A Portland Project Keeps It Funky, With Design and Funding

Kevin Cavenaugh, owner of Guerrilla Development, said he was not using crowdfunding out of necessity; construction work begins this month, and most of the capital is coming from traditional construction lending and accredited equity investors.

"This will get built whether or not we get there," said Mr. Cavenaugh, who is required by state regulators to raise at least $1,025,000 in the crowdfunding campaign by April 2017 or return the money of the so-called Class C investors.

Even so, he is determined to make this crowdfunding effort work, if only to see if it is viable for future projects.

"I remem ber what it was like in 2010 when the banks weren't doing anything," said Mr. Cavenaugh, who studied architecture at the University of California, Berkeley, was a Loeb fellow at the Graduate School of Design at Harvard and has been a developer since 2001. "I want to put one of these deals in my back pocket before the next downturn."

Until 2015, investors wanting to invest directly in real estate projects of this scale needed to meet certain net worth requirements and typically faced high minimum investments. The Jump-Start Our Business Start-Ups Act of 2012 included changes to a regulation that now allows developers to raise up to $50 million a year from an unlimited number of so-called unaccredited investors. Since the Securities and Exchange Commission adopted those rules last year, one notable offering that has successfully used the new regulation is the Fundrise Income eREIT, which includes assets such as the Ace Hotel Pittsburgh.

Mr. Cavenaugh, 49, initially planned to market his crowdfunding campaign via Fundrise. That real estate crowdfunding platform has more than 100,000 members, who have invested $150 million since the company began in 2012. But Mr. Cavenaugh ultimately decided to market it himself, using CrowdStreet, which is based in Portland, to handle the back end, like managing distributions and mailing tax documents.

Only investors living in the handful of states — Oregon, Washington, California and Massachusetts, as well as the District of Columbia — that have given regulatory approval can get involved in the Fair-Haired Dumbbell project.

Photo
Kevin Cavenaugh at the site of his project, the Fair-Haired Dumbbell, which is geared toward office space for small businesses and creative firms. The building is partly financed by crowdfunding, an experiment for Mr. Cavenaugh. Credit Leah Nash for The New York Times

Under the terms of Mr. Cavenaugh's offering, investors can expect to earn an 8 percent annual return for the first three to five years; in the final year, they receive their principal and, if their investment period exceeds five years, additional interest. In a cheeky seven-minute video about Fair-Haired Dumbbell, Mr. Cavenaugh said investors should get involved not for the returns but because they believe in the project.

"We are definitely not in it for the money," said Amanda Morgan, who figures that she and her wife will earn about $240 a year on their $3,000 investment. "We just wanted to make a tiny mark, to show that this is the kind of project that can be done. The way to do that is to put your money where your mouth is."

In a city that was early to embrace food carts and tiny houses, this nascent model for raising capital is fitting.

"Developers shape our environment at the urban scale, so it's great to feel like I'm part of it," said Ms. Morgan, who is a designer at a Portland architecture firm.

The Fair-Haired Dumbbell will be Mr. Cavenaugh's biggest project yet. His previous developments include Burnside Rocket, an environmentally friendly commercial building that is certified as LEED Platinum and is best known as the location of Noble Rot, a restaurant that uses produce grown on its rooftop garden. Another project, the Ocean, is a former car dealership that now houses four microrestaurants and several other food-related tenants.

While Mr. Cavenaugh paints a picture of an artist who develops his own projects so he can design with whimsy, he insists that his ideas are driven by supply and demand.

"I do a bunch of weird stuff, but I design for a specific demographic," he said, adding that his buildings have had no vacancies, even in the recession. Portland needs commercial space like the Fair-Haired Dumbbell, he said.

This parcel of land was previously owned by the city and was slated to be a Home Depot. The recession derailed those plans and in 2010, the city sought proposals. Mr. Cavenaugh was one of three developers chosen to build on the Burnside Bridgehead.

After he learned that the two other developers planned to build mixed-use residential towers, Mr. Cavenaugh looked into other ideas and proposed open-plan office space geared toward small companies and creative firms.

The "dumbbell" design was conceived to give each tenant its own floor and create an entrance and outdoor common area sheltered from the busy intersection. The result allows for retail space on the ground floors and 10 floors of office sp ace, each 4,000 square feet, which he said was ideal for a 12- to 15-person company. The building is 44 percent preleased as of late last year. Mr. Cavenaugh reserved one floor of the building for co-working space that his company will manage; this will be his third co-working space in Portland.

The city appointed an art selection committee to pick artists to paint the exterior, which in renderings looks as though it is covered in Florentine gift wrapping. Mr. Cavenaugh has an agreement with the city to repaint the exterior roughly every 20 years, at which point a new artist may be chosen.

"I like their attitude," said Tarun Upaday, a Washington entrepreneur and venture capitalist who invested $100,000 in Fair-Haired Dumbbell. "They make money, but this is also their passion. And they have certain va lues and principles they don't want to compromise."

Mr. Upaday said he had opted to do most of his real estate investing through offerings on crowdfunding sites like Fundrise. This route, he said, offers more transparency and diversity than most direct investments. In the last two years he has invested roughly $1 million in 13 projects, including a strip mall in Chapel Hill, N.C., and a residential project in Brooklyn Heights, he said.

Eli Spevak, a Portland developer who focuses on affordable housing, said his $3,000 investment in Fair-Haired Dumbbell "was a no-brainer because it's tangible, close to home, and offers pretty much the same financial returns as what we'd be getting from socially conscience funds."

He said he would consider using crowdfunding with some of his own developments. "I'm sure there are plenty of people out there in a similar situation to us, who are looking for somewhere to place a portion of their savings in a project they believe in," he said, "and that will give them a big smile every time they bike past."

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