Crowdfunding isn’t just for indie brands anymore. The practice of using the Internet to solicit funding has come to commercial real estate, and it may be a game changer for developers, brokers and investors alike.
“In some ways, crowdfunding platforms are an MLS for investment offerings. It’s pretty exciting,” says Gene Trowbridge, CCIM, a principal with Trowbridge Taylor Sidoti LLC in Lake Forest, Calif., who advises real estate companies on securitizing real estate investments.
How big is the impact so far? “ It’s difficult to get reliable figures because the sector is growing so rapidly but our publication did single out real estate finance as one of four industries that will be most altered by crowdfunding,” says Andrew Dix, co-founder and CEO of “Crowdfunding Insider,” an online publication that covers the crowdfunding industry. A June 2014 article in the Wall Street Journal estimated that $135 million had already been invested in real estate debt and equity through crowdfunding sites.
Making the Connection
One sign of the growing buzz around real estate crowdfunding is the explosion of sites offering Internet platforms to reach investors. “There isn’t much empirical data on the number of platforms, but there are dozens, and dozens more in development,” says Dr. Richard Swart, director of the program for Innovation in Entrepreneurial & Social Finance at UC Berkeley, and a partner at Crowdfund Capital Advisors Group in San Francisco. Swart is leading a research team to study the impact of crowdfunding on U.S. real estate. Platforms offer a wide range of options, from a focus on senior and mezzanine debt financing (Fundrise) through a mix of equity and debt (Realty Mogul) to straightforward direct equity or debt investment in a sponsor’s properties (RealCrowd and CrowdStreet). Many sites offer turnkey options, in which the sites
Platforms offer a wide range of options, from a focus on senior and mezzanine debt financing (Fundrise) through a mix of equity and debt (Realty Mogul) to straightforward direct equity or debt investment in a sponsor’s properties (RealCrowd and CrowdStreet). Many sites offer turnkey options, in which the sites handle investor accreditation, compliance with Securities and Exchange Commission advertising regulations, tax filings, and payouts to investors. David Waxman, a principal with MMPartners in Philadelphia, appreciates the turnkey service he gets from Fundrise. “It’s the only way you can easily managing 50 investors in a transaction,” he says.
Other platforms, such as Crowdstreet, which was co-founded by Darren Powderly, CCIM, function primarily as posting sites where deal sponsors can use their own legal teams or third-party investor accreditation sites such as VerifyInvestor or Crowdentials to approve prospects. “Many of the larger companies we hope to work with can handle all the responsibilities [of SEC compliance] and would prefer to build their grow their own accredited investor networks,” says Powderly, who is also a partner in Compass Commercial Real Estate Services in Bend, Ore. Crowdstreet grew out of Compass’ own need to find new investors after the downturn. “We were planning on starting and syndicating a distressed properties fund as a private placement when my outside business partner suggested the crowdfunding option. We started with our own properties and then grew the platform to cater to proven real estate sponsors and funds,” says Powderly.
Dan Miller, co-founder of DC-based Fundrise, also began his crowdfunding platform as a way to help finance his own projects. “There’s a huge disconnect between a lot of investment capital and what consumers want from real estate development,” so finding funding can be challenging, he says. Like many debt-focused platforms, Miller says his sweet spot is mid-sized deals, in the $2 to $10 million range; deals too small for most institutional investors and a little too rich for a small investor group. The majority of financing (65 to 70 percent) still comes from banks; $1 or $2 million per deal comes through crowdfunding.
“Crowdfunding lets you take the old friends and family model of private placement and scale it up to expand your business,” says Waxman. He used Fundrise to fund $150,000 for the renovation of an existing mixed-use property in Philadelphia’s Brewerytown neighborhood. Waxman, who is in the process of closing out two larger transactions on Fundrise, has found that crowfunding is “less expensive than making contacts with high net worth individuals at the country club.”
