Music venues, affordable housing, fire trucks and public parks. These are some of the first public works that will be funded on Neighborly, a new funding platform that combines crowdfunding and municipal finance.
San Francisco-based Neighborly began its life as a civic crowdfunding platform, but two years ago shifted its focus to the multi-trillion dollar market for municipal bonds—loans that are issued by towns, states and other civic institutions to pay for essential projects like schools, bridges, sewer systems and other infrastructure. The municipal finance market is extremely complex and has managed to avoid the technological disruption churning through the broader financial world.
Neighborly hopes to change that. “It’s a new era of civic finance,” says CEO Jase Wilson, who prefers to talk of modernizing public finance rather than ‘crowdfunding.’
After obtaining a broker-dealer license in the spring—a necessary requirement for underwriting muni bonds—Wilson and his team set out to recruit the first batch of municipal issuers to launch on the site. To do so, they created the Neighborly Bond Challenge, promising to structure the bonds and host the campaigns free of charge for the winners.
The five winning proposals, from places as diverse as Boston and Lawrence, Kansas, were selected from more than 40 submitted by cities across the country. They were chosen based upon the innovativeness of the project, its community impact, credit quality of the issuer, and civic engagement. The winning projects reflect the unique character and needs of their cities: Austin, Texas plans to issue a bond that will help preserve the city’s iconic music venues, such as the Broken Spoke (pictured above), while Silicon Valley will focus on affordable housing. Burlington, Vermont, meanwhile, will raise money to pay for bike paths and other green infrastructure (more on the winning proposals below).
At its heart, municipal finance is a simple concept: communities paying for the buildings and services they need. The problem is, over the years, municipal finance has become exceedingly complex. Multiple projects are now bundled into massive megabonds that are controlled by a long chain of middlemen and Wall Street banks. That favors big issuers over small ones, who pay higher fees.
Similarly, small investors have gotten edged out. Once widely held by average Americans, muni bonds are now purchased mainly by wealthy individuals and institutions, largely for their tax benefits and low risk. The bonds are issued in minimum denominations of $5,000 or more, putting them out of reach of individual investors.
Lack of transparency is another issue. Muni bond investors are charged $1 billion in excess fees each year, according to federal regulators.
As public finance has gotten so complex, people have become disconnected from the funding of projects that impact their communities. In the process, something has been lost from civic life, says Wilson.
In the old days, he explains, “If you and I wanted a ballpark in a small town in the Midwest, we’d put the deal together, vote on it, and on Sunday we’d go down to the courthouse steps and bust out our checkbooks.” All of the money would go to the local government for the project, since there were no middlemen involved, and the interest would go into local investors’ pockets.
“There was a regenerative approach to that kind of capital formation that would add value over time to a community,” Wilson says, “versus what we have now, which is extractive.”
Neighborly wants to bring that direct connection back again by helping towns, counties and cities sell single-purpose bonds in denominations as low as $100 directly to their communities. The Bond Challenge was a way to kick that off, says Pitichoke Chulapamornsri, Neighborly’s director of business development.
The winners were announced in late September. Neighborly is working with them on structuring their bonds, which will be sold through the Neighborly platform starting in the first half of 2017. Each issuer will set their own interest rate and denomination. “We’re very happy with how it turned out,” says Chulapamornsri.
Here are the winners:
The Office of Austin Mayor Steve Adler submitted an application for “Keep Austin Music Creative Bonds.” The bonds will be used to stimulate targeted economic development in the City’s music industry. Austin is one of the fastest growing cities in the nation and the leading live music city in the world. The proceeds of the bond will be used to purchase and preserve iconic venue spaces, to facilitate the acquisition of new spaces, and to derive economic activity from ensuring the music industry has the space to perform and develop.
The city has not yet worked out the details, but in an article in the local press, one official suggested that it could buy the music properties and hold them in a land trust. “In effect, it would be a lot like permanently affordable housing,” Jason Stanford, the mayor’s communication director said. “The value of the land would be kept artificially low by the owner, which would be this bond, so the rent wouldn’t keep going up, and these guys wouldn’t be forced out of business.”
The City of Burlington, Vermont focused its proposal on sustainability. Proceeds from the issuance will be used to build a bike path, plant trees, stormwater management, replace sidewalks and improve waterfront access to Lake Champlain. This financing will give the Burlington community better access to public lands and provide critical infrastructure that will help preserve community space for years to come. The State of Vermont has a long history of selling lower denomination Citizen Bonds dating back to 1996.
Housing Trust Silicon Valley
Housing Trust Silicon Valley submitted a proposal to support their multifamily lending program and their single-family homebuyer down payment assistance program. This will be Housing Trust’s first bond issuance. The non-profit Trust has provided over $100 million of essential loans on single and multifamily projects to promote affordable housing in Silicon Valley since its founding in 1998. Housing Trust is the first non-profit Community Development Financial Institution to be rated by S&P, earning an AA- rating.
Lawrence, Kansas is the winner of the small issuance award, for issuances below $1 million. Lawrence is offering a low-denomination bond to purchase a new fire truck.
The City of Somerville, the most densely populated municipality in New England, is committed to investing in the city’s parks and open spaces to promote health, wellness and community cohesion. Proceeds from the bond issue will be used to increase the accessibility and quality of green spaces for community members.