MAY ISSUE: Turning to the Crowd for Capital
- Apr 28, 2014
By Anna Spiewak, News Editor
There’s a new buzzword in real estate, and the word is: crowdfunding. While its freshness on the market naturally still raises a question mark in several developers’ and investors’ minds, it is most certainly making waves among the real estate industry and in the media, as several developers, real estate crowdfunding firms and average investors are already making money off
“The word ‘crowdfunding’ is being used left and right, but private equity, investment bankers and regulators today have been using crowdfunding for decades, they just don’t call it the same,” David Drake, a global strategist, told Commercial Property Executive.
According to Drake, crowdfunding, in general, has already raised $5 billion worldwide, $2.5 billion in debt and $2.4 billion in donations. He predicts that will grow to $10 billion in the near future. Drake’s personal crowdfunding experience dates back to the very first FCC meeting on the concept—in the White House in 2011, despite its years-long existence.
“If you go to accredited investors and have them invest in a deal through technology, they call that crowdfunding too, so you have to break it down: What’s the definition of crowdfunding?”
In its new sense, crowdfunding is defined as the collection of financing to sustain an initiative from a large pool of backers, usually made online by means of a Web platform. Whereas traditionally entrepreneurs would seek out banks and institutional investors to secure the capital they needed to take their ideas to the next level, with crowdfunding entrepreneurs are cutting out the middleman and raising capital from a group of smaller investors in a secure and automated way online.
For investors, crowdfunding is less risky and entails smaller dollar investments in projects they care about.
For entrepreneurs, crowdfunding is a better alternative to traditional investment capital that improves the likelihood of securing the financing required to stay in business. And the JOBS Act, signed into law by the President and Congress in January 2012, has encouraged small businesses and startup funding by easing federal regulations and allowing individuals to become investors.
Lately, the crowdfunding platform has spilled over into real estate, inspiring industry professionals to reach out to pools of “crowds” to invest in an asset—especially a higher-price commercial real estate asset. In turn, average investors can make a direct investment into real estate, an alternative to purchasing shares of a publicly traded REIT.
Compared to a tenant-in-common vehicle, which also allows a large number of smaller players to invest directly in real estate, with crowdfunding you invest into an L.L.C., own part of it and invest in a project as an L.L.C. You don’t have to do it all on your own nor sign off on every decision that is being made in the transaction.
While several crowdfunding firms are popping up, giving hungry investors access to various real estate deals, one-year-old Realty Mogul has been getting much traction in the media lately, as it recently announced hitting a milestone of more than $100 million in commercial real estate investments.
“It’s really democratizing access to investments that your average investor would never have access to otherwise,” Jilliene Helman, the young CEO & founder of Realty Mogul, told CPE. “We already distributed millions of dollars out to investors on profitable projects. I think billions of dollars will (still) be funded through crowdfunding.”
The proof is in the pudding. Realty Mogul has crowdfunded the first self-storage facility in North Carolina, the first retail shopping center in the country outside of San Francisco, as well as various multi-family apartments and single-family homes.
“We’re the largest crowdfunding platform for real estate in the country today, as measured by the number of transactions, number of states we’re in and the dollars that have been transacted,” Helman added.
iFunding, another real estate crowdfunding firm, chooses real estate projects for the investor and shares profits. For $1,000 minimum, members can buy into any piece of the site’s portfolio of multi-family, hospitality, office and residential properties. Each project has its own distinct limited partnership that pays dividends in six months minimum.
“We were the first company to implement this, in June 2012,” said Sohin Shah, co-founder of iFunding.
He observed that his crowdfunding investors tend to favor shorter-term alternatives, from six months to a year, as opposed to longer-term investments.
“All the big boys know that crowdfunding is on the rise, and the smart ones are taking some measures to make sure they’re getting a piece of the pie,” he added.
Certainly, there are those who question the new phenomenon, wondering what exactly could be available to a non-credited investor and how one ensures that those getting into the deals actually understand real estate.
“Part of the pitch is that it avoids transaction costs, which brokers are not going to be too happy about,” said Gregory Davies, partner at Cassidy Turley Northern California. “Why wouldn’t you just buy a REIT?”
Drake’s response to that question is that one gets more control and transparency via crowdfunding and easier access to the management. Otherwise, a REIT is “excellent,” he said.
Additionally, there are criteria that potential investors have to meet when dealing with both Realty Mogul and iFunding: They have to be accredited, meaning have a net worth of $1 million or more, or an annual income above $200,000.
Another question raised by crowdfunding hopefuls includes how to reach small investors. That’s where good marketing, branding and distribution come into play, according to crowdfunding experts.
“It’s a work in progress, but it’s not here as just a fad, not at all. It’s real money,” Drake concluded.
Read the article in the May 2014 issue of CPE. Access is free!