“Crowdfunding is a great way to democratize and expand investment opportunities,” agrees Scott White, COO of Mainstreet in Carmel, Ind. White recently used Crowdstreet for his first “experiment in crowdfunding” and found that despite advertising and email promotions in his local market, about half of his investors came from outside the region. “At present, a lot of the most active crowdfunding investors are coming from the coasts,” says Swart. White’s offering was the mezzanine debt of $1.8 million for a 100-bed medical resort facility, “with 10 percent ongoing cash interest and a 4 percent equity kicker on the sale of the asset.” To his surprise, the transaction took only about seven weeks from initial contact to full funding.
“Our secret weapon is speed,” says Jilliene Helman, CEO of California-based platform Realty Mogul. “It’s very hard to get a bank loan done quickly, whereas we can fund a transaction in five to 10 days. Borrowers are often willing to pay a little more to lessen the time pressure.” Although Realty Mogul plans on being “a capital partner for the entire real estate financing stack,” much of its activity thus far is bridge lending up to $10 million, says Helman. The site also offers equity investments.
For Antonio Marquez, a principal with Comunidad Realty Partners in San Diego, finding “a partner we can scale up with” was a reason to try the crowdfunding model. Comunidad, which specializes in acquiring and renovating mid-market multifamily into lifestyle communities for its predominantly Hispanic renters, obtains its senior financing through Fannie Mae but looked to Realty Mogul for a quicker way to source the 20 to 30 percent additional funding it needed. “The best deals are won by those that are quickest to execute, so the fact that we were able to raise $500,000 in five days was critical,” Marquez says. But despite the need for speed, Marquez says it vital to allow sufficient time to fully vet a platform and be sure all paperwork complies with SEC regulations before posting a deal. “There’s no such thing as easy money. You have to be as diligent on your capital as you are on your properties to ensure you and your investors are protected,” he says.
Added speed and efficiency are also key advantages to the appeal of the equity crowdfunding model, says Adam Hooper, founder and CEO of RealCrowd in Palo Alto, Calif. As with debt offerings, RealCrowd’s sponsored equity deals tend to fall in the $2 to $10 million area. “It’s beneath the institutional radar, so it’s where we thought we could add the most value,” says Hooper. Investors on RealCrowd fall into two main groups, says Hooper: local tech types who are comfortable investing online and savvy traders from real estate and Wall Street making purchases for their own portfolios. A platform may also add value by managing what Hopper calls “the entire ecosystem of the transaction.” One key focus for his site is “a deep accreditation process” that looks at tax returns, lawyers’ letters, and credit and background checks.
Is There a Crowdfund in Your Future?
With less than a year since SEC accredited investor regulations were put in place, “it’s too soon to know exactly where crowdfunding will fit into the capital stack, but we are seeing expediential growth,” says Swart.
“It’s an interesting dynamic, but we’ll have to see if the model has traction long term,” says Marquez. His concern is that some investors are attracted to the exciting newness of the option and may be slower to invest when the model is more mainstream. The quality of the deals and the sponsors, as well as the ability of a site to provide the best user experience will help determine which and how many crowdfunding sites thrive, says Helman. Finally, it’s critical to remember “there are a lot of things you have to get right to be success at online crowdfunding,” says Powderly. You need a combination of real estate expertise, financing knowledge, top-flight technology, and a lot of human touch. “It’s not easy, but if it’s done right it can be extremely powerful for both sponsors and investors who want access to larger deals,” he says.
Five Questions to Ask When Choosing an Online Crowdfunding Platform:
- Does the site have high level security and privacy safeguards in place? Also look for sites with an Extended Validation Certificate to prevent unauthorized access to site data.
- What does the site do to drive traffic to your offering? Just posting a deal doesn’t drive traffic to the platform.
- Does the platform comply with all SEC regulations, if it is providing this service? Even if you outsource accreditation and filing to a platform, the real estate sponsor is ultimately responsible under Reg. 506C, says Trowbridge.
- How selective is the site about the deals it accepts? Most sites require deal sponsors to have a set level of experience and pass background and credit checks.
- Does the site have good design and scalability and the capital backing so that it and you can grow together?