Do you ever drive by one of the dozens of buildings going up in Portland and think, man, I wish I owned a slice of that masonry pie? Well, now you can.
“Hi, I’m Kevin Cavenaugh, and I have an exciting business proposition for you,” says the mustachioed Cavenaugh, sitting at a desk in front of a brick wall in a YouTube video. “See, we’re building a building — it’s going to be very cool — and you can be a part of it.”
As the camera zooms out, what looks like Cavenaugh’s office turns out to be a movie set in the middle of a construction site at the east-side base of the Burnside Bridge. “Welcome to the Fair-Haired Dumbbell,” he says, as a passing construction worker asks, “Fair-Haired what?”
The quirky, tongue-in-cheek video is trademark Cavenaugh. His company Guerilla Development creates buildings that sparkle with Portland-style whimsy, from the paintings that hang between the windows on the Burnside Rocket to the eye-popping optics built into the lenticular siding on the Zipper on Northeast Sandy Boulevard.
But the Fair-Haired Dumbbell stands to outshine them all. It’s actually two buildings connected by sky bridges (thus the name) that’s attracted lovers and haters for the decorative gift-wrap pattern that adorned its renderings — a pattern that’s restrained compared to the final psychedelic, abstract painting by the internationally renowned artist James Jean for which Guerilla just won approval from the Portland Design Commission.
The design, inspired by roses and thundereggs, is not the only thing that makes the Dumbbell stand out in the middle of one of Portland’s biggest real estate booms, though. It also happens to be the first project in Oregon and one of the first buildings in the country to raise money via new crowdfunding regulations approved by Congress.
Now, in the era of Kickstarter, crowd-funding a building might not seem so special. The difference is that current crowdfunding sites don't actually offer investments — you don't get equity in that super cool watermelon cozy you funded — they simply offer rewards.
"It's not a donation, it's not Kickstarter—you don't get a mug," says Cavenaugh. "You get a tiny sliver of ownership in the actual building."
That means that, over the course of three to five years, investors will earn an 8 percent annualized return on their $3,000–250,000 investment, like a certificate of deposit at the bank.
Until recently, this sort of crowdfunding to the non-wealthy was difficult. Federal regulations forbid companies from advertising to the public (so no Facebook campaigns) and made it difficult to access unaccredited investors — that is, people worth less than $1 million.
“These are the deals that typically take place on the 17th fairway of a country club golf course,” says Cavenaugh.
But things began to change in 2012 when Congress passed the Jumpstart Our Business Start-Ups Act (JOBS) to make it easier for smaller businesses to go public or raise private capital, by upping the amount they can raise under equity offerings and making crowdfunding equity and online solicitation a possibility. However, it's a big complicated bill that has rolled out in phases — the widest crowdfunding path only went into effect May this year — so only 76 businesses and entrepreneurs have so far successfully filed offerings under its rules.
"I would definitely say Kevin is an innovator — he is groundbreaking, no pun intended, in what he did," says Tore Steen, the CEO of CrowdStreet, a Portland-based real estate crowdfunding company, adding that neither CrowdStreet nor any of the other handful of major real estate crowdfunding companies currently work with unaccredited investors because of the expensive regulatory hurdles that exist to protect individuals of lesser means.
It cost Guerilla Development several months and hundreds of thousands of dollars, says Cavenaugh, to be able to include “teachers, librarians and mechanics” in their investor pool. Even then, it’s only a small portion, $1.5 million, of the building's $16.5 million price tag, with the rest being made up by bank loans, more traditional investors, and Guerilla’s own contributions. But Cavenaugh sees it mainly as a proof of concept.
“There’s a huge wealth gap in America,” he says. “It’s important to change up the way we do things, specifically with aggressive commercial real estate.”
So far, 87 investors have contributed $1,360,000. Cavenaugh thinks they’ll hit their limit in the next week or two.
“We drive down the street, I have an 11-year-old boy, and we point to that construction going on, and his mom will be like, ‘That your dad's building,’” says Pat Castaldo, who invested $3,000 and owns Buy Olympia and Land Gallery, an artsy clothing and card manufacturer and store. Castaldo (and even Cavenaugh himself) admits not everyone’s going to love the paint job, but he doesn’t want to live in a city of beige buildings. “It was a sign of support for this is the type of construction and project I’d love to see. It's not another massive, full-block development of boring,” Castaldo says.
Of course, real estate, like any investment, isn’t risk-free. Guerilla Development chose a relatively conservative mechanism called Tier 1 that required the company to vet the project with regulators in the individual states where it’s offered (California, Massachusetts, Oregon, Virginia, Washington and the District of Columbia), just as any security offering would be vetted. It’s a much higher level of scrutiny than that required for the JOBS Act’s true crowdfunding path, called Title III, which opens the offering to anyone but caps investments at a certain percentage of an individual’s income and the total project at $1 million, making it less appealing for big projects like real estate.
“Inevitably, the easier you make it for people to get their hands on money, sometimes people will cheat and take advantage of investors,” says Donald Langevoort, a law professor at Georgetown University who’s written widely and testified before Congress about investor protections and the JOBS Act. “We know that’s a problem and suspect there will be more cheating due to the JOBS Act, but Congress was willing to take that risk in the name of economic growth.”
Ultimately, Cavenaugh doesn’t think crowd-funding will change the real estate industry as a whole; it’s simply too time consuming and expensive. But he does think it could allow smaller developers like him to do quirky, socially-minded projects that banks won’t get behind, like the next building he’s working on, which will offer apartments to social workers at one-third of market rates, or a building he wants to do that will offer discounted retail space to small business owners who’ve been displaced.
Meanwhile, all eyes will be on the Fair-Haired Dumbbell, as it’s painted in advance of its opening next summer.