iFunding Weekly Educational Newsletter

Part 1: Introduction to Due Diligence in Commercial Real Estate

Due Diligence – What is it?

Purchasing a property without conducting proper due diligence is like buying a used car without looking under the hood……what looks like the greatest deal can turn into your worst nightmare. Good due diligence consists of a thorough review of the physical, legal and financial risks of a potential investment property before committing to the deal.

The due diligence process serves to confirm all the material facts related to a property that could cause a buyer to hesitate from consummating the deal at the price and on the terms proposed by a seller. At a minimum, due diligence for a commercial real estate acquisition should consist of: (1) an environmental assessment; (2) title and municipal records review; (3) a survey; (4) an engineering and building inspection; (5) a zoning review; and (6) review and confirmation of financial data, each of which will be separately addressed in this Seven Part Series.

Due Diligence Contingencies in Contracts

A buyer can either conduct due diligence before entering into a contract with the seller or after the contract has been fully executed. If a buyer wants to conduct due diligence after a contract is fully executed, the buyer should have a due diligence contingency in the contract. A due diligence contingency is a length of time specified in the contract for the buyer to carry out and perform due diligence. If the buyer is not satisfied with its due diligence the contract contingency gives the buyer the right to back out of a deal without penalty (i.e. the buyer will get its contract deposit back). Contingencies are important for buyers who cannot predict with certainty the physical, legal and financial conditions of the property prior to entering into a contract. If a buyer enters into a contract that does not have a due diligence contingency and then uncovers a material issue the buyer will either have to proceed to the closing and accept the risk or terminate the contract and loose the deposit. Due diligence contingencies can vary greatly depending on the facts of each transaction, however there are two main categories: a general due diligence contingency and a specific due diligence contingency.

General Due Diligence Contingency or “Free Look”

For the buyer a general due diligence contingency in a contract is preferable to a specific due diligence contingency. For a general contingency the language in the contract is drafted to allow the buyer the ability to conduct all forms of due diligence (within reason) that the buyer needs in order to feel comfortable to proceed to the closing. This type of general contingency is known as a “free look” because it allows the buyer to terminate the contract for any reason or no reason and still receive a full refund of any earnest money deposit.

Specific Due Diligence Contingency

Specific due diligence contingencies are tied to narrow investigative procedures like environmental assessments, zoning studies, financing or building conditions. A specific due diligence contingency is most beneficial to the seller because it only allows the buyer to terminate the contract under limited conditions. For example, a specific due diligence contingency could contain an environmental provision that only allows the buyer to cancel the contract in the event that a Phase I Environmental Site Assessment recommends a Phase II Environmental Site Assessment (which involves testing) (Environmental Due Diligence will be covered in more detail in Part 2 of this Series); or a specific due diligence contingency could contain an engineering provision that only allows the buyer to cancel in the event that the building inspection reveals structural issues with the roof, walls or foundation (Engineering and Building Inspection Due Diligence will be covered in more detail in Part 5 of this Series). From the buyer’s prospective a specific due diligence contingency is a much riskier contingency than a “free look” because if due diligence reveals a material problem beyond the scope of the limited conditions, the buyer either loses its deposit or is forced to close and then is stuck with the problem.

Seller’s Tips

  • Use specific due diligence contingencies in the contract
  • For each type of due diligence, clearly identify the reasons under which a buyer can terminate the contract and draft language as narrowly as possible
  • Require the buyer to provide appropriate insurance for all of its consultants naming seller as additional insured
  • Make sure that the buyer indemnifies the seller for any damages or liabilities that arise out of testing and that seller will repair all damage at its expense
  • If buyer wants a right to extend the diligence period, require a non-refundable payment

Buyer’s Tips

  • Get a “free look” general contingency which allows termination of the contract for any reason or no reason
  • For all forms of due diligence contingencies make sure that the contract requires the seller to assist the buyer in conducting the due diligence by providing documents in the seller’s possession such as existing property files, reports and permits
  • If the buyer is allowed to apply for permits or make any applications before closing the contract should grant the purchaser the authority to act on behalf of the seller when dealing with third parties such as municipalities
  • Try to get a right to extend the due diligence period, without a non-refundable penalty
  • For each type of specific due diligence, clearly identify the reasons under which a buyer can terminate the contract and draft language as broadly as possible

