The Community Development IPO November 12, 2007
The Goals First bottom line: to secure 450 community “stakeholders” investing a total of $500,000. Second bottom line: 1) to create the opportunity for residents to build individual and community assets while rebuilding their neighborhoods; and 2) to transfer control of Market Creek Plaza and other assets to people who have a stake in the well-being of their communities.
Overview On January 6, 2006, the Department of Corporations for the State of California issued a permit for the sale of securities for Market Creek Partners, LLC, the company that owns Market Creek Plaza. The resulting Initial Public Offering (IPO) represented six years of teamwork and negotiations with the Department. This Community Development Initial Public Offering (CD-IPO), as it has been coined, offered up to 50,000 units of ownership in the Company to residents of the Diamond Neighborhoods. This groundbreaking IPO is specifically designed to give residents with low incomes or little investment experience an opportunity and the right to participate in the ownership of Market Creek Plaza — a $23-million commercial and cultural center in the heart of San Diego’s Diamond Neighborhoods.
The key terms of the offering included: units at $10 each; investors must purchase a minimum of 20 units; payment plans were accepted. The offering deadline was set for October 31. Resident investors made up a preferred class of investors called the Diamond Community Investors (DCI). The DCI Charter set out the voting rights for electing a nine-member DCI Advisory Board, giving each member one vote regardless of the size of their investment. The Charter also provides that a member of the DCI Advisory Board will sit on the management company’s board.
The Two Key Challenges to Approval
In order to conduct an IPO, most states require that the entity conducting the offering make full disclosure. In California, the party conducting the offering must also prove to the Department that the offering is “fair” to the proposed investors. Because of the target audience for this offering and the risk involved in commercial real estate, the Department was willing to issue the permit for the offering only after JCNI presented a strong proforma and absorbed all the high-risk elements of development – clearing environmental contamination, construction of all primary buildings, and fully leasing the Center. At the same time JCNI had to balance the goal of providing access to a major commercial venue to communityowned businesses with the need to produce a strong appraisal of the project.
Knowing that the vast majority of the residents of the Diamond Neighborhoods could not meet any of these thresholds, JCNI, along with the Diamond Community Investors Team, chose to challenge the Department of Corporations on this issue. The approach to the Department emphasized two points: first, in principle, the financial qualifications to invest must be flexible enough to permit virtually any resident of the Diamond Neighborhoods to invest, while at the same time limiting their risk to an amount they could afford to lose; second, JCNI assured the Department that through its outreach strategy, potential investors would be screened and educated regarding the opportunity so that they would have a reasonable understanding of the risks and potential rewards of the investment.
The challenge that was the most difficult to overcome and the last to be resolved, however, was convincing the Department that it was “fair” to residents of modest means for them to be allowed to invest. By regulation and practice, the Department typically limits sales of interests in real estate programs to investors meeting stringent financial criteria. For instance, the Department typically approves offerings to investors with a minimum liquid net worth of $500,000, a total net worth of $1 million, a minimum liquid net worth of $250,000 and annual income of $65,000, or annual income of $200,000.
Eventually, relying upon the intent of the regulation (i.e., which was to protect investors), JCNI successfully negotiated what the team called the 10-10-10 Plan – any individual meeting the “stakeholder” criteria could invest up to 10 percent of their income, no matter what it was, or 10 percent of their net worth, excluding their homes, cars, furnishings and retirement accounts. In addition, no single investor could invest more than $10,000. After this final hurdle was overcome, the Department issued the permit in January 2006, giving JCNI the go-ahead to prepare the documents and sales materials and publicize the offering.
Who Could Participate In preparation for the IPO, the Ownership Design Team developed a set of definitions to help determine guidelines for a qualified pool of investors, called Diamond Community Stakeholders. The Team defined stakeholders as people or organizations who (a) are residents of the Diamond Neighborhoods; (b) people who work or own a business in the Diamond Neighborhoods; or (c) people who volunteer their time at an organization based in the Diamond Neighborhoods. In addition, all investors had to have a demonstrated commitment to the betterment of the Diamond Neighborhoods.
Outreach goals were established to help monitor and evaluate the success of the campaign over time. The Team set targets of 50 percent first-time investors, 80 percent investments of $500 or less, and 50 percent of residents participating on Market Creek Plaza working teams, as well as representation from each of the Diamond Neighborhoodâ€™s ethnic groups represented among the investment pool.
