Technology Solutions

Crowdfunding

Real estate ownership is one of the oldest — and most inefficient — businesses. Real estate companies or “sponsors” looking to raise equity for new development, project repositionings, or acquisitions still rely heavily on old school methods such as their black book of investors and handshake deals at the local country club.

Crowdfunding has the potential to change the financing landscape for both investors and sponsors by bringing greater efficiencies to the process. By using a technology platform that makes real estate deals more transparent and easily accessible, crowdfunding allows investors to shop for the latest real estate investment opportunities on their computers or mobile devices.

That shift certainly streamlines the fundraising process for project sponsors looking to fill equity or debt requirements. The question is whether or not the real estate industry is ready to embrace that change.

A New Paradigm

The original premise behind crowdfunding was to use small amounts of capital from a large number of individuals to finance new business ventures. New startups relied on social media sites such as Facebook and Twitter to reach out to friends, family, and colleagues to raise capital for their dream businesses. It was grass roots and folksy — and it worked. Entrepreneurs found success in funding new creative projects and small businesses, ranging from indie films and art studios to restaurants and retail shops.

That idea has morphed into an investment vehicle that has piqued the interest of a growing pool of investors including venture capitalists, angel investors, high-net-worth individuals, and family trusts. The crowdfunding model is now emerging as a legitimate source of capital to finance a variety of startups ranging from biotech to green energy.

It also has emerged as a viable source of real estate funding. The catalyst that has made that shift possible is the Jumpstart Our Business Startups, or Jobs Act. Essentially, the Jobs Act loosened some restrictions related to who can invest in private offerings and how those offerings could be advertised. The Jobs Act was signed into law in April 2012 by President Obama and advertising of certain private offerings is now permitted.

So what does crowdfunding mean for the future of real estate investing? Think of the change that has occurred in the stock market in the past 15 years. Technology has brought accessibility and transparency to that sector. Investors no longer have to rely on stockbrokers to complete transactions when they want to buy or sell securities. They can log on to their own brokerage accounts to access a variety of investment tools from real-time pricing to a detailed analysis of their portfolios.

That same level of direct access to information and transparency is starting to occur in the real estate market, and crowdfunding has the potential to be a key driver behind that change. Fortunately, for those CCIMs that accept this change, the technology will lead to a more capital-efficient marketplace that will increase deal flow. Furthermore, real estate is, after all, a people business, so innovative CCIMs will always have an important seat at the table.

Crowdfunding is creating a marketplace where investors sit down at their computers, access current offerings, and quickly filter through multiple deals to find the right fit. Investors will have the tools and resources to build a portfolio that meets their specific needs. For example, an investor can opt to have a percentage of their real estate dollars allocated to growth opportunities for a child’s college savings plan or income-producing property for retirement savings.

Traditionally, investors who wanted to participate in direct real estate investments had to participate in entities such as a limited liability partnership where the minimum buy-in was sizable — often upward of $250,000. Crowdfunding deals can be accessible for as little as a few thousand dollars. That lower dollar amount allows investors to split up that investment into smaller allocations to create more portfolio diversification and minimize risks. Instead of investing $100,000 into one deal, they can spread that out into five, 10, or even 20 different investments across different property types and different geographic markets.

On the equity side, crowdfunding allows sponsors to outsource their capital-raising efforts and the management of those investor relationships over time. There are fees associated with crowdfunding, and different crowdfunding firms operate with different fee models. Sponsors must scrutinize those models carefully to make sure the investor’s return on investment is not devoured by fees and charges. But the efficiency that crowdfunding brings to the process in terms of reaching investors, delivering information, responding to questions, and meeting reporting requirements replaces the time and money that sponsors were already spending on those efforts.

Ultimately, crowdfunding allows sponsors to tap into a large pool of middle-market investors who have a desire to put capital into real estate. One of the crucial steps for this emerging niche to evolve is for crowdfunding firms to prove that they can not only reach that pool of high-net-worth investors, but also bring them to the table for sponsors. If crowdfunding can deliver on that promise, then this is a sector that will continue to carve out a bigger place for itself in the real estate arena.

Darren Powderly, CCIM, is co-founder of CrowdStreet and a principal with Compass Commercial Real Estate Services in Portland, Ore. Contact him at Darren@crowdstreet.com.
Currently, crowdfunding real estate opportunities are only available to accredited investors while the Securities and Exchange Commission determines final rules for governing crowdfunding activities. For more information, contact www.sec.gov.

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