In the Concrete Jungle

In New York City buyers of real estate have been hoarding their cash reserves since the financial crisis in 2008. As a result, there is huge amount of cash chasing after very few deals which has placed a lot of the control in the hands of sellers. In New York City sellers therefore heavily favor entering into non-contingent contracts (often referred to as “all-cash” contracts) and have forced buyers to conduct as much due diligence as possible prior to entering into a contract. One reasonable solution is for the seller and buyer to enter into a non-binding letter of intent, which has an exclusive period during which the seller will only sell to that buyer. This allows the buyer a certain amount of time (usually very short) to conduct limited due diligence before entering into a binding contract. However, letters of intent should be used with extreme caution as courts may enforce them as binding contracts, especially with respect to any promise by the parties to “act in good faith”.

Good Resources

A helpful list of documents that a buyer should consider requesting from the seller prior to committing to any commercial real estate deal is here.

Disclaimer

The information in this blog post (“post”) and website is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. By using this website and post you understand that there is no attorney client relationship between you and Tomlin Law, PLLC. No information contained in this post should be construed as legal advice from Tomlin Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction. Although the information on this blog is intended to be current and accurate, it is not guaranteed or promised to be current, accurate, or complete. This blog contains links to other web sites. Tomlin Law, PLLC makes no guarantees or promises regarding these web sites and does not necessarily endorse or approve of their content.

Real Estate Investment to Remain on Fire for 2016

As we head into the new year, investor sentiment toward commercial real estate remains positive, with many investors reporting that they plan to increase their allocations in 2016, reports the recently released Colliers International Global Investment Outlook. Overall, the U.S. remains the top destination for global capital, with global gateway cities the preferred investment target.

One trend the report noted was that while global appetite for real estate remains strong, rising uncertainty stemming from China, economic weaknesses in emerging markets, the tightening of monetary policy in the U.S., and geo-political events across the global has made investors more wary. Of the 600 investors surveyed for the report, 44% said they’re “likely” or “highly likely” to take on more risk over the next 12 months—a drop from 59% a year earlier, though this also may reflect that fund managers have taken as much risks as their mandates allow them. This trend was apparent across all types of capital, with the sharpest reduction in private equity funds, which dropped from 81% to 47% over the year.

When the report looked specifically at U.S. investors, it found that they have dialed back their intended investment activity from last year, with 21% of investors expecting to be net sellers this year, compared to none last year. Fewer investors also intend to expand their activity, while this group, as a whole seems to be moderately risk averse. Yield expectations among U.S. investors tend to be more bullish, with 68% of them expecting leveraged returns of between 11% and 20%, even though they recognize that finding the right yields has become increasingly challenging and further cap rate compression may be dwindling in some markets.

Given these trends, iFunding believes that crowdfunding will become a more popular investment vehicle for those looking to buy into commercial real estate opportunities in 2016.

Investors are reporting the opportunities provided through real estate crowdfunding have competitive risk-adjusted returns, high tangible asset value, attractive and stable income return, and are a good hedge against inflation. While there is always risk associated with investing in real estate, iFunding has the experience and capacity to perform due diligence on all our listings with the goal of minimizing risk and maximizing returns, whether in multifamily, office, industrial, retail, or hospitality.

The Most Popular Property Choices

According to Colliers, the most popular property choice for global investors in offices in central business districts at 61%, up from 46% last year. This followed by industrial and logistics (48%), developments (39%), and shopping centers (38%). Suburban office came in fifth and was one of the fastest growing sectors in terms of preference (32%, up from 21% in 2015), while multifamily felt the steepest drop, falling from second to sixth place this year despite continued interest from U.S. and Canadian investors. To read the full Colliers International Global Investment Outlook report click here.

 

Four Reasons Crowdfunding Makes Sense for Financing Real Estate

In 2014, global crowdfunding grew by 167% to reach $16.2 billion raised—$9.4 billion in the United States alone, and $1 billion of that in real estate. This year, Massolution, a crowdfunding research and advisory firm, predicts that number will more than double.

Many industries are taking advantage of this innovative platform, including businesses, entrepreneurs, social causes, films, performing arts, music, and recording arts. Real estate has particularly latched on to the model, with Times Realty News tracking 152 real estate crowdfunding platforms in the United States and 62 globally as of December 21.

