(Updates with plan to hire scouts in 22nd paragraph.)
Aug. 15 (Bloomberg) -- New York’s real estate world is filled with tales of ordinary people who bought property decades ago and saw values skyrocket to the millions. Seth Weissman is seeking investors to get in early on the next hot neighborhoods.
The veteran of Goldman Sachs Group Inc. and hedge fund Perry Capital LLC started CityShares, which enables participants to reap rewards from increasing apartment demand in gentrifying areas. Investors who pledge at least $100,000 to one of the program’s neighborhood-focused funds become partial owners of a group of buildings and share in the rental income. The first pool is more than halfway toward its target of $5 million, which will be used to buy properties in Brooklyn’s Bedford-Stuyvesant.
Harlem in upper Manhattan is next, with a goal of as much as $20 million. Additional funds are planned for Bushwick, Crown Heights and Sunset Park, all in Brooklyn. Renters are pushing into those more-distant areas after getting squeezed out of the borough’s waterfront communities, where leasing costs rival Manhattan’s. CityShares is the first program of its kind and offers a way to invest in burgeoning markets that are poised to grow as New York’s workforce expands, Weissman said.
“One of the things we learned from talking to investors was a lot of people thought about value creation through the evolution of a neighborhood,” Weissman, 31, said in an interview at a Harlem coffee shop. “Everybody seems to have that anecdotal story -- my aunt and uncle bought an apartment in Chelsea in the late ’70s and made a lot of money. There were so many of those stories.”
Weissman lives in that Manhattan district, where a townhouse costing $150,000 in 1978 could have been sold for $7.7 million in 2013, according to a promotional video on the CityShares website.
In Bedford-Stuyvesant, Weissman plans to buy as much as $15 million of properties -- mostly apartment buildings with ground- floor retail space -- with $5 million coming from investors and the rest borrowed. Buildings will be renovated, with a focus on cost-saving upgrades such as converting old oil furnaces to gas, Weissman said.
Purchases of apartment buildings in Brooklyn jumped 67 percent in the first half of 2014 from a year earlier, with Bedford-Stuyvesant, Bushwick and Crown Heights accounting for about a quarter of transactions, according to a report by New York-based Ariel Property Advisors.
“People are looking to Brooklyn today because of Brooklyn,” said Shimon Shkury, founder and president of the investment-sales brokerage. “Not because of it being less expensive than Manhattan.”
Weissman said he chose neighborhoods for the funds based on amenities renters look for, including easy access to transportation and job centers. Bedford Stuyvesant and Harlem, in particular, are distinguished by their blocks of 19th-century brownstones and a sense of community that’s hard to replicate, he said.
“In Bed-Stuy, you walk around and, people will be tending to their planters and you’ll look up and a cornice will be missing,” Weissman said. “Clearly the building needs major work. They may not have the resources to make those larger investments but they care. They do what they can. They say hello. It’s a little bit more touchy-feely than, ‘Subway line runs here,’ but I think it’s important.”
CityShares investors must be accredited under U.S. Securities and Exchange Commission rules, meaning they made at least $200,000 in each of the past two years or have a net worth of at least $1 million.
That’s more restrictive than crowdfunding, in which large amounts of money are raised through small contributions. Weissman said his program also differs from such websites as Realty Mogul and Fundrise in that those companies distribute pledges to property managers and developers, while CityShares will buy and manage buildings directly.
Participants will collect quarterly dividends from leasing income and in about a decade should see the benefits of price gains as the properties are sold, Weissman said. The goal for the first fund is an annual return of at least 12 percent over a seven- to 10-year timeline, the majority of which will come from rents, he said.
CityShares is the only way for property investors “to get exposure to that appreciation and rental income outside of buying an apartment or buying a brownstone on their own,” Weissman said. That’s “a big check. It’s not a $100,000 or $200,000 check.”
The median sale price of a multiresidence townhouse in Brooklyn was $1.1 million in the second quarter, according to a report by the Corcoran Group. That’s more than 10 times the minimum CityShares investment.
The second tier of Brooklyn neighborhoods, such as those targeted by CityShares, have already become more popular as renters priced out of Williamsburg and other communities along the East River look south and east for cheaper alternatives, said Ofer Cohen, president of brokerage TerraCRG.
In Bedford-Stuyvesant, the median monthly apartment rent in July was $2,386, up 46 percent in the past five years, according to data from StreetEasy, a New York property-listings website. The median was $3,419 in Williamsburg, up 29 percent since 2009 and $224 more than in Manhattan.
“As these neighborhoods mature, there’s more of a critical mass of residents moving into the area, the area’s getting more established, and more retailers are moving into the area,” Cohen said in an interview. Landlords entering the market now are “not getting in on the ground floor, but you’re getting in on the second floor or third floor.”
Weissman, a 2005 graduate of the University of Pennsylvania’s Wharton School, worked in Goldman Sachs’s investment banking group after graduation. He moved to the real estate private-equity group of Perry Capital, a $15 billion hedge fund, before founding a property-investment company of his own with his brother Matthew in 2008. Two years later, Weissman Equities was part of a team that bought about 75 percent of the commercial space in the Pines section of Fire Island.
Michael Amirkhanian, director of sales in the Brooklyn office of commercial brokerage Massey Knakal Realty Services, met Weissman about five years ago when he took the investor on a walking tour of Bedford-Stuyvesant.
“Seth is a sharp guy that had the vision for these areas,” Amirkhanian said in an interview. “You’re seeing more private-equity funds out of Manhattan that are now looking at these neighborhoods that probably didn’t know where Bed-Stuy or Bushwick were on a map seven years ago. He had that vision then.”
As CityShares adds more neighborhoods and rounds of funding, Weissman plans to hire scouts to hunt for off-market deals by building relationships with community leaders and business owners.
The program will offer participants advantages over buying shares of a real estate investment trust, including access to rent rolls, payment histories and other data on the funds’ buildings, Weissman said.
That information isn’t necessarily valuable, as investors won’t be able to sell shares on the secondary market the way they could with a publicly traded REIT, said Jeffrey Langbaum, a Bloomberg Intelligence analyst.
The Bedford-Stuyvesant fund’s projected annual return of at least 12 percent compares with the 23 percent gain in the past year for the Bloomberg Apartment REIT Index with dividends reinvested.
Eric Peerless, a 34-year-old CityShares partner who pledged $100,000 for the first pool, views the investment as “relatively safe, especially if you’re in the long-term game.”
The lower Manhattan resident also sees the fund as a wager on job growth in that area, where new skyscrapers are opening at the World Trade Center site. Workers filling those buildings will venture to Brooklyn to find affordable apartments with short commute times, said Peerless, who runs Mad Development, a builder of websites and applications for businesses.
CityShares is investing in “multifamily housing in an area where there’s a gazillion people and the population is growing,” he said.