In the summer of 2011, a group of designers successfully completed a Kickstarter campaign to build a pool that also filters water in New York City’s East River. +Pool raised over $41,000 to become one of the first modern-day crowdfunding campaigns for architecture. Two years later, +Pool raised an additional $273,000 to be used for research in a second Kickstarter campaign and currently anticipates construction sometime in the near future. In the summer of 2015, a similar project in London, Thames Baths Lido, raised £142,000 on Kickstarter to build a pool in London’s River Thames. Extremely similar projects have since shown up in crowdfunding campaigns in Berlin, Chicago, Houston, Melbourne, and beyond. Most of these campaigns receive funds in excess of what they are searching for, yet it is rare that successful architecture campaigns are actually constructed. This begs two questions: what happens to that money, and can architecture be crowdfunded?

One of the first projects to be successfully built using crowdfunding as a financial mechanism is Luchtsingel, a 400m long pedestrian bridge in Rotterdam. In 2011, the architecture firm ZUS raised over €100,000 ($135,000 at the time) to develop the bridge by offering to CNC-route the name of any donor who contributed more than €25 onto planks of wood that would be used in construction. The crowdfunding campaign was successful because it showed local politicians both the public desire for the project and the willingness of the public to begin funding it. The local government subsequently contributed the remaining €4 million required for construction, and the project was completed in the summer of 2015. Crowdfunding was the catalyst for taking the architect’s initial idea and making it a reality.

In 2013, David Loewenstein, Philip Auchettl, and Jason Grauten were completing their thesis project for their Master of Architecture programs. Together, they proposed an urban park in downtown San Diego; the hipster-type with a dog park, biergarten, and concert venue that would exploit vacant city-owned land. After receiving a plethora of positive feedback from their proposal, they decided to give themselves six-months to make the student project a reality. They launched a Kickstarter campaign and raised $60,000 in the first 30 days to cover the initial administrative costs and to prove to private investors and the city that the community was serious about having such a place in their community. RAD LAB convinced the city to temporarily lease them vacant land on which a large condo development was scheduled to be built. David, Philip, and Jason then approached investors and raised funds to build the temporary project utilizing previously used shipping containers. They limited their initial capital costs by requiring each tenant to purchase the container and pay for the renovation using RAD LAB’s design. The tenant would then pay RAD LAB for the lease of the space, who would turn around and pay the city for the land. Completing the urban park took a lot of hustle and collaboration between the city of San Diego and many private investors, which Architect & Developer RAD LAB successfully mediated.

I sat down with Philip Auchettl of RAD LAB who discussed his experience. “We were going to be a placeholder for future development. We used shipping containers so we could pick everything up and move it to a new location. That way we could reactivate somewhere else when it came time to move. That was when people started to get excited. I think it made people in the community more open to the idea of it. Anything that is temporary, people seem willing to give it a go. Anytime someone wants to build a brick-and-mortar thing, people line up with their pitchforks.”

Kickstarter-type campaigns have created interesting ideas and possibilities, but few results considering the staggering amount of money raised. Donation-based crowdfunding can be used as a catalyst for obtaining conventional financing or government support, but what about crowdfunding architecture as an investment? Can an architect pull together small amounts of funds from various sources to finance a building? Up until recently the answer was “no.” The Securities Act of 1933 made it illegal to market shares of unregistered securities such as interests in real estate development, which meant that people seeking capital were unable to publicly state that they were raising money for investment purposes to finance a project. The JOBS Act changed this and made crowdfunding architecture possible.

In 2012, Congress passed the Jumpstart Our Business Startups Act, more commonly known as the JOBS Act. This has allowed crowdfunding to permeate into real estate. You no longer have to rely on personal relations or country club connections to pull together a deal. You can put together an offering online that outlines a project you intend to develop with the intent of luring any investor, big or small. Prior to the JOBS Act, investors were required to have a net worth of $1 million or an income of $200,000 per year in order to participate in similar investments. Now, people of any income bracket are able to invest in a project, though there are limits set by the Securities and Exchange Commission (SEC) based on a combination of net worth and income levels. By imposing these types of restrictions, the SEC tries to protect smaller investors from risks they cannot bare, which could have devastating effects on the economy if a large portion of the population were to take part in high-risk activities.

A recent report from the Cambridge Judge Business School has shown tremendous growth in real estate crowdfunding. In 2013, online platforms generated $43 million in investments. By 2015, this had increased to $468m per year. As the more than 125 American based real estate crowdfunding platforms gain momentum, serious money is being invested in real estate in a more grassroots way than we have ever seen before. The industry is still adapting and finding its groove.

Two exemplary architects have successfully used the JOBS Act to help finance projects: Kevin Cavenaugh of Guerrilla Development, and Jonathan Tate of OJT. Kevin recently completed his second successful raise, and completed construction on his first crowdfunded project, both located in Portland, Oregon. Kevin was interested in trying a new pathway of financing that would allow him to develop his projects without the bank meddling in the process. “In 2009, I was really mad at banks,” mentioned Kevin when I spoke with him about his work. “Crowdfunding was this neat way to minimize the seat at the table of the lender.” In his first project, the Fair-Haired Dumbbell, he raised $1.5 million from regular people who were not accredited investors across five states. To do this, he spent 15-months and $200,000 in attorney’s fees to successfully complete the required SEC process in order to crowdfund the project. It wasn’t easy.