Whether you’re a new or seasoned commercial real estate sponsor, tapping into a crowdsourced platform like iFunding should be taken into serious consideration for financing acquisition and development projects in the new year. Here are four reasons why crowdfunding makes sense:

1) It’s an excellent alternative to traditional lending sources

Since the market downturn, banks and other traditional lenders have enacted stricter credit and lending standards. Crowdfunding can fill in gaps created by more diligent underwriting and provide capital for projects that these lenders may otherwise find too complex. Larger institutional lenders may also pass over opportunities underneath a certain price threshold, instead preferring one $30 million investment to managing six $5 million investments. Crowdfunding is a strong contender in the mid-market space.

2) It taps into an entire new class of hungry investors

Companies like iFunding track the solicitation, preferences, and commitments of thousands of accredited investors whom sponsors or developers may not have access to via traditional networking. Crowdfunding’s digital platform allows for a broader promotional reach, introducing projects to investors who may not otherwise be familiar with the sponsor or geographical area.

Overall, crowdfunding broadens participation in real estate investment. iFunding’s typical customer is an entrepreneur with $1 million to $5 million net worth seeking high-quality deals, and investment opportunities are available for as little as $5,000 across a broad range of property types, including multifamily, retail, office, and mixed-use. And as crowdfunding regulations begin to encompass more investors, we’ll see greater participation at even lower buy-ins.

3) Technology makes the process simple and efficient

In addition to tracking potential investors, technology utilized by crowdfunding companies takes care of a project’s promotion, subscription, due diligence, fund management, project documentation, investor communication, and financial reporting—allowing sponsors to instead focus on project quality and completion. The overall process is more streamlined, reduces sponsor and investment fees, and increases transparency into a project.

4) It’s a targeted approach

A digital platform allows investors access to carefully selected investments based on their preferences, from property type and location to risk profile and return profile. This ensures the right investors are matched to the right sponsors and projects.

Real Estate Crowdfunding is Only Rising with iFunding’s Best Month in August 2015

iFunding, a leading real estate crowdfunding platform, had its best month in its 3 year history, offering investors over $14 M in real estate investment properties.

August is typically one of the quietest months of the year, with investors distracted by summer activities. However, due to the quality of iFunding’s real estate opportunities, the company quickly funded six of its eight projects listed within a week of introducing the project to its 7,000 accredited investors.

“iFunding takes pride in providing quality deals for our investors, “ William Skelley, Founder and CEO, states, “We have been focusing on developing sound relationships with our sponsors, and this month, it’s clear this effort has paid off.”

“We thoroughly enjoy working with the iFunding team and using its platform for our funding source.” Myles Bruckal, Founder of The Bruckal Group says, “Raising capital with iFunding exceeded our expectations, and therefore listing with them again was an easy decision. We are honored to be apart of its most successful month, and we’re in discussions regarding our next project for the iFunding platform. ”

iFunding expects continued growth by offering larger and higher quality opportunities and acquiring additional accredited investors.

About iFunding 
iFunding is a leading real estate crowdfunding platform, facilitating debt and preferred equity fundraising for properties ranging from multi-family residences to apartment towers, hotels and resorts, ,retail locations, malls, offices, mixed-use buildings, and more. iFunding provides opportunities for its 7,000 accredited investors to invest in institutional-quality real estate deals, with a minimum investment of $5,000. The company oversees deals throughout their lifespan, providing extensive information and transparency to give investors insight and oversight into their investments. It also generates financing for multi-project funds, and partners with family offices to co-fund opportunities with its individual investors. iFunding offers flexible financing terms to real estate developer and operators. Visit http://www.ifunding.co for more information, or connect with us on LinkedIn athttp://www.linkedin.com/company/innovational-funding, on Facebook at http://www.facebook.com/iFunding , or via @inno_funding on Twitter. The phone number for investor and operator inquiries is 844-367-4386.

iFunding Contact:
Paula DeLaurentis
Marketing
844-367-4386 ext.3
press(at)innovationalfunding(dot)com

William Skelley on panel, 2nd year in a row, at Annual Crowdfunding Forum for Real Estate 2015

For the 2nd year in a row, William Skelley, CEO and Founder of iFunding, will be speaking on a panel at the Annual Crowdfunding Forum for Real Estate hosted by IMN. This year’s event will take place September 16th and 17th at the Fairmont in Santa Monica, California.

