Commercial Real Estate Crowdfunding
Find out how it really works.
Crowdfunding is probably the biggest buzzword to hit the commercial real estate industry in the last couple of years. But what's the reality behind the hype? As hundreds of crowdfunding portals appear online, is this really the disruptive technology that some experts claim or just another option for funding and investing in commercial real estate?
To find out how it all works, Commercial Investment Real Estate talked to three CCIM members who are active in the crowdfunding arena: Elizabeth Braman, CCIM, chief production officer, Realty Mogul Co.; Adam Hooper, CCIM, CEO/founder, RealCrowd; and Darren Powderly, CCIM, co-founder, vice president of real estate, CrowdStreet.
CIRE: What's a typical size and type of deal your company targets for equity crowdfunding?
Elizabeth Braman, CCIM: We make investments in the range of $1 million to $5 million per deal. We will invest alongside other investors as well as taking a minority interest.
Adam Hooper, CCIM: At the beginning of 2014, average deal size was around $19 million; in the last quarter of 2014 the average deal size was $24 million. We anticipate to grow substantially in 2015 as we are currently looking at several $100 million-plus projects. We've seen projects in office, retail, industrial, and multifamily. The bulk of the opportunities have been property acquisitions, though we have also featured several funds that perform very well.
Darren Powderly, CCIM: CrowdStreet posts institutional-quality commercial real estate investments in a single asset or fund offering structured either as debt or equity. We're comfortable helping our sponsors raise $500,000 to $2 million from our accredited investor membership base. The property values range from $2 million to $200 million, yet are typically under $20 million.
Where do you find the deals?
Braman: Generally speaking, qualified sponsors find us through our marketing efforts and press. Sponsors and borrowers come to our site and complete a form to see if they have a qualified project. We immediately schedule a call with one of our acquisition professionals to determine if we want to invest in, or lend on, a transaction.
Hooper: We source our deals from a mix of our experience and relationships in the industry. Combined, our real estate team and founders have more than 65 years of real estate experience and more than $5 billion of transaction experience. We also receive referrals from groups we've done business with and from inbound interest.
Powderly: Sponsors are finding us online. We have an excellent online presence, which we extend to our sponsor clients to help them build their online brands. Today we are fielding eight to 10 inquiries per week from real estate sponsors. We're also communicating with institutional-quality sponsors on a regular basis to help them understand how to raise capital online via our marketplace. There are a lot of moving parts from a regulatory, technology, marketing, real estate, finance, partner, and investor relations points of view, so we go to great lengths to make sure our sponsors are prepared prior to posting an investment on our marketplace.
What are your company's parameters for putting a property or deal up for crowdfunding?
Braman: Realty Mogul has internal guidelines that we use, but really it comes down to sponsorship and the risk/return of the investment. We look for sponsors and borrowers who have already shown that they have the ability to execute on a plan and have expertise in their asset class. From there we look at the property, the market, and the plan for reaching the return in the estimated hold period. If we feel like it is a deal we can support, we discuss it at a credit committee and collectively decide whether to proceed with finalizing a full underwriting and making the offering available to our investors.
Hooper: Our focus is on the real estate operating companies and their track records, experience, and what they have done to show that they put their investors first. In contrast to most real estate crowdfunding companies, we are not building a real estate investment company. Rather, our focus is providing best-in-class real estate operating companies with a technology platform that gives them the tools to raise capital in this new environment. As such, we do not provide investment advice or recommendations on which assets to invest in, but we do provide investors with direct access to partners with the best real estate companies in the U.S.
Powderly: CrowdStreet posts institutional-quality commercial real estate with defined business plans from reputable and proven sponsors. As a CCIM-founded company with deep expertise in the investment real estate market, we know how to evaluate sponsors and deals prior to posting them on the marketplace. CrowdStreet introduces individual investors to high-quality sponsors in a transparent, secure online setting where they can access all the information they need to make an informed investment decision. If they have a question, they are welcome to contact us via chat, email, or phone, and we will help them get the answers they need prior to investing.
What's the average timeframe for crowdfunding real estate deals?
Braman: It really depends upon the crowd. We have more than 15,000 investors, so things go more quickly on the Realty Mogul platform. We close our loans in 10 to 15 days on average. For equity, if it is a strong deal, we have raised funds in a week or less, although we set reasonable expectations of 30 days from start to finish. Usually we are waiting on the sponsor's conventional loan to be underwritten and finalized to close.
Hooper: We've seen deals literally fund in a few days and we've had funds that have raised $3-plus million over the course of a month and a half.
