Analysis of Small Change
One of the few crowdfunded real estate networks available to non-accredited investors, Small Change supports transit-oriented development that meets sustainability and walkability requirements. Selection is minimal, but small change is worth a look for investors looking for a certain kind of civic effect as much as a return.
Some of the most interesting things to watch as the investment crowdfunding environment grows is the rise of niche platforms based on specific geographies, business segments, or unique styles of investment. Although there are now hundreds of crowdfunding real estate sites, Small Change is carving out a niche by concentrating on supporting initiatives that they believe will transform cities for the better as calculated by the 'Small Change Index' of Mobility, Sustainability and Economic Vitality.
Emphasizing the concepts of modern urban planning and transit-oriented growth, Small Change is working to finance developers with innovative projects in areas that could be underpinned by conventional commercial development (this is a crowdfunding real estate platform that Jane Jacobs would have approved of...).
Investment Forms Small Change Offers
Small Change provides a wide range of residential, industrial and mixed-use developments. Many of the loans are for 1-3 years, but one recent investment had an estimated hold term of 5-10 years, while another was a loan for just 3 months. It is unusual to see such a large variety of initiatives on a smaller forum such as Small Change, but it makes sense considering their particular emphasis – the common theme throughout their initiatives is that new-urban lens promotes mixed-use, walkability, and transit-oriented growth.
Although some investments are available to everyone (via Reg CF), others are limited to approved investors (via Reg D).
What do you get when you're investing with Small Change?
Specifications differ by investment, but in general investors obtain some sort of ownership interest in the LLC, although, as with many crowdfunding investments, specifics can be somewhat byzantine, as Small Change succinctly summarizes in its FAQ - you hold an interest in a limited liability partnership that manages real estate. For other cases, you will have a promissory note that is protected by real estate. For other businesses, you would hold an interest in a limited liability partnership that holds a promissory note backed by real estate.
How Small Change makes money?
Small Change itself does not charge investors any fees, although as in other real estate transactions, there is always profit sharing with the broker of the contract. For example, in one currently open investment, investors receive a pro-rated share of 30% of any income from the selling of the land, with the remainder going to the developer.
Possible Returns and Cashflow
Definitions differ by product, but as with most crowdfunding real estate transactions, there is a recurring cash payment (usually either for rental payments or interest payments) and, in some cases, a share of income (if any) when the property is sold or refinanced. For example, one active investment provides an 8 percent annual preferred return, which is allocated on a quarterly basis, and then a pro-rated share of 30% of the income remaining after investors have earned their original investment, their full desired return, and $20,000 (equal to their initial capital contribution) is paid out to the sponsor. The specifics vary depending on the investment.
Breadth of Small Change Offerings
As expected for a smaller niche site, there are usually only a few investments available at any given time, so if the specific investment doesn't suit your needs, you're on hold until a new one comes along. (Though in fairness, the same situation is becoming more popular even among larger platforms).
While most of the projects were in their native Pittsburgh, Small Change also funded programs in New Orleans, Washington DC and Los Angeles.
Regulatory structure and standards for due diligence
Reg CF investments provided on Small Change are officially provided through the affiliated agency, the "NSSC Funding Portal" which is the SEC-registered Title III Funding Portal. It ensures that they are subject to a number of laws and responsibilities relevant to investor awareness and due diligence. All developers providing Reg CF investment in Small Change must be subject to background checks by key officers and owners, and there are direct ties to the respective SEC filings made by the company. (Though, unlike start-ups or on-going companies, the "company" raising funds for such ventures is always a brand new LLC with little operating background – that said, Small Change does include information of the developer's past projects and experience.)
Prospective investors will have access to an online space to ask the developer questions (and to show responses to previous questions from others).
Small Change also offers other investments through SEC Reg D, which are only available to approved investors. They are sold by a separate related agency and are not exclusively subject to the same due diligence and disclosure provisions as those of the Reg CF. Prospective investors should be sure to consider what kind of deal they are evaluating before investing.
Small Change main features and highlights
- Crowdfunding Platform