Kevin’s second project, Jolene’s First Cousin, raised $300,000 in three days through a different route. Kevin took advantage of an exemption from SEC registration under Section 504 of Regulation D, which permitted him to raise money exclusively in the state of Oregon through the Oregon Intrastate Offering (OIO). This allowed him to avoid the expense and bureaucracy of the SEC, but limited him to pursuing investors within a single state. The second project also allowed him to test his suspicion that investors would accept a lower return of 5 percent if investors knew their investment would fund a social cause; in this case, low-income housing for homeless people. Jolene’s First Cousin was so popular that investors funded it in three days! Kevin has been able to prove that crowdfunding is a viable pathway to create a project. It required a lot of legal legwork, upfront costs, and time. It did, however, result in a viable financial path forward. This is real money. Big Money. Take a look at the Fair-Haired Dumbbell and Jolene’s First Cousin crowdfunding videos. They are really entertaining, and also explain how participating investors receive distributions and the risks involved in the investment.

Kevin used his own platform to crowdfund the equity for his projects. This required him to deal directly with the SEC, the OIO, and all the bureaucracy therein. Jonathan Tate used a different strategy. He partnered with a third party platform, Small Change, who was already accredited by the SEC to raise funds through Regulation D and Regulation CF, which are the new parts of the JOBS Act that have only recently been available. I sat down with Jonathan to discuss the work he was doing as an Architect & Developer. “The hopes of the Reg CF is that there is an enormous untapped investor pool,” mentioned Jonathan. “The point of the JOBS Act was to get everyday individuals involved in this. I do think there is a lot of potential out there, but it needs to build up some momentum and visibility. Most people don’t understand what this is.” By going through Small Change, Jonathan was able to limit his required involvement with the SEC. He only had to supply the offering information, and Small Change took care of the rest.

All three of these projects still used a construction loan from a local bank. Neither Kevin nor Jonathan used crowdfunding for the entire amount. The crowdfunding was used as the mezzanine debt in the capital stack. In each case, this limited the equity that Kevin and Jonathan would have otherwise had to supply. In Jonathan’s case, his capital stack was $20,000 of sweat equity, $95,000 of crowdfunding, and the balance in the construction loan. “Essentially, the money that we are asking for is the equity requirement for the construction loan,” explained Jonathan. “It is 20 percent of the construction loan. But the rest of it shows up as our own contribution. We have money in the land and in soft costs. We are not reimbursing our services until the end when we sell everything. There is a preferred interest for the investors, and then they get a share of the upside afterward.”

Regulation CF of the JOBS Act offers the best opportunity to crowdfund architecture today. Partnering with a platform like Small Change is the most strait-forward path to get started. Kevin, Jonathan, and Philip all love the architect as developer business model. It allows the architect to have more control and gives the ability to design not only the project, but the process. “I believe that we learn a lot as architects and as developers,” reiterates Kevin. Crowdfunding architecture is one of the most unique ways to act as an Architect & Developer. I believe that the crowdfunding sector of real estate will quickly explode to a point of saturation by standard mediocre developers. I hope that more architects lead the way for a better future.

For more information on architects self-initiating work, see the book Architect & Developer: A Guide to Self-Initiating Projects.

When Guerrilla Development opened up crowdfunding for its latest project, a two-building mixed-use development called Jolene’s First Cousin, the team figured there would be strong demand. An earlier project, the Fair-Haired Dumbbell (they have a penchant for quirky names to go along with their iconoclastic buildings), raised $1.5 million from 121 investors in eight months, using Regulation A.

But when the Jolene campaign hit its $300,000 target in just 72 hours in late December, even its developers were surprised.

Real estate has been one of the hottest segments of crowdfunding under the JOBS Act. Most real estate crowdfunding portals have shifted to REIT-style investing, which bundles many projects into one fund.

Jolene’s First Cousin stands apart—and not just for its name (which comes from an off-color, inside joke). For one, Guerrilla Development is well known in the community and its projects suit the idiosyncratic aesthetic of Portland, Oregon, where it is based. The project is relatively modest in scale, but it has an ambitious social mission: to help address Portland’s growing homelessness problem.

Democratizing Development

Jolene’s First Cousin, which recently broke ground and is expected to be completed by early 2019, involves the development of twin two-story buildings on a single lot in the heart of the Creston-Kenilworth neighborhood in southeast Portland.  It will have three ground-level retail spaces and two market rate lofts that will help subsidize the project’s 11 single resident occupancy (SRO) rooms. The SRO rooms, which will share common space and amenities and rent for $425 a month, will be filled with the help of JOIN, a Portland-based nonprofit that helps the homeless transition to permanent housing. JOIN will also hold the master lease.

The success of the Jolene’s First Cousin campaign underscores how a unique venture and vision can resonate with investors who long to be part of something meaningful—and offers lessons for others looking to crowdfund similar ventures.

