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Crowdfunding: Breaking Down the Barriers in CRE Investment

Wednesday, August 10, 2016

Real Estate Indicators from HFF Director Ben Sayles and Gary Porter of HFF's Boston office.

“Real estate cannot be lost or stolen, nor can it be carried away.
Purchased with common sense, paid for in full and managed with reasonable care, it is about the safest investment in the world.”

– Franklin D. Roosevelt

CrowdfundingFrom the first settlement in Jamestown, Virginia, to the Land Rush of 1899, real estate ownership has figured prominently in United States history. Investment in residential real estate has very few barriers to entry: Listings are generally public, financing is available based on the creditworthiness of the borrower and the occupancy or operation is fairly straightforward. Conversely, investment in commercial real estate is less available to private investors, most commonly due to the increased equity investment and complexity of its operation. Individuals who wanted exposure to commercial real estate generally had to settle for buying shares of real estate operating companies (REITs) or tenant in common (TIC) syndications. That was true until the emergence of crowdfunding, the technology-enabled and legally-permitted ability to raise capital from a large number of individual investors. But, will this be a lasting source of capital or just a flash in the pan?

How Did we Get Here?

Before we can understand how crowdfunding is used today, we must first understand the two contributing factors that led to to this new means of raising capital:

  • Regulation:  Modern day crowdfunding traces its legality back to 2012 with the implementation of the Jumpstart Our Business Startups Act (JOBS Act). Title III of the JOBS Act allowed companies to raise funds from ordinary investors as opposed to “accredited investors,” those who earn an annual income of at least $200,000 (or $300,000 if married) or those with a net worth of at least $1 million.
  • Technology:  The Internet has changed our daily lives, but it has proved revolutionary for companies seeking to raise capital. Newly-formed crowdfunding companies include Indiegogo, Tilt and Kickstarter. To provide some context, according to Kickstarter, "over 10 million people, from every continent on Earth, have backed a Kickstarter project." Combined with a social media platform, these companies have created a new industry that is booming.

An Industry Is Born

Using the same concept and technology, real estate crowdfunding companies have brought about two significant changes for the commercial real estate industry:

  • Breaking Down the Barriers:  For the first time, individual investors not associated with the commercial real estate industry can now access opportunities that were previously only available to institutional or high net worth investors.
  • Increasing the Investor Base:  The commercial real estate industry has a current total value of roughly $29 trillion. By marketing to individuals, the investor base for commercial real estate has increased to include approximately 300 million individuals.

So Who’s Doing it and How?Crowdfunding

So which comes first, the deal or the capital? Successful companies need both. Real estate companies, who use crowdfunding to raise their capital, all start with real estate professionals. However, they need capital ready to deploy when the opportunity presents itself. Many crowdfunding platforms will make an investment, usually alongside a sponsor and then subsequently sell down the position on their website. This investment is generally structured as preferred equity, although first mortgage and mezzanine structures are also available.

A brief summary of those at the forefront of this industry are detailed below:

  • Fundrise aims to “give everyone the opportunity to invest directly in high quality real estate, without the middlemen.” With over $3 billion of capital raised, Fundrise offers investors debt and equity investment vehicles. Through the debt fund, investors pay zero percent management fees unless they earn a 15 percent compounded annual return. Additionally through the equity vehicle, Fundrise will pay a penalty of up to $500,000 to investors if it earns less than a 20 percent average non-compounded return.
  • Acquire Real Estate allows investors “to own pre-screened, institutional quality, real estate properties through crowdfunding.” Through Acquire, investors can go to the website, create a profile and invest directly into their real estate holdings. Offering only an equity strategy, investors are able to enjoy the benefits of direct real estate ownership while investing alongside Acquire.
  • RealtyMogul.com, founded in 2013, has more than 80,000 investors and $200 million invested in equity and debt transactions. Their website offers a convenient and quick way to immediately invest across various capital structures, and it also provides a portal for companies to raise debt and equity capital.
  • RealtyShares offers a wide variety of property types, returns and locations to investors. With a minimum investment of $5,000, an investor can partake in either the equity or debt of a residential or commercial investment. RealtyShares also provides companies the ability to source funding through their website.

Outlook

While crowdfunding is still in its infancy, it has already created two major benefits:

  • Providing a wider population with access to commercial real estate.
  • Providing real estate operators with a new source of capital that has been previously untapped.

Will crowdfunding be the ultimate “disrupter” that the real estate industry has been talking about? Maybe. Will online platforms replace traditional brokerage? Unlikely. That said, crowdfunding has become another arrow in the quiver for capitalizing real estate transactions. When it comes to just how big crowdfunding will be, the sky is the limit as the process becomes more normalized for both the investor and the sponsor.

About Ben Sayles

HFF Director Ben SaylesBen Sayles is a Director in the Boston office of HFF with more than 15 years of experience in commercial real estate. He is primarily responsible for investment sales transactions focusing on office, multi-housing and retail properties.

A graduate of Trinity College in Hartford, Connecticut, Mr. Sayles is the Director of the Commercial Brokers Association and an Executive Committee member of NAIOP Massachusetts. Additionally, he is active in several other notable commercial real estate professional groups, including Urban Land Institute and International Council of Shopping Centers.



About Gary Porter

HFF's Gary PorterGary Porter is a Senior Real Estate Analyst in HFF’s Boston office. He is primarily responsible for preforming complicated financial modeling, preparing investment memorandum for all capital markets activities and coordinating due diligence and closing process.

Prior to joining HFF in August 2015, Mr. Porter was an Asset Management Analyst at Jamestown Properties, an Atlanta-based private equity investor. Before joining Jamestown, Mr. Porter began his career in the Real Estate Investment Banking group at Jefferies LLC. Mr. Porter is a 2011 graduate of Wake Forest University, where he received a Bachelor of Science degree in finance.





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