap and that is where it started. In fact, it was by paying attention to gaps in the landscape of New Orleans that the process of finding lots began in earnest.
Developable lots were either priced way out of affordability range and drove the desire to provide housing to potential buyers that was affordable by design. The search for workable lots became largely a land play but cheap land in areas of the city that were desirable were hard to find. What Jonathan noticed, however, was an abundance of parcels of land in the city that most people would not identify as being buildable. These nonconforming or small lots or odd lots were being overlooked because most of the folk that were developing housing in the single-family infill space were not interested in them at least initially because they have models for design and aesthetics that do not fit. Jonathan tasked his team with research to locate all this property in the city in areas of the city that they felt that they wanted to engage in. And then they filtered this list to find the sites that they specifically thought would work for their purposes.
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Their target market for end user was housing catering to first time and last time homebuyers in the middle market price range. In other words, not deeply affordable but not high-end market housing that offered entry opportunities into historic neighborhoods. These areas were otherwise quickly closing up due to the escalation of housing costs in that kind of inner city areas. To put that into perspective, a standard housing lot in the neighborhoods that Jonathan was interested in could be $300,000. The cost of the nonconforming lots, on the other hand, averaged between $30,000 and $50,000 a lot which, of course, has a significant impact on the cost of the finished home.
The approach was successful, and Jonathan now has either under development or in construction or constructed some 17 houses that are part of the starter home strategy. The two houses that were crowdfunded are two that belong to this whole index of housing in the portfolio.
There has been one notable exception to the spec home formula that Jonathan’s firm generally engages in. They designed one home specifically for an individual. It was a self-built home i.e. the client built the home himself. The home was designed for a small lot and was designed specifically so the client could understand how to build it on their own. The home stands out because it is the smallest permitted house in the city of New Orleans. It is only around 192 square feet in size, and, although you could squeeze another square foot or two out of it, it is basically the smallest house that code will allow in the City of New Orleans – and at a cost of around $100 per foot probably the least expensive house in the city also.
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For the most part, the homes that Jonathan builds under the Starter Home banner are not designed for any one particular individual; they are truly spec housing and the process of developing this direction for the firm was just getting off the ground (or into the ground) at roughly the same time Eve had engaged them about to work with her and SmallChange. At around that time, the city of New Orleans was auctioning off a number of their abandoned and vacant properties throughout the city, and in that mix, as it turned out, was a number of nonconforming lots. NPR ran some coverage on Jonathan’s nonconforming lot Starter Home concept so while people were buying these odd shaped lots at auction, his firm was getting some press coverage. The phone started ringing from people who just bought these funny little lots and did not know what to do with them.
The SmallChange project is actually two parcels that are being developed into two individual houses right next to one another. The lots are about 1,200 to 1,300 square feet apiece so though not so small but they are not enormous either, and definitely not a standard lot. The homes that are being built on these lots are just a hair over fifteen hundred square feet each, two floors, with one parking space each.
Eve was aware of the work that Jonathan was doing and met with him during a visit to New Orleans for a conference. Jonathan became fascinated with the mechanism of financing his projects in this novel crowdfunding way because it embodied the spirit of investigating creative possibilities in everything he was doing through his work. It presented a fascinating possibility and they tracked the opening up of Regulation CF in May of 2016.
The Reg CF Process – Developer’s Perspective
The first thing that needs to be compiled is a package explaining the project that you can present to the world basically. In many respects it is no different than a package you might put together and walk to a bank and say, ‘here let me tell you about our project and why you should invest in it.’ The developer needs to be able to tell a story about your project, why it makes financial sense, and needs to be able to talk about him/herself and what their qualifications are for doing the deal.
The first person that needs to be sold on the project at the funding portal, because you want them interested in you, and, of course, as Jonathan used the SmallChange funding portal, that person was Eve Picker. Once that hurdle is cleared, there is a background check that covers regulatory requirements, but a lot of the vetting actually comes through conversations and mechanisms that the portal has in place that says OK I need to get to know these people and know something about them. Because the funding portal is so heavily regulated, there is an imperative to be able to trust the developer, know who it is, and understand exactly what they are trying to accomplish.
It is the developer’s responsibility to pull the material together that explains the project in all aspects, and it needs to be distilled in some way so that people can understand it in plain English. There are a series of forms to fill out that are required by the Act and the developer generally needs guidance in completing, submitting and uploading these, including Form C, to the Securities and Exchange Commission, the SEC. Together with SmallChange, Jonathan found himself completing the first Regulation CF offering completed on the platform, so they approached it as a process for which kinks would need to be ironed out. Naturally along the way they were feeling around in the dark in a few places but were able to get through and consequently, the next time around, no matter who that is, the process will be a lot easier.
Smallchange has a network of investors that they have developed over the last few years; people who have signed up to newsletters and who get announcements about new opportunities. It is a pool of people that the portal can immediately send information for any of the offerings. For the most part, Jonathan relied upon SmallChange’s network but they did put a sign out on the site to let people know that there was an opportunity to engage in funding, and they conducted personal outreach and alerted people to the project and the process.
In total it was a three month raise. The first month when it came out, there was a lot of activity with potential investors immediately, and they had a good burst of folks that jumped on board right away. The majority of these came from Eve's network. In total it was a $95,000 raise, with a minimum of $40,000 which was hit really quickly, perhaps in that first month. Then the next month was fairly quiet and dormant. Actually, during this middle period there was not a whole lot of activity and people were investing but it was not the kind of quick pop that the saw at the beginning. And then the third month was really active where they closed the gap on the funding and and made it all the way to the ultimate $95,000 goal. This final push was largely thanks to an aggressive marketing campaign from SmallChange.
Having a large social media following would likely have helped Jonathan with his raise. If you already have an embedded audience associated with you that you can reach out to then that is probably the best platform you could have starting out with. For sure there are certainly people familiar with his work but it is not like he sends out e-mail blasts to thousands of people every month. If you do, this could be helpful in conducting a Regulation CF raise.
Jonathan has an investor that he works with all the time and with which he really enjoys working, but the opportunity to pursue the crowd funding option was one that allowed him to broaden what he was doing. Furthermore, his own investor network is limited and frankly is not a big pool of investors or friends and family that are willing to give money to him and yet from the SmallChange raise he was able to find an additional 38 investors with whom he can now work.
Smallchange itself is essentially a host to an offering and that is it. When the offering is done they close up and then it is up to the developer to manage the rest of it. The Starter Home investors come from all across the country, with concentrations on the coast and as far out as Australia. There are only three people from New Orleans that participated in the offer.
What Jonathan found most captivating about raising money through SmallChange and Regulation Crowd Funding was watching the process evolve and seeing how people found it and decided to participate. He actually had an investor that was ready and actually had been keen to invest the entire $95,000. He was the person who helped with the first Starter Home project and was interested in anything else Jonathan was doing. He thought Jonathan was crazy to be raising only $95,000 through the crowd funding process rather than just taking a single check from him.
But for Jonathan, the process has not been burdensome at all, and in fact he says that it has been quite pleasurable and intriguing and worth a lot beyond just the capital raise because of some really incredible conversations that have resulted. He feels comfortable recommending Regulation Crowd Funding and SmallChange to people who might be interested in it. What he particularly likes about it is that it raises awareness of his work in and around different scales of communities. If you are doing socially minded or urbanistically minded projects, whatever you name it, if there is an agenda around your work then crowd funding is a great platform for people to both to see your work and to be able to contribute and help support it.
WHITE BOARD WORKSHOP
The Investor Acquisition System