Guerrilla Development is a believer in democratized development, and that extends to financing. Everyday Oregonians were able to invest in Jolene’s First Cousin under a Rule 504 exemption of Regulation D, which was qualified by the State of Oregon. (The developer considered using Oregon’s intrastate crowdfunding exemption, but that exemption limits the amount that can be raised to $250,000).

The Class B shares, paying 5% interest, were offered directly through Guerrilla Development’s web site, using back-end technology from Portland-based Chroma.

“Everyday Portlanders” 

In a few short days, 43 people snapped up the shares, nearly all of them from Portland. Even with a fairly high minimum investment of $3,000, 15 of the investors were unaccredited (meaning not high net worth individuals).

The $300,000 crowd investment was just a portion of the overall capital stack for the project, which also included a small group of accredited investors and a $1.5 million construction loan.

The crowd-investors will receive an annual 5% preferred return (uncompounded) for the next 10 years. A preferred return means they’ll be paid before all Class A accredited investors, but after the bank (bank loans are always paid first). In year 10, the Class B investors will receive both the return of their principal and a percentage split of the proceeds of a refinancing event.

Guerilla plans to build more Jolene development projects— a second, third, and endless stream of “cousins.” It will continue to carve out a role for crowd-investors, even though the projects could be funded entirely by conventional means.

“We want everyday Portlanders to be able to invest in their neighborhood and to enjoy returns that are likely better than they are accustomed to,” said Kevin Cavenaugh, Guerrilla’s owner. That includes “school teachers and mechanics” who would typically be excluded from such opportunities, he said. “It’s ethically important to cast a wider net to our investor pool.”

“There is also a community empowerment component to crowd-investing.  Instead of just telling someone what is going to be on their street corner, this is a chance for them to make money while being involved with the active development of their neighborhood,” added Cavenaugh.

Finally, he said, homelessness is a hugely pervasive issue in Portland, and “creating an avenue of action through crowd-investing is a way for concerned citizens to contribute to solutions (and make a profit).”

Here are some of the potential success factors and lessons learned from Guerrilla Development:

Topical Issue: Jolene’s puts a spotlight on Portland’s growing homeless problem, allowing people to invest in a tangible project, be part of a novel experiment, and use their investment dollars for social impact.

Reputation: Guerrilla is known for designing interesting spaces that are very visible in the community. It has a successful track record and a reputation for being radically transparent and creating models others can follow.

Existing Investor Pool: For Jolene’s, Guerrilla was able to tap into an existing pool of Oregon investors from its Fair-haired Dumbbell project, a popular development and well-known crowdfunding campaign. About half of Jolene’s 43 investors were also investors in the Fair-Haired Dumbbell. Those investors have already begun receiving distributions—approximately $120,000 was paid to FHD’s unaccredited investors in 2017—lending further validation.

Marketing: Guerilla’s clever and engaging marketing for FHD, along with a well-publicized campaign, may have paved the way for more efficient fundraising for JFC. Marketing is delivered via channels their audience is already in, such as sending snippets via Instagram.

Relationship with Regulators: Guerrilla’s relationship with regulators was a critical factor in the success of the offering. State regulators communicated openly and proactively and were open to reasonable ‘no-actions,’ including waiving restrictions on public advertising and general solicitation (with pre-approval of material by regulators), waiving of escrow requirements (Guerrilla instead was allowed to segregate the investment dollars in a separate bank account at an approved institution), and flexibility on the structure of the offering.

Solid Technology Partner: A good tech partner or platform is key. In Chroma, Guerrilla found a collaborative partner that customized its tech platform for Guerrilla and helped to keep costs low. It also shares Guerrilla’s ethos.

With two crowd-financings under its belt, Guerrilla Development offers lessons for others contemplating a crowdfunding campaign.

First, raising money this way is not for the faint of heart. Community investment is a cornerstone of how Guerrilla finances its projects. However, the cost of pulling together the actors is not cheap or easy. For example, it can be difficult to find a lawyer who understands or is interested in crowdinvesting regulations. (Guerrilla worked with Kyle Wuepper of Brix).

Keeping costs low enough to be viable and repeatable is challenging. At around $45,000, the cost of capital was not cheap or easy for Jolene’s First Cousin, but Guerrilla hopes it will become simpler with future raises. However, should Guerrilla decide to change the vehicle or platform, those efficiencies will not be gained.

Finally, it’s critical to have an engaged community and marketplace in order to be successful.

See more about Guerilla Development and Kevin {here}.

In December 2017, I sat down with Architect & Developer Jonathan Tate of OJT in New Orleans, LA. See more information about OJT at offcejt.com. Find more articles and interviews with Jonathan {here} including a lecture at Harvard’s GSD that we did together.

Jonathan Tate: Why we ended up doing development work had nothing to do with wanting to be a developer. In fact, I say quite frequently that we are not developers, and we do not want to be developers. It was a tool that we had to use in order to continue the application of the idea that we had.

James Petty: The Starter Home*?

