Crowdfunding in the commercial real estate space has steadily evolved since passage of the JOBS Act and now represents a viable way to capitalize the equity side of a deal. Institutional-quality platforms have grown considerably in recent years and continue to gain market share. In our “Intro to Development Deal Structuring” blog, we covered several ways a sponsor can create and contribute equity into a deal. The article also discusses how development partners add value and the return expectations for different sources of equity. Here, we will share our notes on the specific source that is crowdfunding.
Limited Partner equity raises of $2-5MM (which tend to capitalize projects costing approximately $7-20MM) will find a gap that exists in the equity capital markets. This investment size typically proves too big for the solo developer to syndicate from friends, family, and/or acquaintances and is not large enough to attract the attention of institutional LP equity investors. Those groups are unlikely to endure the brain damage of structuring a joint venture investment, only to deploy a small amount of capital that’s an immaterial contributor to their annual production goals. Crowdfunding can fill this gap nicely. (It is worth noting that as this space matures, crowdfunding platforms are even giving some larger institutional LP equity funds a run for their money as these platforms can now raise and deploy hundreds of millions of dollars from accredited and non-accredited investors.)
It is important to understand the various types of crowdfunding source in this space today:
Their platform, your investors (a cloud-based reporting platform) – Juniper Square and other like firms provide software for investment managers to automate the investment operations and investor relations (think subscription agreement, reporting, return calculations, etc.)
Their platform, their investors – CrowdStreet, EquityMultiple, RealtyMogul and Cadre bring a rigorous vetting process to the deals and sponsors featured on their platforms. These groups are concerned about protecting and enhancing their brand and reputation with their ever-growing investor pool.
Sizes of investment vary here. CrowdStreet is the “big dog” in the space with about $1.3Bn invested across nearly 500 deals. They passed on a RECA partner’s deal because it was too small ($4MM of equity was required). Conversely, the same deal was too big for EquityMultiple, who felt they could raise half of that amount. A crowdfunding source of this stature is best utilized for rounding-out a friends & family syndication.
A distinct advantage these investment platforms have is that they typically use the sponsor’s entity/org documents so splits and governance tend to be more sponsor-friendly than an institutional joint venture equity partner would allow. These groups have a pretty good track record at raising money, but at the end of the day, it is a best-efforts exercise.
This type of structure ends up costing about 3% of equity raised – a bit more for smaller deals and a bit less for larger deals. A couple of corollary notes:
- Investors must be accredited because they are making investment decisions on a deal-by-deal basis.
- Minimum check sizes are usually larger $25,000 to $50,000.
- In the event of an adverse event, and downside variance that saw the sponsor unable to perform, it is unclear who would step in to run the project. This creates more of an investor concern than a sponsor concern.
Future contact with investors is a grey area. Some groups seek to assert control, some less. The question of if they remain their investors or if they become your investors varies on a case by-case basis. CrowdStreet acts as a conduit to their investors, but subject to a tail on fees, those investors can become sponsors’ investors. CrowdStreet does not firewall the sponsor from each individual investor.
Private, non-traded REIT’s – These groups use crowdfunding to aggregate capital (vs. the broker-dealer network or large financial institutions). FundRise and RealtyMogul act just like a discretionary fund manager would in other institutional joint ventures. They interface directly with the sponsor/advisory team to place a discretionary pool of capital and do not run a real-time syndication. These platforms form a private REIT investment vehicle (typically a Reg A offering) that registers with the SEC. For this reason, their investors don’t need accreditation since they are contributing to a managed fund instead of a one-off investment. These platforms truly open commercial real estate to the crowd with minimum investment sizes of as little as $500-$1,000.
While the firms above are equity-oriented, others use the same models above for debt. For instance, PeerStreet originates and invests in one-off single-family home loans in this manner.
To dive deeper, check out this episode of Offshoot, the Fident Capital podcast where Kevin Choquette interviews CrowdStreet CIO, Ian Formigle. He speaks about their journey from a 2013 startup to today, where CrowdStreet is placing $1B annually and has over 50,000 investors in their stable.