William Skelley

Skelley is founder and CEO of iFunding, the online, commercial real estate investment marketplace for accredited investors and institutions. He is responsible for business development activities at the company, which has financed over 35 real estate projects with total real estate value of over $400 million. William specializes in working with family offices. Prior to iFunding, he founded a boutique investment bank that underwrote $2 billion in real estate transactions, ranging from hotels/resorts acquiring hundreds of millions of dollars in financing, to mixed-use properties and single family homes. Earlier, William was a principal at Rose Park Advisors, a hedge fund founded by Harvard Business School professor Dr. Clayton Christensen, specializing in “disruptive innovation.” He has also worked at General Electric, Olympus and as an advisor to several start-ups.  He attended Harvard Business School and Hobart College.

Skelley will be speaking on the panel discussing, ‘Evaluating the Expansion of & Economic Factors Behind the Growth of Crowdfunding’ along side other executives in the real estate crowdfunding industry.

iFunding will be meeting with developers and investors by request from September 16th through 17th. If interested, email press@innovationalfunding.co.

 

Raising Company Equity through Crowdfunding – an Interview with Chance Barnett, CEO of Crowdfunder

Crowdfunding is being used for a wide variety of fundraising purposes these days, not the least of which are (a) equity for growing companies and (b) financing for real estate projects.

Crowdfunder is the number one ranked equity crowdfunding site on Google, with over 77,000 registered users and $56 million committed across investments to-date. iFunding, a real estate crowdfunding platform itself, chose to use Crowdfunder when we decided to raise funds for our corporate operations. In the first week of its campaign, iFunding raised $1,200,000 via its listing, with more expected in the coming weeks.

Because effective crowdfunding will be of interest to many of our business partners and investors, we asked the CEO of Crowdfunder, Mr. Chance Barnett, about his platform and secrets to success with equity crowdfunding.

How did you come up with the concept for Crowdfunder?

The idea emerged three years ago, after I became involved with a policy group in Washington DC that contributed to the creation of the JOBS (Jumpstart Our Business Startups) Act. That federal Act liberalized the rules enabling more individuals invest in privately-issued securities, such as startups issuing equity or real estate companies financing deals. It was exciting working with leaders in the Senate, House and SEC. After the law passed in 2012, I turned to the tremendous opportunities on the business side and decided to create Crowdfunder. I had been an angel investor and entrepreneur several times earlier.

There are many active crowdfunding sites, with a number of them raising equity for new ventures. What makes Crowdfunder unique?

There are only three or four equity crowdfunding sites driving meaningful financing volume. We are one of the largest. Most of our growth has been organic, based on the quality of our service and investments. We were ‘live’ even before the passing of the JOBS Act, acting as a startup networking and investor matching service that identified and promoted entrepreneurs in their communities. This has given us a lot of time to understand the dynamics between passionate entrepreneurs and investors, and build that into our culture and operations.

What best practices should companies be aware of, when planning to crowdfund equity?

We advise companies that:

  • Crowdfunding‘s financial returns are proportional to the effort you put into it. Plan your ongoing campaign steps – marketing and response processes – well before launch.
  • The first days of the campaign drive momentum. Leverage your best relationships and marketing ideas to reach the most likely audience to invest, starting day one. Your founders should personally lead the outreach, and the entire team should highlight the campaign to their personal contacts.
  • Investors are interested in the returns, but equally so they want to connect with your company’s mission. You should think carefully about crafting your story in a compelling way. Then, target your outreach to people who are likely to connect emotionally, including the community of existing users of your product or service, or those with similar demographics.
  • Similarly, many investors want to feel engaged with your company or learn alongside your team, by participating as an investor. They realize the financial returns will take years. Therefore, give thought to how you will include your investors in the ‘journey’ and keep them involved even after the fundraising round is complete.

iFunding is very happy with our fundraising results so far on your platform – one million dollars raised in 3 days. Do you see that level of activity frequently?

We have seen a number of companies raise hundreds of thousands of dollars in a few hours, and a million plus in a few days. iFunding is definitely one of the strong outcomes, for being active just a week so far.

