Crowdfunding Grows Up
In just one year, online financing has become an important feature of the commercial real estate scene.
Crowdfunding, or using the Internet to solicit funding from online investors, “has grown from a very new concept to a business strategy that is already producing success stories,” says Darren Powderly, CCIM, cofounder of the real estate crowdfunding platform Crowdstreet. In 2014, the first full year that real estate deal sponsors were able to conduct general solicitations of investors, U.S. real estate crowdfunding raised $565 million in debt and equity, according to the 2015 Crowdfunding in Real Estate report, published by Massolution. The crowdsourcing advisory firm estimates that amount could increase to $1.42 billion this year. That number is still small compared to the $399.8 billion the Mortgage Bankers Association reported in commercial and multifamily loans originated in 2014. But it’s no longer just a blip either.
New Tech Meets Old Play
In part, the rapid acceptance of crowdfunding by the real estate industry is a function of the never-ending need for funding. But there’s also a more subtle reason that crowdfunding has taken off so rapidly. Take out the Internet piece, and the idea of syndicating loans or preferred equity to a group of investors has been around since the ’80s. Real estate syndication, “is easy for investors to wrap their heads around,” says Jason Fritton, CEO of Patch of Land, a real estate crowdfunding platform. All crowdfunding has done is add technology and the ability to solicit nationwide to that old-school model.
And while crowdfunding may still be in its infancy, the speed of capital formation and the transparency of online investing have already caught the attention of deal-hungry investors, both individuals and institutions. Institutional interest brings more funds for bigger deals, as well as sophisticated improvements to metrics and underwriting that benefit all investors, says Fritton.
The expansion of property options is contributing to the crowdfunding boom. “The biggest transition in crowdfunding financing today is from residential fix-and-flip to commercial assets,” says William Skelley, CEO of New York City’s iFunding, a debt-focused crowdfunding site. The shift reflects changing opportunities in the real estate market, as well as the efforts of many crowdfunding platforms to carve out a niche amid the approximately 75 real estate crowdfunding sites worldwide.
How to Win at Crowdfunding
- Pick an existing property with cash flow
- Choose properties that offer options to improve value
- Have a business plan and active management in place
- Tell a story that’s compelling to investors
- Use lots of photos, not just numbers
- Offer short time horizons. Loans are best at 18 months or less
- Keep senior debt to more than 65 percent LTV
The amounts raised per deal are also growing and may expand even more once new SEC regulations take effect this summer. Crowdfunding lenders are also expanding their options. Mezzanine debt to bridge amounts borrowed from conventional lenders and sponsor equity and short-term, fix-and-flip loans still dominate, but several platforms are starting to offer 3- to 5-year low-balance loans on terms comparable to other forms of nonbank financing, says Skelley
Crowdfunding at Work
Funding speed and favorable terms are what attracted Sayam Ibrahim, president of Hero Homes Inc. in Florida. “I was looking for hard-money lenders online to cover the purchase and renovation of single-family homes when I found RealtyMogul,” he says. “I’d never really considered crowdfunding, but their terms were better than I could have gotten from traditional sources.” It took about two weeks for RealtyMogul to evaluate his credit and make sure that he had deal experience. But after the initial review, “the purchase of my second crowdfunded home was completed in two weeks,” says Ibrahim.
Most platforms require sponsors to have either several years’ experience in real estate development or a certain number or dollar amount of transactions. As the demand for crowdfunding has grown, most platforms have maintained their standards or become even more selective.
Times to complete a crowdfunding transaction also vary by platform from a few weeks to a few months, depending on the time needed to complete the offering and its appeal to investors. Platforms like Realty Mogul, which fund transactions themselves and then crowdsource the deal, will generally be able to fund transactions more quickly.
“The ability to fund the project up front and then fill in with investors later is invaluable because it allows you to close in a reasonable amount of time,” agrees Gabriel Silverstein, SIOR, president of Angelic Real Estate in New York. Another benefit, says Silverstein, is that crowdfunding adapts to unique properties that may not fit into the parameters of the private equity firms. Case in point: Angelic recently acquired the master lease on a 25-acre retail site within the grounds of the Redstone Arsenal in Huntsville, Ala. About 40,000 people work or visit the Arsenal every day, and Silverstein plans to tap that community investor pool through crowdfunding. “The project isn’t going to appeal to most institutions, but the people in Huntsville get it and understand that there is a real demand,” he explains. He expects to fund most of the capital stack—both debt and equity—through the crowd.
The Rise of Private Branding
The improving real estate market was major reason that David Bleznak, director of business development for the Bleznak Investment Group, turned to crowdfunding. The company began purchasing distressed multifamily properties with company money in 2008 and 2009, then stabilizing and managing the assets. But when the buying opportunities in real estate shifted to commercial and light industrial and prices rose, “we realized we had to create a tranche of money to buy properties in the higher $10 million to $20 million range,” he says.
And while Bleznak embraces the concept of crowdfunding, he doesn’t plan on using a third-party platform. Instead, he’s following another crowdfunding trend—private branding. “We want to keep control of our offerings and create a pool of investors for future deals by taking out the middleman,” says Bleznak. To create a branded portal, Bleznak turned to Groundbreaker. The company provides a range of customized software products that allow real estate owner-operators to post deals, accredit investors, and distribute profits, says CEO Joey Jelinek. “It gives real estate companies full control over their deals,” he says. Groundbreaker also offers its own platform where clients can post deals that did not garner enough support on a company’s own site.
The bottom line: Crowdfunding is probably here to stay. Its democratic underpinnings open up real estate investing to more people. True, there are risks. “Many crowdfunding deals haven’t gone full cycle, and the regulatory environment is still evolving,” cautions Silverstein. Still, money talks, and crowdfunding offers an innovative new way to fund properties.
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