The IPO Outreach Campaign Gearing up for Sales (January through June 2006): Working closely with the resident team, outreach documents for the offering (i.e., marketing brochures, sales videos and PowerPoint presentations) were drafted and presented for approval by the Department of Corporations. The final IPO documentation package included a series of user-friendly tools for use by firsttime investors. The offering documents were approved in both English and Spanish. Training and Hiring of Sales Staff: Typically, IPO sales are conducted by licensed securities broker-dealers. However, an exception allows the offering firm to use designated staff to conduct sales of its securities without a license, provided they have other duties after the offering is over and certain other requirements are met. This exception allowed JCNI to hire and train a sales team comprised of community stakeholders for a peer-to-peer approach to sales. The current sales team consists of individuals with long-standing community ties and includes bilingual members. The Sales Process and Campaign (June through October 2006): The sales process was designed to ensure that investors would fully understand the double-bottom-line nature of the investment. There were five steps.
Potential investors were asked to:
1. Indicate their interest in investing and reserve attendance at a community sales meeting 2. Attend the sales meeting, which included an investor’s tour of MCP, a PowerPoint presentation with a Q&A period, and handouts which described the offering 3. Schedule an investor subscription meeting to meet individually with a member of the sales team to resolve any outstanding questions or concerns 4. Complete the subscription agreement and write a check 5. Participate in a confidential interview with a member of the evaluation team. The first IPO community outreach meeting with potential investors was held on June 7, 2006. By October 31, 36 meetings were held. Over those 146 days, personal outreach efforts targeted more than 1,000 residents, varied materials were distributed throughout the community, and the offering was fully subscribed with a total of 416 investors. Because an “investor” represents individuals, married couples, parents and children or groups, the 416 investors actually represent about 600 people. Of these investors, 64 made their investments in installments. The average investment was $1,185. Offering Timeline The expiration date for the permit extended to January 5, 2007. To complete the offering and provide a cushion for those on payment plans, the October 31 deadline was set. Nearly 25% of the investments were completed on the final day of the offering, requiring support from everyone in the organization.
The First Year Shortly after the first of the year, investors received a welcome packet letting them know they were officially investors and sharing information about the work going on to shape the Village at Market Creek. Many of them were unaware of the larger community building work going on in their community and have since joined various resident teams. The group gathered to celebrate with a welcome party on February 15. Special recognition was given to the Ownership Design Team that had worked so hard to develop the offering over those six years. One month later, 70 nominees for the Diamond Community Investors Advisory Council attended an orientation meeting to develop an understanding of what would be asked of them if they were elected to the council. Half of those nominated were on the ballot and voted up by the membership at the first annual meeting of the DCI members on March 23. With each investor casting one vote, nine council members were elected and sworn in. Gus Newport, former mayor of Berkley, CA and long time friend of Dr. Joe Jacobs was the keynote speaker at the event. In his message, he talked about the significance of this offering to the country. Since then, the DCI Advisory Council has met monthly, with a “meet the council” meeting hosted for DCI members in May. They’ve participated in conversations regarding the selection of a drug store tenant for the second parcel owned by Market Creek Partners, LLC. Finally, they’ve created four sub-committees to help them focus their work:
1. Business Promotion: Concentrating on promoting Market Creek Plaza in the community and weighing in on matters related to safety, customer service, and the overall atmosphere of the Plaza. 2. Education and Activities: Assisting in the development of financial education sidetracks for both investors and the community at large. They conducted a survey of the kind of financial education needed in the community and are working with the Jacobs ownership team to set up those classes. 3. Social and Economic Impacts: Carrying the great news about the positive double-bottomline impacts Market Creek Plaza is having on the community to the residents at large. 4. DCI Charter and Operating Agreement: Establishing policies and procedures for how the details of the charter are implemented and recording those guidelines for future council members. The DCI membership at large will meet again at the end of November, just over a year after the close of the offering, to celebrate the first distribution of dividend checks for members. The Plaza’s profit of more than $100,000 in 2006 will bring investors a full 10 percent return on their investment this year.
