Thanks to the sizable audience that attended last week’s NYC panel discussion on real estate crowdfunding, despite the 7° weather. As this market achieves a multi-year track record, then the findings, the possibilities and the panels are becoming more interesting. Here, we share the top insights from the panel, co-hosted by iFunding and our partner, Citrin Cooperman, a nationally recognized auditing, tax and advisory services firm.
- Harmen Bakker, moderator, and Partner in Citrin Cooperman’s [www.citrincooperman.com] Real Estate practice;
- Mark Mascia, President of Mascia Development [www.masciadev.com] – real estate developer and investor experienced with several crowdfunding platforms
- Mark Roderick [www.crowdfundattny.com], attorney and expert on crowdfunding securities regulations, of Flaster/Greenberg.
- William Skelley, CEO of iFunding [www.ifunding.co], real estate crowdfunding platform.
Bakker/Moderator: Let’s start with the advantages and any cautions with using crowdfunding, from the real estate developer’s perspective…
Roderick/Attorney: Crowdfunding is nothing more and nothing less than the Internet coming to the capital formation industry. The Internet directly connects developers and investors. It sweeps away all the middlemen. It’s disruptive, reduces cost, and increases efficiencies.
Skelley/iFunding: The best deals I know of need to close fast to capitalize on an opportunity. Our latest investment offering was listed on our website the night before this panel, and was fully funded before I went to sleep. On the other hand, larger, more sophisticated deals can take one to several weeks. We’re looking at 3-7 days to fund on average. Also build in one to several weeks for due diligence and investment arrangement setup.
Mascia/Developer: I agree, speed of fundraising can be a key benefit, depending on the platform and deal. It’s not possible for me as a developer to raise $1 million anywhere near as quickly as the good online listings, and certainly not with so many investors. Just having meetings and lunches with potential investors could take weeks. To me what it comes down to is delivery [of the financing on a timely basis]. I’ll gladly pay more for a service I can count on to deliver.
Mascia: There are (at least) two interaction models for developers with the investors. In the first, the investors are passed by the crowdfunding platform directly to the developer. In the second, the investors are pooled into an LLC managed by the platform. Right now I’m on the fence as to the preferred model, as I watch the size of crowdfunded investments grow and number of investors increase. It’s more efficient for the crowdfunding platform to handle investor questions. However, if the platform starts to provide a larger portion of my total financing, I need to be careful to maintain my own relationships.
Roderick/Attorney: The most common investment structure is a single purpose vehicle (SPV) set up by the crowdfunding platform to pool all the investors’ funds into the deal through a single entity. However, this limits the total number of crowdfund investors to 100, according to securities law. You’ll start seeing other structural relationships as the field grows.
Investor Due Diligence
Mascia: Many family offices tend to emphasize social due diligence, that is, reaching out to colleagues to gauge the integrity of a developer. The good crowdfunding platforms tend to be more rigorous in their due diligence checklist. And, they share the findings with all the investors.
Bakker: It is important that investors and sponsors carefully review and understand the structure of the deal, the platform model, reporting provided, and the regulations to minimize their risk and increase the reward.
Individual property investments versus funds of properties
Roderick: In a sense, when an investor decides to work with a real estate crowdfunder, they are partly relying on the platform’s pre-screening of a deal. I believe investors will want more of this; pooled assets are the future.
Skelley: We’ll offer investments in semi-blind funds, where the investor receives knowledge about existing investments and some information about potential future property investments. We generally don’t offer blind-funds, where only aggregate returns are reported, as that’s the domain of a REIT or a Blackstone.
Bakker: One day, will there be aggressive and conservative portfolios an investor can choose from?
Skelley: In the not too distant future, expect to see from us the option to invest in different tranches in a deal, such as either the mezzanine debt or the preferred equity. And, we’ll share analytics about risk and return. It’s early in the real estate crowdfunding era to have a large enough sample for good metrics, but we’re working on it.
Mascia: Some platforms send investment updates weekly; others do it monthly or quarterly. This also depends on the duration and speed of progress on an investment. The less frequent ones tend to be more detailed.
Skelley: For any deal where it makes sense, we provide weekly or bi-weekly updates, including a statement of progress, photos and even video. One developer shares time-lapse images showing stages at the site. We encourage developers to reinforce the confidence of the investors in them, through the updates. This makes a big difference.
Bakker: Looking ahead a few years, what will be game changers for real estate crowdfunding?
Skelley: Two years ago, no institutional investors would take a meeting on crowdfunding. Now, we’re in frequent dialogue with family offices, private equity firms and real estate power-houses. You’re going to see more institutional money get involved in this approach, just as they have in consumer lending plays like LendingClub.com.
Mascia: I’d like to see a secondary market, where investors can resell their participation in crowdfunded deals to other investors. I think investors at this point may prefer one to three year investments, but for my commercial deals, the best returns may come by timing a market sale five or even ten years out. I don’t want to have to refinance all of my crowdfunded equity every two or three years, so a secondary market would make the market more liquid.
Roderick: To date, the crowdfunding platforms have been reluctant to become broker-dealers, given the filing and compliance requirements. However, the role allows for the most straightforward way to be compensated proportionally to value added: as a percentage of the amount raised for a deal. I’m seeing the emergence of a few broker-dealers with an online presence that make it easier and less costly for a crowdfunding platform to ‘plug into’ that broker-dealer with the same benefits.
Roderick: There’s a chemistry in any market sector, a critical mass where all the necessary ingredients start gelling. That’s coming. When securities regulations finally allow non-accredited investors to participate in most online deals, that will open up the market to millions of individuals and create even more innovation. I think the crowdfund platforms will want to balance the influence of individual investors and that of institutions wanting to syndicate their deals.