JT: Exactly. Nobody was going to ask us to do what we were talking about. So we had to move out of the realm of the abstract to something that was real in order to prove it. The only way to do that was to make it happen. Since then, I have had an affinity for development and a feeling as an architect that if you learned how to manipulate and run the course with
the natural tendencies of development instead of resisting it, you could actually do a lot of great work.

For us, this is applied research and to see what happens with it. Sometimes we are in partnership with other people who are developers. They know how to develop. But even then we are all equals, and we all have a seat at the table, we are also generating the idea of the project. It isn’t someone else coming to us with some “great idea about housing” and asking us to come along with them to develop their idea. What I am trying to figure out now is that I don’t always want to be the developer. I am trying to reframe the way architects work with developers, even in general terms. Because of the Starter Home* projects, we have been solicited by people around the country to help do similar things.

JP: Like the project in Louisville?

JT: Yes, Louisville is a big one. How do you reframe that relationship between architect and developer? Something where we don’t always have to be the developer, but where we have a different way of working with developers. In Louisville, we had a development entity that liked what we were doing. They have an area of town that they are working in and had properties that were ready to go. It is the same Starter Home* theme, but it is a different project. When we have conversations with other entities around the nation, we have to explain that what it looks like here, is not what it is going to look like there.

JP: You are not selling them a plan set.

JT: It is not just about the size of the house. It is a total land play and everything.

JP: That is the fine line between an architect and a developer though, right?

JT: Yeah exactly. The conventional role of practice is that you are waiting for someone to hand you something. Your ownership of the project is an aesthetic one. It is nice to own the intellectual foregrounding of something. There is a real sense of ownership at the end of that. We weren’t just given a site and told to put a house on it. This site was created and generated out of our own thought and creativity. You think of development as a play on a program, costs, time of construction, and land. It is a matrix. Those are the principal pieces. We were rethinking what land meant. Where and how we found the land was important. How do we build value at the same price point of the people that aren’t building value?

JP: That seems to be the most important concept of being successful.

JT: Yeah. With land, it required a lot of mapping. We used scripts and GIS to look for parcels we thought were opportunities. We could define criteria of what we thought value was. Where are the bands within the city that are on the verge of being both really expensive and really cheap? Can we fit within those bands? We overlaid that with what is permissible by code. We take our technical expertise as practitioners of zoning ordinances and look for gaps and opportunities. This is something people don’t usually approach us for otherwise. But we are the ones who see them. We try to exploit that as well.

In New Orleans, land is so expensive, so we needed to find a small parcel. In Louisville, land is so cheap. So we had to look at other dynamics that we could use to influence why or what we would do there. We started looking at ownership and what foundations and non-profits were doing. We tried to pair those together. We looked for land owned by a land bank that was adjacent to a non-profit. We knew we could leverage site control to gain larger site control. The scale of the project could change over time. You create value with the land that you own as a way to take free adjacent land and capitalize on it.

JP: Your subsequent projects profit off the first, just like your work here in New Orleans. Was it a coincidence that your second development, the 9th Street project was directly next door to your first project, St. Thomas?

JT: Yeah. It was a coincidence. It was a development that happened through the course of the project. Originally we were looking for land opportunities. Regular lots are expensive. So we started looking for these little things. We sorted through zoning and through neighborhood locations to map them all out. We began to focus on one particular location. There were about thirty properties, and we got one after soliciting with nearly all of them.

JP: Were you offering below market rates?

JT: No, we were paying market rate. But it is a small lot. You are paying the same per square foot as that of a larger lot. There will be one next to standard lots that go for $200,000 or $250,000 for an empty lot. These are smaller pieces that still go for $45,000 or $25,000. Most spec homebuilders want a standard lot. That is what their house is made for. They don’t have to hire somebody to figure it out. These little lots, they just don’t know what to do with. They consider them unbuildable.

So when we were building the first house, there was a neighbor who owned the land next to us. He was very interested in what we were doing. So we started talking to him about possibly buying the land. We ended up buying that lot and trying to do the same thing we did at the first house but on the larger lot. We thought we could put twelve homes and do it in the same amount of time. That generated it’s own complexities.

JP: You mentioned something about that at your lecture in New York for Architecture League’s Emerging Voices 2017. You said that the second property didn’t have an as-of-right to build twelve units on it.

JT: Yeah, if you look at what the subdivision ordinance tells you what you can do with a property of that size, you can only put three regular single-family homes on it. The lot was multiple parcels already, but they were little fragments of land. We consolidated the lot and then used the condo regulation as a way to inscribe the lot lines. We drew the condo map. We drew the plan and outlined what people owned. It was an incredible experience and a fun piece of this. We as architects are typically on the backend of this. You are told how it works, and you don’t get to challenge it. Now we get to see what we can do with it.

JP: It is also an incredible urban opportunity. Instead of designing a single-house, you are able to create a community and the in-between space.

JT: Exactly. We are not trying to repeat one project over and over again. The fun part of this is that for everyone we do, we are trying something different. The first one was a small lot, small house. The next one was a private client to do what we do. Then we took another small lot and basically created a set of documents for somebody to build their own tiny house. At the time it was the smallest permitted residence in the city.