What we are Learning from the Experience Community residents are embracing the idea of community ownership. The Resident Ownership Team developed a set of principles, reflected in the offering documents, which have been validated by the response of potential investors at the offering presentations. Community residents included unique features in this offering, including a community commitment requirement, affordable financial entry to ownership, equal voting power, ownership limits, and the preferred return â€“ have had universal acceptance by potential investors. Our investors routinely tell us during the personal interview process that they were motivated to purchase by these principles more so than by the potential financial returns. Many investors see their investment as the 21st century extension of the civil rights movement. They have told us that this investment is an example to their children or grandchildren of how a person should stand up for their community. Many attendees are unfamiliar with Jacobs Centerâ€™s work. Our outreach strategy and sales process provided an effective screening mechanism to ensure that persons attending the sales meetings met the investor stakeholder criteria. Attendees during the first month of sales meetings were mostly residents who had been connected to the planning and building of Market Creek Plaza over the years. Beginning with the sales meetings in July, we started seeing a shift in the attendees. Overwhelmingly, the attendees were people who heard about the offering through the media, from friends, their employer or other word of mouth.
Surprisingly, most of these attendees have been people who have had little, if any connection to the work of the Jacobs Center for Neighborhood Innovation. It has been exciting to make new connections with such active community residents. Examples include members joining the Village Center, Construction Working Team, Business and Leasing Team, and other resident-led teams, participating in financial education initiatives, and supporting the success of Market Creek Plaza by shopping and dining there. The mix of investors has differed from our expectations. In preparing for the offering, we set a number of goals for the investor mix. Our internal and resident ownership teams together established goals for representation by first-time investors, working team members, business and non-profit organizations, among others. We also anticipated that 80 percent of the investors would invest $500 or less. The actual investor mix has differed from our thinking, in some cases profoundly so. First-time investors represent a much smaller share of the investors than we expected.
The IPO Evaluation Process Given the implications that this IPO has for the field of community development, an IPO Evaluation Working Team was formed to hire an outside evaluator, participate in the creation of the evaluation design, and oversee the implementation process. The evaluation documents the process, impacts and outcomes of the Market Creek Plaza ownership opportunity. In keeping with the values and practices of JCNI, residents have been an integral part of the IPO evaluation process since its inception. Dr. Victor Rubin, Director of Research, is providing management supervision and coordination to the evaluation team. Members of the evaluation team include Philliber Research Associates, Abundantia Consulting, and Allio Consulting. This team is leading the 18-month baseline study, which is the first phase of a multi-year evaluation effort. For the baseline study, four major strategies are being used to gather information: an investor survey, a community survey of non-investors, an IPO pathways analysis, and focus groups. Each of the four components is described below: Investor Survey The purpose of the investor survey is to gather baseline information about the investors’ attitudes and their economic and social circumstances. For example, the survey documents the degree to which investors are involved in neighborhood groups/organizations, how they feel about the community, and whether or not they have previous investment experience. This information will allow us to compare the investors’ profiles to those of non-investors. It will also allow us to track and compare future changes in their attitudes and circumstances. To collect this information, the surveys are being conducted on-site, immediately following the signing of the subscription agreement. All investors will be included in this component of the evaluation. Survey of Non-Investors The randomized survey of non-investors establishes a comparison group and creates a baseline for the community which can be used to compare current profiles and future changes in the investor group to Page 7
the community at large. This will allow us to attribute differences in the investor group to their experience in the Market Creek Plaza investment. The anticipated sample size is 350 community members that did not invest in Market Creek Plaza. This component of the evaluation will commence once the IPO has closed. Pathways Analysis The pathways analysis will describe the ownership strategy’s evolution and the context in which it took place. It will also document how the ownership strategy is perceived and understood by members of the community, staff, consultant team and JCNI leadership that were involved in creating it. Focus Groups The purpose of the focus groups will be to explore in greater depth issues emerging from other research methods, the surveys in particular. After the above approaches have been completed, key themes will be identified for the focus groups. Trained facilitators will then convene a cross section of participants to probe specific areas of the evaluation. The investor survey was launched simultaneously with the Community Development IPO and concluded in June 2007. We chose to survey only investors who were adult individuals or married couples. In all, 329 of such investors, about 80%, were surveyed. Most of the surveys were conducted at our offices, however some were conducted by telephone or at the investors home. An initial draft of the Pathways Analysis revealed that additional interviews may be needed to complete this component. Our IPO Evaluation Working team is closely working with the Evaluation professionals to ensure the analysis is comprehensive and accurately captures the key questions and strategic decisions that resulted in the Community Development IPO. The instrument for conducting the survey of noninvestors was completed in September of 2007. A team of community members who were hired and trained as survey researchers will conduct the survey by visiting Diamond Neighborhoods households selected randomly. We expect to complete the non investor survey by the end of March 2008.