The Next Frontier: Crowdfunding Reaches New Heights
- Sep 23, 2016
Four years after the Jumpstart our Business Startups (JOBS) Act opened the door to a new way of raising funds for investments that included sponsors posting them on the Internet, crowdfunding for real estate deals has become more mainstream.
But even the entrepreneurs who were the early adopters and real estate executives who were among the first to dabble successfully in CRE crowdfunding will tell you that it is a fast-growing, evolving industry with changes and challenges.
Regulatory changes from the U.S. Securities and Exchange Commission opened up the real estate investment world to those with thousands to deploy rather than millions. In March 2015, the SEC agreed to an update referred to as Regulation A+ that allowed smaller companies to sell as much as $50 million in securities in a 12-month period, with certain requirements and by accredited investors. This May, Title III went into effect, allowing sponsors and startups to raise as much as $1 million in a 12-month period from non-accredited investors.
Other innovations have come from some of the crowdfunding companies themselves—particularly pioneering firms like Fundrise and RealtyMogul.com—as they create new products and funds to attract more investors and have dedicated capital to deploy.
“They’re morphing into more traditional investment vehicles,” said Michael VanderLey, the FTI Consulting senior managing director who leads the firm’s real estate capital markets practice.
Fundrise and RealtyMogul.com both now offer REITs on their sites. For Fundrise, in fact, the only way to invest via its site is through two REITs, according to King Davidson, senior vice president of real estate.
Fundrise took advantage of changes under Regulation A+ to launch its two REITS: the Growth eREIT, focusing on equity, and Income eREIT, focusing on debt. Aimed at retail investors, they have a minimum investment requirement of $1,000.
“One, there is no more stigma. We’re just like any other private equity fund,” Davidson said. “Two, we can now write big checks. Before, we had to raise money per project.”
Davidson said Fundrise recently was involved in a $14 million joint venture equity deal for a multifamily property in Florida with Joe Lubeck, founder of ELRH Investments.
“We’re at a point where we are talking to the best and the brightest, and we’re having really good conversations,” Davidson said. “We’ve had four years of execution, and now we have the ability to point to the deals we’ve done.”
Davidson said Fundrise, which sourced $75 million in transactions in 2015, is expected to reach $150 million this year. Average deals in 2015 were about $3 million each, he said, and this year the average should be closer to $5 million to $10 million. Fundrise has more than 80,000 members and has invested in nearly $3 billion worth of real estate, including its most high-profile deal: raising $2 million for Class 1 bonds to finance construction of 3 World Trade Center in Manhattan.
RealtyMogul.com, founded three years ago by CEO Jilliene Helman and CTO Justin Hughes, has also grown very quickly. With about 85,000 investors, RealtyMogul.com has originated more than $220 million in transactions, Helman said. In May, RealtyMogul.com became the first real estate crowdfunding platform in the United States to fully fund $200 million in debt and equity transactions.
“We’re now growing at a nice clip. And even more important, we are doing high-quality transactions,” she said.While the company can work on a $50 million transaction, Helman noted that its “sweet spot is the $1 million to $2 million check size. “We’re doing mezzanine financing and preferred equity financing,” she said, adding that with a lot of CMBS loans set to mature soon, many will need gap financing, too.
While RealtyMogul.com will continue to operate its traditional crowdfunding platform, it did launch an online REIT in August. “One of the ideas behind that is having dedicated capital that we can deploy as we see fit,” she explained. “That allows us more flexibility. We’re not raising on a real-time basis anymore. We’re ready to go.”
VanderLey said the changes are “just part of an evolutionary process,” adding that the challenge to move to larger deals is demonstrating to sponsors that the capital has been lined up.
Then there are sponsors like Trion Properties, a private equity investment firm that acquires and renovates multifamily value-add properties and used crowdfunding early on to raise capital for some of its deals. When the firm launched its first investment fund earlier this year, co-founders & principals Max Sharkansky and Mitch Paskover again turned to crowdfunding.
“It was a no-brainer when we formed the fund,” Sharkansky said. “We already had relationships in the crowdfunding space, so we said why not build on that with the fund.” Sharkansky said the company is using two crowdfunding platforms—RealCrowd and CrowdStreet—to supplement what it is raising internally for the fund.
“It’s a game changer for both sponsors and investors,” he said. “We had such an archaic industry in terms of how people could access investors. Now you can sit down at your computer and Google ‘crowdfunding in real estate’ and find plenty of real estate online.”
Funds for the Future
“One of the things for the crowdfunding industry to be sustainable and work in the long term is to continue strong quality control and work with sponsors who are buying quality real estate,” Sharkansky said.
Trion, with a portfolio of approximately $150 million, has used crowdfunding for a portion of about half its acquisitions. The fund has achieved raises of more than $1.5 million, with a high of $1.9 million, he said.
Origin Investments, a real estate investment firm that acquires office and multifamily properties, has also used the medium in raising capital. Origin, which manages more than $500 million in its portfolio, built its own digital real estate investing platform and found it has accelerated its investor base, according to co-founder Michael Episcope.
“It took us about seven years to reach 70 investors. In the last seven months, we’re up to 210 active investors and adding one to two every day,” he said, adding that the firm is raising between $1 million and $5 million a week. While he credits a lot of that growth to the firm’s marketing efforts and its solid reputation, he said the online platform has been successful, too, making it easier for qualified, high-net-worth individuals to participate.
Origin has used crowdfunding on several office acquisitions, including the Denver Corporate Center I building earlier this year, raising about $2.5 million toward the $9 million total.
Episcope said there were concerns at first. Some firm members felt it was “rinky-dink stuff” and worried it might hurt their brand, he noted. But he and co-founding partner David Scherer believed it was important to be in the space.
“The only thing I regret is not doing it earlier,” Episcope said. In fact, he said the technology has worked so well that the company plans to license it next year.
Others look to companies like CrowdStreet, a software and services firm that offers CrowdStreet Marketplace, which allows sponsors to access accredited investors, and CrowdStreet Sponsor Direct, which enables sponsors to present offerings to their own investors under their own brand.
Darren Powderly, CrowdStreet co-founder & vice president of business development, said the firm launched Marketplace in early 2014 and now has some 10,000 in its investor community. Most of that growth—a 300 percent increase—came in the last six months.
On the Marketplace, the average fund raise is $1.1 million, with a high of $4 million. At least 57 deals have been posted and about $45 million has been funded, with $6.3 million being raised each month. Sponsor requests to raise money on their own portals with their own investors resulted in CrowdStreet Sponsor Direct.
Now the company’s revenues are split evenly between the two sites, he said. He noted that a lot of clients use both.
Just how much real estate crowdfunding activity has grown is hard to quantify, but Massolution, a research and advisory firm, last year put the number at $2.6 billion in North America and estimated it could reach $3.5 billion this year.
Some speculate the addition of the Title III non-accredited investors might push the $3.5 billion estimate even higher. But others, like VanderLey, don’t think Title III changes will have that big an impact. “I don’t think it’s a big enough pool of capital to move the needle,” he said.
Helman agreed that current limits are restrictive. She predicts the capital raise limit may expand from $1 million to $5 million.
Of course, potentially one of the biggest challenges to the crowdfunding industry—and so far untested—is how the companies and their investments will perform in a down market.
“We don’t really know yet,” VanderLey said. “But we’ll find out.”
Originally appearing in the September 2016 issue of CPE.