For more on Jonathan Tate, see the book Architect & Developer: A Guide to Self-Initiating Projects. See more articles about Jonathan {here}.

In August 2017, I spoke with Architect & Developer Philip Auchettl of RAD LAB in San Diego, CA. See more information about RAD LAB at radlabsd.com. Also, check out a short documentary on their student thesis turned reality, Quartyard, {here}. See more articles about RAD LAB {here}.

Philip Auchettl: Myself, Jason, and David all went to school for architecture together in San Diego. I was an artist before getting into architecture, I was always very interested in getting into development so architecture just made sense.

James Petty: Can you talk about the Quartyard project and how you guys took a student thesis project from the school studio to a reality?

PA: It was pretty crazy. Our thesis was a pretty unique. We started the whole concept with the mindset that we wanted to build something. This was in 2013, still while we were coming out of the recession. We were looking at properties, but we were just a couple of students and we didn’t have any money. So we started looking at empty land parcels, whether it was publically or privately owned. We came to find that people weren’t necessarily ready to develop, but just sitting on them. So that was when the question came to us. “OK, if people were not ready to build on it for 3, 4, 5, even 10 years from now, how can we activate it now and create a community space?” From there, we started looking at publically owned properties. We had this crazy notion that if it was publicly owned and vacant, that it should be used for the public good. That is what we approached the Mayor’s office with while we were still in school. Basically, we started knocking on his door until he started listening to us.

Eventually, we got a meeting with him. He told us, “Yeah, sounds good!” But then we never heard back from him. So we went back. Eventually, we were able to get something going through the city. By the time we graduated, we had identified the property that we and the city felt would make sense. It was a property that they had no plans for the next few years. It was a high impact area that had a lot of visibility. It was also in a designated problem area according to the police department. For us, that was just part of the whole challenge of what we were trying to do by improving the area.

After we graduated, we agreed to give ourselves six months to see if we can get this project funded and built. We were working at design firms on the side and we took some additional loans out. One of our partners was living in a closet eating ramen every day. Not the nice ramen that is trendy now. After we graduated, we didn’t have any office space so we ended up working at school in the back of one of the classrooms for six-months until they eventually kicked us out. In the end, it took us about a year after we had graduated to get it built. There were plenty of up and downs. We had this plan, we had some tenants locked in. The next step was to try and raise money.

To get this project moving we needed about $60,000. That was the cost for the conditional use permit along with a number of other city permits. So, we did a Kickstarter for Quartyard. It was super cool which really started to get the community involved in the project. We managed to raise $60,000 in thirty-days. It was basically pure donation from the surrounding area as they wanted to see an urban park instead of an empty dirt lot.

It was pretty amazing to watch the community take such a stronghold to that, to actually want something in their community, and willing to support that. The project obviously cost more than $60,000. But after the Kickstarter and approval from the City, we were able to get investors involved. They were definitely angel investors as we didn’t have a track record and just a short lease with the city. The concept was that we would do this for a few years until the city is ready to develop this property, acting as a placeholder for future development. All the structures are built out of recycled shipping containers, so when the time comes to move we can pick everything up and reactivate somewhere else. That was when people started to get excited. It also made the community more open to the whole idea of it. Anything that is temporary, people seem willing to give it a go. Compared to a developer who wants to build a brick-and-mortar, people can tend to line up with their pitchforks.

JP: How did you find the initial property? What made you choose that specific property?

PA: We just kept digging, going down to the city and we ended up putting together a map of all the vacant city-owned properties in San Diego.

JP: Did they own the properties out-right?

PA: They owned the property. There is actually a large amount of land that they own and are slowly selling it off. It was pretty interesting as it wasn’t even a parking lot, it was just vacant.

JP: Was the property repossessed with the previous owner?

PA: The City has owned it for a long time, initially with the plan to develop it. After the recession state of California took control of a large number of city-owned properties. In order for the state to release them back to the city, the state put a bunch of regulations on the land of what they can and cannot do with it. The state had already released the property that we ended up taking over. Part of the restriction to the city was that they had to put out a Request for Information (RFP) for a 34-story high rise with a specific amount of affordable units and a specific amount of office space.

JP: What do you think you did that really got buy-in from the city? What got them on board? Was it the dog park? Was there anything specific that resonated with them?

PA: I think we had a pretty good story. We were putting up signs on all of the empty lots asking, “What do you want here?” That was our initial driver. We met with all of the community groups and obtained letters of support from them. The Mayor was on board to begin with and was pretty excited about the whole concept. This was a new type of public-private partnership we were proposing with no risk to the city, but the upside was a community urban park. So really, it was a win-win.

JP: It is an amazing learning opportunity compared to your peers from school. I would assume they were simply working as interns at a local office while you were changing San Diego. You mentioned that this was a Public-Private-Partnership (PPP). Did you get any funding from the city?

PA: No. That would have been nice. We took the project on as a lease. We are leasing the land from the city since they were not making money on it anyways. The profit that the city earns goes towards the affordable housing fund. That was part of the project overall, which was great.

