New impact funds in Boston are giving minority communities a chance to invest in real estate and economic development, after being shut out of many opportunities available to wealthy individuals under federal securities laws.
Real estate development is a risky and potentially lucrative wealth-building opportunity, but not all potential investors need apply.
Since 1982, SEC rules have set high thresholds for investing in non-public offerings such as real estate private equity funds. They currently disqualify most people with net worth under $1 million or annual income below $200,000.
Facing these high barriers to entry, some local organizations have launched impact investment vehicles designed to share the wealth. The funds invest in small businesses and real estate with minimum investments as low as $50 and a mission to support underrepresented communities.
“We ended up designing a fund that was pretty accessible,” said Nia Evans, executive director of the Boston Ujima Project. “And we set aside a pool for the types of investors we wanted to participate, so that they wouldn’t get crowded out.”
Ways Around Investor Requirements
Launched in 2018 with a $5 million target, the Ujima Fund is an example of a growing community-based investment model. Decisions on investments are determined through votes of members, including Boston residents who pay $25 for dues but don’t overwise invest in the fund.
As a debt fund run by a public charity, Boston-based Center for Economic Democracy, the Ujima Fund is exempt from the SEC’s accredited investor income and net worth requirements. And unlike a private equity fund, investors don’t have an ownership stake or participate in profit-sharing. Instead, they buy debt securities with terms ranging from three to seven years.
And unlike a typical debt security, the highest returns are targeted for the notes with the shortest terms. “Kujichagulia” notes, named after a Swahili word for self-determination, are offered for three-year terms at 3 percent interest.
By contrast, the Ujima Fund’s Nia notes, with a $5,000 minimum and seven-year term, promise a more modest 1.5 percent return.
“We reversed the relationship between how much one puts in, and how much one gets out,” Evans said. “That was to acknowledge historical exclusion from these opportunities.”
So far, the Ujima fund hasn’t made any direct real estate investments. But it’s in discussions with local community development organizations and community land trusts about potential deals, Evans said.
Other investment segments identified by the fund include microfinance, working and growth capital for businesses and seed financing for community infrastructure. In early February, members approved a $200,000 loan to Kush Groove Clothing, a cannabis-themed apparel company from Mission Hill.
Another charitable debt fund, Boston Impact Initiative’s Fund II, casts a wider geographic net for investments in businesses and real estate throughout New England. The fund has raised nearly $4 million toward a $20 million target, CEO Betty Francisco said.
The fund recently invested in the East Boston Mixed-Income Neighborhood Trust, which acquired a 36-building portfolio of apartment buildings in October for $47 million to prevent displacement. It’s also seeking to invest in other community-owned real estate ventures, including commercial real estate cooperatives by business owners seeking to acquire their own building.
BII Fund II’s minimum investment of $1,000 is geared toward non-accredited investors with a five-year term and 5 percent interest rate.
Two other categories of notes with minimum $10,000 investments have a 10-year term, designed to match the investment cycle of a real estate acquisition.
Barriers to Investment Lowered
The low investment minimums and lack of income qualification limits offer an alternative to some of the big-ticket developments with minority investment partners, such as the 22 Drydock Ave. and Seaport Circle life science projects in Boston’s Seaport District.
“More and more developers are starting to create diversity plans, but the entry point is still pretty high,” Francisco said. “If you’re going to have a lot of retail investors, a developer has to want to have that.”
Related Beal and Kavanagh Advisory Group are seeking approval for a 319,000-square-foot life science project at 20 and 22 Drydock Ave., while Lincoln Property Co. has targeted a 2023 groundbreaking for its 650,000-square-foot Seaport Circle lab project at Massport’s 601 Congress St.
Both developers are partnering with the Boston Real Estate Inclusion Fund, led by entrepreneur Darryl Settles and developers Richard Taylor and Kirk Sykes. The fund is targeting racially diverse and female investors with minimum investments of $50,000.
The minority ownership component was part of diversity plans submitted by the developers to Massport and the Economic Development Industrial Corp. of Boston, which used them to evaluate proposals for the publicly-owned parcels.
Balancing Fairness and Consumer Protection
SEC accredited investor rules limit private securities offerings to “sophisticated investors,” reflecting the investments’ potentially higher risk.
The SEC most recently amended its accredited investor rules in 2020, but the changes have not had a major effect upon expanding wealth-building opportunities for minority communities, said Carl Valenstein, an attorney at Morgan Lewis who advised the Ujima Project and Boston Impact Initiative on their fund organization.
That leaves alternatives such as charitable debt funds, and emerging models such as neighborhood real estate investment trusts. Also known as investment trusts or cooperatives, they enable residents to buy equity shares in a project. The structure is modeled on a conventional REIT, but focuses on local acquisitions and non-accredited investors.
In Los Angeles’ Echo Park neighborhood, a neighborhood REIT recently acquired an 84-unit portfolio of rent-stabilized properties after selling shares to local residents.
The rationale for continuing to exclude lower-income investors from private equity has prompted critiques from across the political spectrum.
Steve Adams
After the SEC filed notice of potential changes to the accredited investor definition, a Congressional subcommittee in February heard testimony that the rules serve as a barrier to minority wealth-building.
Non-accredited investors were barred from $2.3 trillion in private offerings in the year ending June 30, nearly 10 times the amount raised by IPO’s in the same period, noted Jennifer Schulp, director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives.
John Hunt, a partner at Sullivan & Worcester LLP, said the illiquid nature of many private placements makes them unsuitable for some lower-income investors.
“One of the reasons they want to narrow who can invest is that people who don’t have as much wealth also sometimes have different needs for access to their cash,” Hunt said. “With a private equity fund, once you’re invested, you’re not seeing that money for six or 10 years.”
