Q1 2020 - EisnerAmper Q&A with Max Levine and John Chaffetz, Co-Founders, Nico
- Feb 24, 2020
Nico is a neighborhood investment company that makes it possible for people who love their neighborhood to build a long-term financial stake in their community by investing in local real estate. They’ll initially do that with the launch of Nico Echo Park—the world's first neighborhood real estate investment trust (REIT). This new model for community-driven investment radically broadens access to neighborhood equity, helping to stabilize communities. EisnerAmper sat down with Co-Founders Max Levine and John Chaffetz, who shared their story on why they started this new public benefit corporation, and their hope for how their model will help bridge some of the socioeconomic gaps that exist in neighborhoods today.
Please give us a brief overview on Nico. When did it start and what was the primary reason you launched it?
It started based on conversations we had over two years ago. Since both of us came from the mainstream real estate space (John was an entrepreneur and investor in real estate markets across Seattle, Salt Lake City, and Los Angeles, with a focus on the urban environment, and Max formerly focused on industrial real estate in New York City), we decided to brainstorm on how to innovate around housing, communities and participation in communities.
We started thinking about the gap that exists between the traditional home ownership model and the rental model and tried to come up with something in between to create a new housing product that would combine the features of home ownership and renting while empowering individuals with the opportunity for wealth creation, especially those who are excluded from homeownership.
The concept of a neighborhood REIT started to come out of that conversation. We wanted to create a new community wealth-building paradigm between the homeownership and rental models. We wanted neighborhoods and the people who love them to have the chance to become financial stakeholders in their community. And we wanted to do it in a way that recognizes the complex social nature of communities, and facilitates resident participation.
That’s how Nico was born. Through the REIT, we have an opportunity to define the way people in communities are able to participate in investing into their neighborhood while creating wealth. This model has shifted people who have typically been excluded from participating in investing into their community to where they can now participate through a model that balances investment returns with the social and environmental impact of the model on the community.
Can you walk us through a step-by-step process how the residents of Echo Park can access the REIT for the local properties part of it in Echo Park?
Through our website application, neighborhood residents and others will be able to create an account and start investing and monitor their respective investments. With as little as $100, residents of the neighborhood can become local shareholders in the neighborhood REIT, which initially owns a portfolio of three income producing local properties. They can make a one-time investment, a recurring monthly investment or both.
The three local Echo Park properties include: 1461 Sunset Boulevard, a 1920s mixed-use building with 20 apartments and four retail stores on the ground floor; 1412-16 Echo Park Avenue, a 32-unit property with 11 distinct structures connected by a series of courtyards; and 1650 Echo Park Avenue, a 28-unit art deco-style brick apartment building. All of the initial properties are part of the city of Los Angeles’ Rent Stabilization Ordinance (RSO) program (meaning they are rent stabilized).
Speaking of Echo Park, tell us about the neighborhood and its history and how that inspired you to invest in that specific neighborhood?
Echo Park is an historic residential neighborhood in Los Angeles, not far from downtown LA and home of Dodger Stadium, Echo Park Lake and more. One of the reasons we chose it is because of its socio-economic and cultural diversity. It presented us the opportunity to find solutions for some of the issues we wanted to tackle like finding alternatives to traditional homeownership and how to reduce the barrier to entry for wealth creation. The median household income here is under $40,000 while the average home price is approximately $900,000, which is a huge mismatch and excludes many long-term community members from investing locally. On the positive side, the neighborhood boasts a strong identity and residents are proud to live here. Therefore, we wanted to find a way for residents who love their neighborhood to build wealth by investing directly into their community. Additionally, the neighborhood has a history of leadership around new ideas, innovation and experimentation and has been featured in award-winning films, novels, music and literature.
How did you choose the three properties in Echo Park to be included in the REIT?
One thing we want to emphasize is all three properties are subject to the Los Angeles RSO. This was important to us because of our view is that rent-control presents attractive investment opportunities with low-beta cash flow stability. Further, rent stabilized apartments are a good fit for long-term owners and are supportive of some of the components of Nico’s Social Impact Framework including helping to foster neighborhood diversity and stability, which is one of our focus areas.
Through residents participating in their REIT, one metric we hope to increase is the length of tenancy in these properties. Currently, there is a mix of short-term and long-term residents, some have been there for a few years, others between five and ten and finally, some more than 30 years.
Speaking of Nico’s Social Impact Framework, can you discuss how you came up with it and the five focus areas?
Nico’s Social Impact Framework is the logic for how we will work to achieve our vision of positive social and environmental change. It connects our actions to a defined set of outcomes and it identifies five elements of change that we believe are key to building stronger neighborhoods.
- Increased financial inclusion and wealth creation, which aims to democratize real estate investment and ensure that local stakeholders have the opportunity to participate as financial stakeholders in their neighborhood.
- Distributed power and stakeholder alignment, which intends to align neighbors around shared financial and social interests.
- Improved environment and quality of life, which seeks to improve living conditions for local residents and minimize negative environmental impact.
- Neighborhood diversity and stability, which attempts to preserve the socioeconomic diversity and stability of the neighborhood.
- Strong local economy, which strives to contribute to a strong local economy that benefits neighborhood residents, business owners, and other stakeholders.
By measuring our social and environmental impact, we can collect information to know how we’re doing and inform decisions so we can focus our resources on the right things to maximize our impact for stakeholders within the community. The impact framework is our roadmap for how we will prioritize and measure the non-financial impact of our business on the neighborhood and local community over time. It is not a claim that we are having any specific impact when we launch.
What are Nico’s immediate and long-term goals?
We have organized this structure and vision for Nico because this is a dynamic that is happening in neighborhoods across the country. We are laser focused on launching the first neighborhood REIT in Echo Park. Part of what we are doing in launching this is giving ourselves a bit of time to iterate our model and evolve it and see what’s working. We believe this is a problem set that is screaming for some new solutions. We feel that the solution we are putting forward for what we believe to be the first neighborhood REIT can be a fit across many neighborhoods in the country. Hopefully, we can bring this model to other markets.
What are the biggest challenges you face?
We are an early stage company, but whenever you are trying to create something new, whether it is around innovation or starting a new company, there is a process of evolution and exploration; not everything is going to work and you have to be flexible and we are in that camp. While we believe this is a big opportunity and addresses a problem, we are coming at this from the perspective of learning, input and trying to remain flexible in response to what we learn and to allow space for on-going input from our stakeholders in the neighborhoods where we deploy this model.
Any final or concluding thoughts you want to share.
Over the past real estate cycle, there has been a vast amount of institutional investment capital that has been pouring into neighborhoods—there is just so much more outside capital being deployed in them than ever before.
For us, thinking about solutions that help to align how that capital judges success and making sure that those motivations are more aligned with people in the communities themselves in longer-term responsible definitions of success. Whether it is through Nico or other structures, we have to make sure the capital is working for people in these communities.
We are really trying to create a product that is inclusive to local investors at a low minimum investment for their investment capital to be deployed in their communities. We think the opportunity to realign capital with communities can help drive a more optimistic and inclusive future for neighborhoods, and that large sources of investment capital are excited about this approach.
OUR CURRENT ISSUE: Q1 2020
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Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.
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