JP: You said that angel investors funded the construction of Quartyard. Did you set up a contract with them that you would give them a percent of return?

PA: We did. We set up contracts with about half a dozen investors. Based on them getting get paid back first and then there is a percentage share there on out. The way we brought in tenants; the coffee shop, the restaurant, the bar, was pretty unique. They actually own their own containers. So they paid for the development cost of those units. The concept being that when we do close this location, they have first right of refusal to move with us to the next location or go somewhere else. That saved us big in initial construction costs.

JP: Do they then lease the space in the park for the container from you?

PA: Correct. We have a management team that manages the tenants and they also book all of the music, events, food trucks, farmers markets, and art shows. They take care of all the fun stuff. The tenants themselves pay us rent which is profit based, based on a percentage of their sales. The idea is that the more profitable they are, the more everyone is which encourages everyone to work together.

JP: Is that how RAD LAB is able to be profitable?

PA: RAD LAB is the architecture firm, and Quartyard was our first project. RAD LAB is a part owner in Quartyard along with our other investors. From there we have grown our architecture firm on a large scale, specializing in container development which we have since implemented all over the country.

JP: You mentioned that you guys had initially taken some loans out. What was that used for?

PA: The three of us took some personal loans to get through the first part of the project. Trying to start a new business, let alone two businesses at once can be costly.

JP: Were you able to pay those back once the project was up and running?

PA: We sure did.

JP: What do you think was the biggest obstacle of Quartyard? Did you ever feel like there was a moment when the project wasn’t going to take off?

PA: There were certainly a couple of times when we thought it wasn’t going to work. The biggest one was when we initially had just one investor and he decided to pull-out. We had to scramble and find new investors, there was a bunch of drama. Then the second scariest moment was when the city decided they wanted to scrap the lease we had been working on and restructure the whole thing. That was going to cost us another $10,000 in fees which we didn’t have. To be honest, I don’t know if it was just ignorance in that we didn’t know any better, but we kept going and pushing forward.

JP: It paid off. It feels like one of the best returns on investments of completing the first project is that it stems new projects. It looks like Quartyard attracted other clients for RAD LAB, like Pocket Park. Do you think Quartyard helped you get off the ground and attract commissioned work?

PA: Absolutely. Quartyard has been a huge flag in the ground for us. Pocket Park was one that we did for pennies as it was on a very small budget but had the opportunity for big impact. We took a small empty lot and activated it using a few hundred recycled pallets as furniture, threw in some trees, and painted giant words on the ground. We were out there ourselves on our hands and knees painting these words. It was ridiculous but we were able to create a big impact.

JP: It was real sweat equity.

PA: It was fun, these types of projects have opened up so many doors. We are doing projects across the country now. We have one that just opened up in Oakland, Bay Meadows, and Monterey. We are doing some cabins up in Tahoe. We are doing a boutique hotel project up in Seattle. We have been busy and growing which has been a good thing.

JP: What was your initial interest in this tactical urbanism and creating nodes of entertainment in cities?

PA: We do it because we think it makes sense. What we do is actually pretty simple, we look at how to best activate an underutilized space.

JP: But no one else is doing it.

PA: It’s funny. I mean we took an empty lot and made Quartyard. When you break it down, we took an eyesore and gave the community something they wanted. You throw in a dog park, cut a few holes in shipping containers, serve beer, good food, and people come! You add in live music, events, and make it a cool space. That is what we focus on. That is what makes sense to us. I think that we are very fortunate that we are not stuck doing bathroom remodels. I fully appreciate how fortunate we are for that. A big part of that is due to Quartyard. It has opened up a lot of doorways.

JP: Do you think that this type of development is something that other people could replicate in other cities?

PA: Absolutely. If someone can see what we have done here and replicate this, it is a huge win for us. We are currently working with a number of developers as a consultant to help facilitate activation of their outdoor space. Whether it is vacant land or outdoor public space of a high rise, you have to activate it. You have to create a place where people want to go to and have a reason to go to.

JP: Do you still engage with local communities and the Mayor’s office about other opportunities?

PA: Yeah, Quartyard’s first location just wrapped up in June this year. After we closed we proved the model, we picked everything up and moved ready to reopen on another vacant site only a block away. It is another unoccupied city-owned lot that has its own challenges, but we are excited to activate it continuing the community sense of place that has become so important to the neighborhood. The city has been very supportive of this. We have a couple of other locations in San Diego that the Mayor’s office is wanting us to get involved in. It’s growing and it is definitely something that can be activated anywhere. This can be a reality in any city and the concept of Quartyard is simply that it is flexible.

JP: It is like having the best parts of Brooklyn all in one place. If you could go back in time and give your younger student-self some advice on the future, what would you tell your younger self?

PA: Just keep going. Patience is a virtue. As long as you keep working hard, it does pay off. I think that is something that always been instilled in me. Just keep going.

For more on Philip Auchettl, see the book Architect & Developer: A Guide to Self-Initiating Projects.

Also, watch a video on Quartyard {here}. See more articles about RAD LAB {here}.

