Crowdfunding meets tax benefits as Fundrise seeks $500M

Fundrise LLC helped pioneer a model of raising small amounts of money online for real estate projects around the U.S. Now it’s starting a fund to buy properties in low-income areas of the country eligible for generous tax breaks.

The company plans to open investment in the Fundrise Opportunity Fund next week, aiming to raise $500 million by the end of 2019, according to co-founder and Chief Executive Officer Ben Miller. Clients can invest as little as $10,000, he said. The money will be used for projects in census tracts throughout the U.S. that were recently designated “opportunity zones” under the new federal tax law.

The opportunity-zone provision has been seen as both an innovative and a controversial way to draw investment into the nation’s distressed communities. It allows people to defer paying capital gains taxes until 2026 if they sell investments and roll the money into funds that target opportunity zones. Investors can avoid paying capital gains on any further appreciation if they hold their new assets for at least a decade.

“When I first heard about it, I said, ‘That can’t be real,’ ” Miller said in an interview. He said he sees “lots of people” who will find this kind of investment interesting. “For some people, it’s a religion not to pay taxes,” he said.

Miller said the fund would concentrate on metropolitan areas starting with Los Angeles, Seattle, Washington, Atlanta, and the San Francisco/Oakland area. Fundrise is based in Washington.

Some researchers and community groups have said the law could promote the kind of investments that are intended, such as new small businesses and affordable housing. But many have also voiced concerns that the legislation is so broadly written that savvy investors, corporations and real estate developers could exploit it for projects they might have done anyway or that displace lower-income residents. Some of the opportunity zones are in areas of cities that are already experiencing rapid gentrification.

Banks, private equity firms and others have been studying the measure in recent months, but significant uncertainties remain. The Internal Revenue Service and U.S. Treasury Department haven’t issued rules that could limit investors’ ability to claim the tax benefits. In lieu of guidance, accountants and lawyers have been poring over the law for clues to what the government might allow.

Miller said that Fundrise plans to ensure compliance by focusing on “what the statute provides and is in plain language and not go beyond that.” Even so, the landing page for the new fund includes a long disclaimer about uncertainty around the law that could affect results.

Many investors and analysts expect that the law will be particularly attractive to real estate investors, in part because of the long holding period required to get the full tax benefit. In addition to Fundrise, a few other property investors have recently announced they’re raising money to take advantage of the change in the tax law. Steve Case’s venture capital firm Revolution LLC just hired two real estate executives to begin making direct investments with a focus on opportunity zones.

Earlier this month, Fundrise acquired a small multifamily property with retail at its base in Washington’s LeDroit Park neighborhood, which deteriorated for decades after riots in 1968. It intends to expand the residential space and update and find a user for the retail space.

“Our whole mission has been to bring low-cost, technology-centric democratization to real estate,” Miller said. “The Opportunity Fund is spot on to our business model.”

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Homes in old neighborhood