A beloved small business can’t keep up with constant rent increases, and its owners need help to either buy the building or find another space they can afford.
A neighborhood resident sees a triple-decker go up for sale on his block and wants to buy it, but doesn’t have the money or the experience of a typical real estate investor.
Rhode Island’s first-ever community investment fund is designed for situations like these. There’s nothing else like it in the country, according to Jessica David, one of the founders.
People who lack access to capital can turn to the fund for loans and equity investments and learn how to invest in real estate, which isn’t a new concept. But the model is unique, because anyone can invest in the fund, even if they don’t meet the typical income and net worth requirements. And investors with lower incomes get a higher percentage of the returns.
Known as the Local Return Diversified Community Investment Fund, it’s been several years in the making and is the brainchild of David and co-founders Josh Daly, Raul Figueroa and Lisa Raiola. All four sit on the board of Local Return, a nonprofit, and have created the Rhode Island Community Investment Cooperative, a public benefit corporation, to manage the fund.
They’re now seeking to raise $3.5 million in their first direct public offering, and they envision making loans and equity investments in sums ranging from $15,000 to $500,000.
The Providence Journal asked David, a former vice president at the Rhode Island Foundation who’s now a consultant and student at Harvard Divinity School, to break down how the concept works.
These were her responses, edited for length and clarity.
Q: Let’s start at the beginning. What does Local Return do, and how did that lead to the creation of this first-of-its-kind investment fund?
A: Local Return is a nonprofit organization founded in 2021 to build community wealth in Rhode Island neighborhoods that have experienced historic, generational disinvestment. These are communities that suffer the worst outcomes when it comes to health outcomes, COVID rates, educational outcomes, incomes and poverty rates.
The two strategies that we focused on from the very beginning were community investment and ownership.
For folks who care about Rhode Island, who want to invest into our communities, there really were not any mechanisms to do so. And when money and investment was flowing in, it was coming from outside the community, and it was very transactional.
So how do you build ownership and control of those resources? How do we use the assets that already exist in communities, and keep building wealth in those places?
We worked with some national advisers, people who are really on the leading edge of community investment, and we decided on this Diversified Community Investment Fund model.
Q: What does that entail?
A: Basically, it’s a way of pooling money from people within the community, including accredited investors, who are the wealthy folks who are used to working within financial markets, and unaccredited investors, who are everyday people who have a stake in our local community and our local economy.
We set up three types of preferred stock. The first is Series A, and that is for those with low incomes. They can invest with a minimum of $500, and when the cooperative declares dividends, they will get 100% of every dividend.
The second series is Series B. That’s for what we’re calling “community members.” I think of it as people like me and my peers. It’s a $2,500 minimum investment, and when dividends are declared, we’ll get 85% of the return.
And then Series C is for folks who are a little bit more well off, more used to this type of investment. It’s a $5,000 minimum for individuals and a $25,000 minimum for institutions, and they will get 70% of every dividend.
We tried to flip the return structure, so the folks who we think are taking the greatest risk will get the greatest return from the fund.
Q: What types of projects are they investing in?
We’ve identified four types of real estate deals we want to invest in, although I also anticipate that might evolve as we go.
One is helping small businesses actually own their real estate. We know that a lot of small business owners invest a ton of money into making their space work for their business, but they don’t own it and they’re not building equity through it. And they’d like to be able to actually own and control that real estate, and build wealth for their business, and commit to their communities.
The second category is what we’re calling early-stage, small-scale real estate developers. These are people who want to maybe buy a triple-decker, or the multifamily house they live in, and become a landlord. That’s how many people build generational wealth, so we’re making that option available to people who otherwise would not have it.
The third category is community infrastructure projects, which tend to be nonprofit-driven. It could be a food hub, a community center.
Then the fourth category would be a shared ownership model, like housing cooperatives, where a group of people own real estate together.
At least 60% of our investment portfolio will be in real estate assets. I think it will actually be well over that, although we do have flexibility with the other 40% if we want to invest in small businesses in other ways.
For example, if we’re investing in real estate projects within a specific community, we might provide working capital to businesses that are located there.
We’re really focused on bringing money where it wouldn’t go otherwise, to things that are considered too risky for traditional financing.
We’re also focused on building capacity and really supporting these potential projects. So, for example, we’re partnering with a group out of Philadelphia called Jumpstart. It’s an education and mentorship model where you actually train people on how to be real estate developers.
Q: How can that model deliver returns for investors?
We anticipate that early on, we’ll be starting with more loans. For example, it could be a loan to help someone acquire a property, and then they’re able to do some minimal renovation, start renting it out, and pay monthly loan payments through the rental income.
Or it could be someone who acquires a property and then ends up selling it to someone else in the neighborhood, and through the sale proceeds, they can pay us back.
Q: Who makes decisions about what projects to invest in?
That’s a really important piece to us. We wanted to keep the decision-making as close to the community that is actually going to be living with the results of the decisions as possible.
So we are forming an investment committee that is made up of people who live in the neighborhoods we’re prioritizing for investment. These are, on the whole, not people who have finance and investment backgrounds. But we’re wrapping a whole series of supports around the group to educate and build capacity.
They will be making recommendations and vetting all of the applications, not just from a typical finance perspective, but how does this particular project fit in this community? What do the neighbors think about it? Does this person have credibility with the residents in the community? How will this be perceived? How will this build assets and ownership and pride within the local neighborhood?
The final decision-making does rest with the board, but we’ll be taking the recommendations of the investment committee very seriously.
One of the other pieces that’s really unique about us is that we’re acting as a cooperative. So everyone who invests in the fund will have a vote, no matter how much money they’re investing, and they will be electing the board of directors and can nominate themselves to be on the board.
We’re trying to keep the ownership and the power local, and we’re trying to keep that money within the boundaries of the state, so that it’s benefiting people here, not just a wealthy few who don’t even live here. So it’s a different approach than what we’re used to.