In July 2017, I spoke with Architect & Developer Kevin Cavenaugh of Guerrilla Development in Portland, OR. See more information about Guerrilla Development at guerrilladev.co. See more articles about Kevin {here}.

Kevin Cavenaugh: I knew that architects would toil for years making super-low money. That is all fine, but the bad part was that the work wouldn’t be inspiring. We would toil a decade before we had any design opportunities. So I was getting paid a shitty wage to do shitty work. It didn’t seem fun, but I loved Architecture. I wanted to design buildings. So I moved to Sacramento, which at the time was a pretty pitiful town. This was thirty years ago. I bought a house for $51,000. I could do that with my $10 per hour architecture salary. It worked. I knew real estate was going to augment my salary as an architect and make me a better architect in the process. So I bought a house and fixed it up. It was a beat-up house in a beat-up neighborhood. I learned a lot. Once you do one, it didn’t take long until I had done a couple of dozen.

Buying and fixing up a house is no different than commercial real estate. It is the same basic concept. You own the property. You buy something for A. You spend B fixing it up or making it more valuable. When you are done, if it is worth more than A+B, then you succeeded. If it is worth less than A+B, then you failed. It is that simple.

James Petty: As you were working on these projects, were you trying to get a little bit bigger and a little bit bigger?

KC: Well at the end of a couple of dozen houses I realized that I was a restorer. There wasn’t any design work in renovation. I was doing really neat turn of the last century houses. I was learning a lot about construction and historic detailing. Even as a 30-year old, no one knew I had any design skill at all. I had a feeling that I did, but I wasn’t even sure. Back then I slowly realized that while I had my day job at an architecture firm, the people that were sitting across from me at the table, the client or developer, were not necessarily smarter than me. They just had control and were calling the shots. I took a couple of them out for coffee and asked them questions about the industry. That was when I realized that fixing up houses was no different than what they were doing. It helped demystify the idea of development. I already had a risk appetite because I was fixing and keeping houses as rentals. I was renting them because once you make something, it is hard to give the keys to someone else.

JP: Would that help you finance the next project?

KC: Yeah. I would only sell when I had to refill my coffers. It was frustrating because I was still a 34-year old designer. I was doing rather tedious work at a mid-size architecture firm here in Portland. I was tired of becoming a restorer of these houses. I needed to prove to myself whether or not I could design. I thought I could. So I took two of my rental houses, and I sold them. With those proceeds, I bought a piece of commercial property. I went to my bosses. I knocked on their office doors and said, “Hey, is it OK if I hire you? Can I be the client and the employee at the same time? Do you mind?” They had nothing to gain because it was such a tiny job. It was a 54-foot
by 100-foot corner lot in a neighborhood that was on the east side of Portland in kind of a non-location. I saw it had potential. It was affordable. I bought it for $168,000. So I asked them, “Can I hire you? But can I work
on it here in the office?” I am not a licensed architect, and I couldn’t moonlight. I had two young kids. That is the last thing you want to do, work 40-hours and then come home and then work more. I am innately a lazy man. I don’t think I have ever worked more than 40 hours per week in my life.

The only reason I brought it in was so that I could do my own design. I needed the firm’s help on the technical side, the detailing, and code analysis. So I designed what is now the Box + One building. It was strange. I would draw it and draw it and draw it. I would get a paycheck once per month, and then I would get handed an invoice for three-times the amount of the paycheck at the same time. But it worked. The budget allowed for an architecture fee. I had a bank loan, and I owned the land free and clear.

JP: Finding the initial capital always seems to be the biggest hurdle. That is the complaint I hear the most.

KC: That is exactly right. Initially, I used smoke and mirrors and leverage. I had some money from the real estate so I could juggle properties to create assets and create a path forward on my first project. So I had no investors then. Post-recession I have investors for all my projects.

JP: Are you contracting out other architects to create your drawings?

KC: Yeah. Every morning I go to the coffee shop and get out the same recycled brown napkin, and I sketch what I am working on that week or month. By the time I hand the napkin to the architect, it is pretty tight with dimensions. It is more than what I call Phase Zero, which is just the program. It’s fun! It is everything that you want to do. Now in my career, I get to choose what I do. I get to draw the fun stuff and then I can pick and choose which architects I want to work with. The only reason I put my name on the dotted line and take on massive debt and massive risk is so that I can do the fun part.

JP: How does Guerilla Development make a profit?

KC: We don’t have clients. I don’t want clients ever. The last clients I had were my parents when I was designing their house about eight years ago. They fired me. Clients get to decide Phase Zero, and they hire me at Phase One.

Someone always tells us what Phase Zero is. I look at that and think, “I would rather do family-size units and surround it with a garden and see if the finances work.” They would not give us that opportunity. Everyone else always decides what Phase Zero is. It is boring as hell to me. I don’t want someone hiring me to design X for them; I want to decide the X.

I keep all of my projects long-term. When they fail… and every single project fails… I just fix it. I get a letter from the tenant telling me they have a leak in their space. We manage our own properties. So I email it over to the guy in the desk next to mine. He is the asset manager. He runs over and fixes the leak or hires someone to fix it. When he gets back, he will tell me that one of the details was a shitty detail and that we shouldn’t do that detail that way anymore. We should do something different. We are always getting better as architects.

