Today, there appears to be an ever-expanding number of sponsors and markets for crowdfunding. Commercial real estate is no exception. At the recent IMN US Real Estate Opportunity & Private Fund Investing Forum, Elizabeth Braman, Chief Production Officer of Realty Mogul, presented at a session focused on crowdfunding for real estate. It was very well attended. Dechert and CRE Financial Council (CREFC) recently hosted an equally well attended seminar in San Francisco featuring leaders in the field to discuss the current state of crowdfunding debt and equity real estate investments and that discussion, in our thinking, was illuminating about this fascinating, and perhaps fraught, new business.
So, what is crowdfunding, really? My take is that Crowdfunding refers to a wide range and amorphously bound set of businesses through which non-institutional investors are brought together with (in real estate) owners, operators and developers of commercial real estate in need of capital. This entire industry is made possible by two things. First, the growth of sophisticated technology which allowed plugged in suppliers and users of capital to connect in the electronic marketplace. Second, recent changes to longstanding SEC policy embodied in Rule 506(c) following adoption of the Jumpstart Our Business Startups Act…aka JOBs Act…(Have these people no pride?)…which permits broad public solicitation of investment opportunities, so long as certain conditions are met, most importantly, only Accredited Investors are allowed to actually make the investments.
There are a host of regulatory issues triggered even by thinking about crowdfunding and we will go into some of these in a later post, but for now, we thought we would start with a quick snapshot of what’s happening in the market. At Dechert’s recent seminar in San Francisco, we heard from representatives at Realty Mogul, Reality Shares, Patch of Land, FundRise and Peer Street. Each of these enterprises is essentially a newborn birthed in the cauldron of technology known as Silicon Valley. That should tell you something about how these folks approach the world.
To date, crowdfunding platforms seem to be taking two approaches to funding investments. Some companies are lending or otherwise providing capital against their balance sheet, and then creating a derivative product which is marketed as the crowdfunded investment. Others directly match pools of capital from investors with an investment once a critical mass of investors (and monetary commitment) has been met. Investors are usually able to track the progress of deals in which they’ve invested through an online dashboard.
Typical deals in the real estate crowdfunding space are smaller than those seen from traditional investing sources. Perhaps real estate crowdfunding’s mission and niche is in providing capital for investments of a size that don’t make sense for traditional institutional investors, and may become the “go to” capital source for smaller enterprises. And speed matters. We have heard crowdfunding sponsors give typical timelines of 14 days to close for a loan and 30-45 days to close for an equity investment.
Debt deals offered through real estate crowdfunding platforms today typically circle higher risk and higher returns than opportunities that attract bank financing and institutional investor interest. Returns of 8-12% to investors. These platforms include short term bridge loans for residential “fix and flip” projects, as well as small commercial loans in the $1-$5 million range.
A number of crowdfunding platforms are offering preferred equity products that offer returns in the 10-14% range, with more risky products offering returns in the mid-teens. Deal size is usually in the $5-$25 million range, and typically a sponsor must invest a minimum of 10% in the deal.
The crystal ball being what it is, two things still seem true here. This business is going to continue to grow by leaps and bounds…as long as the current economic expansion and a healthy commercial real estate market survive. At first, many more players will enter the market. This will be followed by a period of consolidation and/or specialization. It’s also likely that all the various models which are represented by different players will begin to consolidate around one or two approaches to crowdfunding. Will crowdfunding grow as just a technology platform matching buyers and sellers? (That’s my guess.) Will it grow as principal platforms where sponsors make investments and finance those investments through crowdfunding technologies? (maybe a few) Will sponsors be investment advisors? Is this just a technology platform or not? What will happen when the economy turns down and investments disappoint? Will this market have staying power to survive the inevitable next cycle?
The future of the real estate crowdfunding space remains to be seen, but there seems to be little doubt that this emergent field is an exciting space. Stand by, it’s going to be a wild ride.