By Andrew Han
Doing well while doing good may become easier in the near future. Neighborly is a financial startup with offices in Kansas City and San Francisco focused on allowing citizens to fund local government projects and make money in the process. By making instruments called “municipal bonds” more readily accessible to individual investors, Neighborly will enable retail investors – people like you and me – to invest in relatively secure, tax-free securities while funding the communities that they care about.
Municipal bonds help local governments finance development
Put simply, municipal bonds are a way for local governments to borrow money when they need to finance projects, such as the construction of water facilities, playgrounds, hospitals, educational facilities, etc. When they issue municipal bonds, governments borrow money and pay that amount back in the future, plus interest. On Neighborly, you can currently choose to invest in projects related to “Education,” “Green Spaces,” “Transportation,” “Environment,” “Urban Spaces,” “Healthcare,” “Housing,” “Sports” and, soon, “Technology.” Municipal bonds are an especially attractive investment because their returns are tax-exempt.
Jase Wilson, a technology entrepreneur who holds degrees in urban planning and design from the University of Missouri-Kansas City and the Massachusetts Institute of Technology, co-founded Neighborly after spending a decade studying cities and speaking with countless community builders. It was during a breakfast with a municipal bond trader in which the idea for Neighborly became clear.
“There were a lot of middleman that made you wonder how much money would actually get to the ground… Why isn’t there a Lending Club or AngelList for cities? Why isn’t there a Kickstarter for municipal bonds?” he said at the breakfast.
Neighborly has since evolved from its original concept of donation-based crowdfunding for local governments toward becoming an actual investing platform dealing in securities. On Neighborly, users can view a list of prospective municipal projects, follow along with the developments of a bond deal, and provide financial capital to the projects that they care about.
Current projects on Neighborly’s beta platform include new housing facilities for Indiana University and St. John’s University, a bond refinancing deal for Yucaipa Valley’s water filtration facilities, new sewer systems for Sacramento, California, for example. Those projects are examples of what Wilson calls the first phase of Neighborly, addressing the municipal bond market “as is.” Eventually, Neighborly will allow issuers of municipal bonds to post deals directly, optimized for individual investors in their community. In that long range vision, smaller community-scale projects that used to lack financing options will be enabled, such as neighborhood wireless mesh networks, charter schools, community solar, skate parks and more.
Simplifying investing for retail investors
The current municipal bond system is complex enough to deter the regular retail investor. The process varies from project to project, but often takes this form: When a local government has an idea for a project, they create a proposal for a loan and hire one or more underwriters to help them find retail investors and institutional buyers to fund the loan. The issuer then publishes a preliminary official statement (a POS) that includes information about the bonds being offered and about the financial health of the issuer. Interested investors can then express interest in investing in the deal by submitting an indication of interest (an IOI), which is a non-binding indication to the broker-dealer that an investor would like to receive updates on the bond deal. During the order period, investors can confirm their intent to buy the bonds with an order to the broker-dealer, who then submits the order to the underwriter. Once this period has closed, the underwriter allocates the bonds to each investor based on order priority. The bonds are then transferred to the investor’s accounts and an official statement with the finalized price and interest rate of the bonds. Investors then receive regular payments of the interest on the bonds, which, in the case of municipal bonds, are usually tax-free. The investor receives these payments until the bond reaches it maturity, at which point the issuer pays back the original amount borrowed.
Where does Neighborly fit in? The average retail investor normally wouldn’t be able to access these bonds until after the price has been considerably bid up on the secondary market. By increasing accessibility to the bonds when they are first being originated, Neighborly allows retail investors to buy bonds earlier, at better prices, and opens up an entirely new capital base to local governments. By helping issuers optimize for retail, Neighborly also enables more people to participate in the market, thus increasing liquidity in the market.
When asked about Neighborly’s long-term vision, Wilson said “municipal bonds are a gateway drug.” Neighborly hopes to make the broader fixed-income (bond) market more accessible to the average investor. Whereas stocks have enjoyed innovations in market infrastructure that have given retail investors access, the fixed-income market has been left in the dust, and Neighborly hopes to take its innovation in technology and market infrastructure to other types of bonds as well.
Neighborly is looking for strong developers with experience in data science, who are interested in helping cash-strapped communities through technology. Reach out via https://neighborly.com/contact if you are interested in joining the team.
Contact Andrew Han at handrew ‘at’ stanford.edu.