Powderly: We're experiencing an average funding time of 30 to 45 days from online property posting to closing of the transaction. The biggest surge of investor interest comes in the first three weeks and the remaining time is used for transaction management leading up to the deal closing. We're solving the problem of aggregating a high volume of investors with the use of our technology. It's certainly possible for an attractive deal to be fully funded within a few days. That's the power of our online marketplace.
What are the due diligence requirements for investors on crowdfunding deals?
Braman: At Realty Mogul we underwrite very similarly to how a conventional lender underwrites a deal. We look at the strength of the sponsor and its track record in the same asset class and market. We look at the market to see if the fundamentals are there and the trends are positive. We look at the asset and how it has performed historically in the past and add stressors to future performance. And finally, we look at the deal structure proposed by the sponsor to see if it is favorable to our investors and something that will sell on our platform.
Hooper: Of utmost importance - and this is an area that I fear many investors don't spend enough time and attention on - is doing their diligence on what the collateral of their investment is. What are they actually investing in: the real estate or a synthetic investment product that's been structured by the crowdfunding company? If the crowdfunding company fails, what happens to their money? A lot of the crowdfunding companies are now offering “property dependent notes,” which, for investors, provides no security to the underlying asset. At RealCrowd, we believe that 100 percent of investor dollars should be invested in the actual real estate, not invested into a crowdfunding entity that bleeds fees and doesn't provide direct ownership of real estate to the investors. Beyond that, it's customary due diligence: who is the sponsor, what's its track record, are its projections reasonable, and what has it done during the last downturn.
Powderly: Since our sponsors are best in class, they are professionals at due diligence and underwriting. Therefore, when we request due diligence documents, we often receive a full set of documents that are then uploaded to a property posting for investors to view. CrowdStreet follows a professional due diligence process based on industry best practices. If necessary, we will hire third party consultants to help us complete due diligence on a sponsor's project. We've had success partnering with CCIMs in secondary and tertiary markets where they are the local experts.
When it comes to the investors, we build relationships with our investor members. It's important to us to understand their investment goals, so we survey their investment preferences and maintain regular contact with them. The success of our individual investors and the health of our overall investor community are of paramount importance to CrowdStreet.
What are the investorexit strategies on crowdfunding deals?
Braman: The beauty of a platform like Realty Mogul, as opposed to a fund, is that we don't have required end terms. With a fund, you might have to sell even if the market is not positioned for that to be the best investment decision. For us, we ask for the sponsors to give us an estimated hold period of three, five, or 10 years. We underwrite to the estimated hold period, but if it is not in the investors' best interest to sell, we will allow our sponsors to hold longer. Alternatively, if the sponsor gets an amazing offer to sell one year into the hold they have the flexibility to do that as well.
Hooper: Right now, most exits are determined by the real estate sponsor according to the business plan for the asset. On some of the funds that have raised capital through our platform the investors enjoy quarterly redemptions (meaning they can request their initial capital to be repaid quarterly). Eventually we will see the development of a secondary market emerge as a natural extension of these platforms.
Powderly: Investor exit strategies vary from deal to deal. The exit strategy on a particular deal should be clearly presented in the sponsor offering materials. These are private offerings, so unlike investing in a publicly traded real estate investment trust, there is no secondary market (yet) to create immediate liquidity. Investors should plan on having their money invested for the entire term of the investment or longer.
Anything else investors/service providers should know?
Braman: There are many different structures in how the crowdfunding platforms can invest. We have chosen to take on the capital raising responsibility for our sponsors by becoming their single point of contact; we create an LLC for our investors to be limited partners, and then invest as one limited partner into the ownership structure so that the sponsor has one Schedule K-1, one distribution, and one quarterly report. We can come in alongside other investors, and/or provide up to 90 percent of the required equity in a deal. We also offer debt on transactions, so we can be a true one-stop shop for the entire capital stack. One final thing of note is that we are selling securities, so sponsors should be careful to only work with companies on the equity side that either are a broker deal or are affiliated with one.
Hooper: Investors should double or triple check to make sure they know what they're actually investing in. Look at the pedigree and background of the founders and team on these crowdfunding companies, and do your diligence as an investor as you would with any other investment product. Overall, if done correctly, this is a great vehicle to get direct access into real estate investments.
Powderly: As a CCIM-founded company with deep expertise in the investment real estate market, CrowdStreet knows how to evaluate sponsors and deals prior to posting them on the marketplace. Once an investment is made, investors receive regular updates via an online investor room where they track all of their active investments. Investors, for the first time ever, are empowered to build a diversified commercial real estate portfolio without high middlemen fees or the management responsibilities of direct ownership.
The future of commercial real estate capital raising is online. I'm proud to have applied my CCIM knowledge and network in the creation of CrowdStreet.
Sara Drummond is executive editor of Commercial Investment Real Estate.