An Interview Between +SocialGood Connector & Managing Partner at Mission & Co., Shariha Khalid Erichsen and Diane Schrader of thirdACT.
The Responsible Finance & Investment Summit brings together key stakeholders within responsible finance to build connections to new growth opportunities and more measurable impact. +SocialGood Connector and Managing Partner at Mission & Co., Shariha Khalid Erichsen reported from the forum.
In this interview, Shariha speaks with Diane Schrader, the Founder and Chief Executive Officer of thirdACT, a real estate finance and technology company. They develop real estate portfolios for institutional investors who want access to the US small commercial market. Through thirdACT, investors fund energy efficiency, clean energy and other sustainability property improvements.
Meet Diane Schrader: Diane is the founder and CEO of thirdACT, the first blockchain company to be a Public Benefit Corporation. Diane studied figurative painting at San Jose State University, taught herself to code and began her career as an animator in the computer games industry. When she joined the entertainment division of Autodesk, Diane was responsible for developing a global user base for new 3D animation/visualization technologies. Her work took her to over 50 countries. The experience taught her to leverage the strengths of local cultures towards overall growth and greater good.
Mid career, Diane leapt into finance, developing an algorithmic trading platform for index futures. Prior to founding thirdACT, Diane was drawn towards sustainability. She became an investor/advisor to startups, particularly those with a strong mission. She still works with a number of entrepreneurs, regularly taking office hours and speaking at numerous events.
Shariha: Diane, thank you so much for chatting to me. Could you tell me more about yourself, your organization thirdACT and the work you do?
Diane: Sure. thirdACT is a Silicon Valley based Real Estate FinTech. On the fin, or finance side, we’ve created a new way to invest in real estate that also drives resiliency in communities. On the tech side, we’ve created a new way to use technology to manage these investments. This not only greatly enhances returns for investments, but we believe will drive more investment towards community resiliency as a whole.
We focus on small commercial properties. These properties, with buildings under 10,000 square feet, are not what most people think about when commercial real estate comes to mind. They are 72% of the US commercial building stock. When you look more closely at them, most were built over 50 years ago, before there were energy and other safety standards in the building code. Add to this that most are owned by people, not corporations, who must use personal debt to finance property improvements. This means that many defer maintenance. It’s a huge problem, not only for the property owners who can’t afford to upgrade their properties. It also impacts entire communities, as it’s been shown that these small buildings consume more energy than every other category of commercial real estate.
What we do is enable these property owners to exchange a small percentage of their property’s future sales proceeds to fund improvements now. Investors fund a pool of these projects for long term cash flow and for diversification into a market they’ve had little access to. We focus primarily on energy efficiency and clean energy improvements. We believe that a small investment into these buildings can reduce energy consumption by 30–50%. This benefits both property owners and the tenants who keep all benefits such as energy savings, any tax incentives or utility rebates.
Getting back to that tech side, we use blockchain in our administration of these investments to enhance the returns. Our contracts are for 30 years. We have no performance or management fees. If you compare this to the traditional 2 and 20, this means that we could be saving investors over half of their returns. So, it’s the combination of the new form of investing plus the way we manage it that matters.
Shariha: For the sake of our readers, how are you working with Blockchain to enable you to do this? And on the other hand you also work with clean energy technologies, solar energy if I understand it right?
Diane: I think everyone gets excited about solar and we love solar certainly. But in order to size the solar to what a building really needs, you must first reduce its energy consumption. Otherwise, you run the risk of oversizing the solar system. And now to go to the beginning of your question on blockchain. We use the Stellar Network. It does three very important things for us. It was designed specifically for secure, high frequency, low cost transactions. This is important as we don’t want returns eaten up by fees. Stellar is already at institutional scale, which is important to us. They expect to process over a half billion dollars in transactions this year.
Shariha: I love how you are innovating investment. You are almost democratizing investment in that sense — investing in impact without bringing in impact investors?
Diane: Yes, that’s so true. It’s one of the pillars that our company was founded on. Not all investors are thematically looking for impact and that’s fine. We are here to prove that the same investment can meet the needs of diverse investor needs, all while having a social and environmental impact. As part of this, we are working on Sharia compliance. Our product is non-debt, more equity based. That will provide more inclusivity as well.
Shariha: Wow that’s fantastic. You are also bringing in an Islamic finance component to it which you can do on either a risk-sharing and profit-sharing framework.
Diane: It’s inherent in all that we are doing. I was in Hong Kong last year. We were talking with some impact investors there who shared our investment thesis with a real estate investor in Malaysia. So I have to say thank you to your home country because it was that investor who came back and said that our product might be Sharia compliant. I have travelled to over 50 countries in my career but I didn’t understand or appreciate Sharia finance or Islamic finance. It took me some time to be connected to an institution that could execute the formal review. It’s been quite a journey and we are excited that we will be announcing our Sharia product in May this year.
Shariha: That is exciting. What would you like to share about the potential of this market and these type of products and where you hope this will go for your company?
Diane: It excites me to unlock value that has been trapped in these little buildings. This is value for the property owners, the investors and the community. While we are focused now in the United States, I believe these are global issues. We have approached this problem as a Public Benefit Corporation that has created a new form of finance and a new way to manage these investments. We hope that our different approach from our corporate governance to our product and our processes will inspire more people to think creatively. We also know that capital begets capital. We have created an instrument that we believe provides market rate returns in a way that could attract more capital. The more returns that investors are able to keep, the more capital they will deploy in instruments like these. All this means amplifies our collective impact.
Shariha: Thank you so much Diane. It’s been a pleasure to speak to you.