JP: That is a great feedback loop.

KC: If you hired me to be your architect, and there was a leak, I am not getting a letter from a tenant; I am getting a letter from your lawyer suing me. If I were your architect, I would be a lot safer and a lot less experimental with my design hand. That sounds horrible. To answer your question, 100 percent of what keeps the doors open is based on our developer fees and our management fees. With long-term ownership, all of the properties are spinning off income. We have three different ways that we are generating money. Two of them are active, and one of them is passive.

JP: So this Fair-Haired Dumbbell project… It is a big showstopper. Everyone is curious about how you are using crowdfunding. Can you talk about working with the SEC and how you used the JOBS Act to get this going?

KC: There was a lengthy timeline, and it was a circuitous random winding road. In 2009, I was really mad at banks. Crowdfunding was this neat way to minimize the seat at the table of the lender. So, of course, I was curious about that and I wanted to figure that out. I met with Fundrise. Portland was a city that they liked and fit their model. So they said, “Let’s do this! Once you get all the paperwork taken care of and a blessing from the SEC, we will make a go of it.” I did that. It took me fifteen-months and $200,000 to get through the SEC paperwork. Then I went back to Fundrise and I said, “OK, I’m ready!” They turn and go, “Oh crap, we don’t do that model anymore. We are a much bigger company than when we met with you. We went out and raised money. Gosh, we feel bad… but sorry.” What do I do? I finally have this paperwork signed by all of these states. I had already done all of the hard parts, but now what do I do? So I decided to host the offering myself on my own website. I raised 1.5 million dollars. It was crazy. It took me a while. I put the word out and we self-promoted.

JP: I have seen the video! It was amazing!

KC: The SEC actually had to bless the script on that. There are laws on what you can say and what you cannot say. So we took that video, and we raised a shit-load of money. The most money that we raised was when we were on the front of the business page of the New York Times. Once that hit, then we made it. $800,000 of the $1.5 million was in the three weeks. I would do it again.

JP: Was the SEC approval for the project specifically, or for Guerilla Development for multiple projects?

KC: It was project-specific. So we would have to go through that again. If I can do it in half the time, and for half the legal fees, then it would be a model that is worth it. If I couldn’t, then it wouldn’t.

JP: The JOBS Act is still relatively new, and the government is slow to adapt to new things. Do you think as time passes by, that the process with the SEC will become smoother?

KC: With the Fair Haired-Dumbbell, I could, in theory, raise money from any state. At the end of the day, I need to pick and choose which states I accept investors from. I only chose five states. Each state has their own specific demands. For example, New York State wanted specific things from me that I wasn’t willing to do, so I chose not to take investors from New York State. Same thing for Texas. Both had a lot of interested investors. But at the end of the day, I could not get them to the table because of the regulatory hoops. But I took Washington, Oregon, Massachusetts, California, and Washington DC. That was enough.

I am currently doing a crowdfunding project, which is an unsubsidized mixed-use development. One of the units is an eleven-bed homeless SRO project. It is a profitable project and a tiny little infill project. I believe that we learn a lot as architects and as developers. Politicians should not put an entire population of poor people in one building with one address. Just think of Pruitt-Igoe. Efficiency is rarely the right long-term answer. So I have a project that helps that. It is cheaper than the city can provide homeless units for. The city pays on average $600 per month for providing housing, and without subsidy, we are offering rent for $400.

I am raising half of the money from an Oregon Intrastate Offering (OIO). It is a very streamlined and simple process. The SEC is not involved. Only the state regulators are involved. I am wrapping it up pretty soon. [See
more information on Jolene’s First Cousin project here]

JP: You are very embedded into Portland. Every one of your projects is really curated. Has that always been your intention to make something that aggressively makes those specific locations better?

KC: It is not just random and chance. A Chipotle Grill, Starbucks, or Subway Sandwich will never be in one of my buildings. Traditional developers, the Donald Trumps of the world, monetize every move. Everything is a pro forma. Everything is a dollar. Everything has a success or failure based on profit. I am a capitalist. So profit matters such that I want to be able to do this again. These are long-term holds. I don’t have to monetize every move whether it is architectural or programmatic. If I have an empty ground floor space, it hurts everything else in the building. The right tenant for a slightly diminished rate is always a better answer than an empty space. Always.

JP: What advice would you give your younger self if you were given the opportunity?

KC: To young developers, I would first ask if you have a rich aunt. Then I would start small. Just be successful enough that you can do it again. Then after the second one, do the third one, and then do a fourth one. Don’t be in a hurry, but make everything you do wonderful. You just have to be in the black. It doesn’t have to be in the black by six-figures. I don’t own a boat. The only reason to do a bigger and more profitable building would be to buy a bigger boat. I don’t give a shit about that.

For more on Kevin Cavenaugh, see the book Architect & Developer: A Guide to Self-Initiating Projects. See more articles about Kevin {here}.