How would you respond to investors who want to be confident they have the right information to decide on a startup investment?

Our platform compiles, in an easy-to-follow format, all the relevant materials from a company that is raising equity. Also, through our social networking “Connect” function, you can request to connect directly to the fundraisers, the investors in a deal, or anyone else in our investor base with a similar interest, and create a dialog via text, phone… whatever works for both of you. The “signaling” function of a social networking also helps reduce risk; you can see who already invested in a company and get a sense of their professional background and knowledge about that field.

What do investors say they like best about your platform?

We serve up a unique variety of deal flow. That is, we highlight more than just the latest consumer technology fad, like a mobile app or social media platform. Often the companies on our website have a combined for-profit, and social-good mission. We also have a growing deal flow at the intersection of technology and entertainment.

Crowdfunder is known for crowdfunding investment in Pono, which is the brainchild of rock legend, Neil Young. His goal is to record and distribute significantly higher fidelity music, “as if one were listening in the studio.” What do you think of Pono?

Pono (https://www.crowdfunder.com/pono-music) is great! I’ve been playing guitar since age thirteen, and learned quite a few Neil Young tunes. It’s a thrill to listen to the super hi-fidelity music and feel like Crowdfunder has contributed to the financing of Neil’s business venture.

Here is your opportunity to be an equity owner in iFunding!

The iFunding team is excited to announce that we are raising a round of financing for our own company. What better way to do this than to use the same crowdfunding principles that we live by day-to-day? You can read all the investment details at www.crowdfunder.com/ifunding. We encourage investors to consider participating directly in our company’s success by owning equity in iFunding.

Our Expansion Plans

After a year of raising tens of millions of dollars for nearly thirty real estate projects, and introducing the industry’s first mobile investment app, iFunding is ready for its next growth stage:

  • Real estate operations, including market analytics, deal sourcing, due diligence, entity setup, legal filings and compliance, financial reporting will be scaled up to manage more deal flow.
  • Greater ease-of-use features and richer deal information will be deployed on our web and mobile platforms.
  • Marketing, especially online real estate education programs, and digital/social outreach will spread the word about crowdfunding to more investors and property developers. Meanwhile, an account management team will work with the most prominent investors and family offices.

Learn More

Those who are accredited investors are invited to read our investment materials and participate in our corporate fundraising via www.crowdfunder.com/ifunding. Individuals will be asked to verify their “accredited investor” status via online income verification or a letter from your lawyer or CPA. And, if you haven’t already, take a moment to acquire a free account here at www.ifunding.co to be able to browse our real estate investment opportunities.

Financing Strategy

Because much of iFunding’s business model is based on receiving a profit when our real estate investors do the same – we feel this approach aligns our incentives with our investors – capital is needed to expand operations in this stage of our growth. We are now raising $1 to $2 million ($1 million is our target, $2 million is the cap), which will bridge the capital already contributed by select customers, business partners and colleagues of the firm, and an A Round planned for 2015. We feel this is the most effective sequence of funding in order to facilitate growth while managing the strategic direction of the company. As the future A Round will leverage venture capital and real estate industry financing, effectively, individual investors can benefit from crowdfunding to participate now at preferential terms, with a low minimum investment ($10,000).

Market Growth

Our founders, William Skelley and Sohin Shah, were recently reflecting on how quickly the real estate crowdfunding market has grown, since their idea for the company emerged in 2012. “There were a lot of people who thought that real estate crowdfunding couldn’t become a reality, as recently as 2012 when we were starting up. It’s been amazing how knowledgeable investors and leading-edge developers have supported crowdfunding and iFunding so confidently.”

The market effectively went ‘live’ a year ago, when companies including iFunding started listing their first investment opportunities. Our average internal rate of return in the first projects that have been completed is more than 20%. More recently, the analytics firm Crowdnetic determined real estate to be the largest industry participating in “private securities, publicly raised” (i.e., crowdfunding). Given that total worldwide real assets are worth more than $25 trillion; over $150 billion in real estate is transacted each year; and at least $25 billion of that is from individuals, we see plenty of room for future growth.

With Appreciation

We’d like to thank several partners that have assisted with this fundraising round.

  • We chose to list the investment at Crowdfunder, because Crowdfunder’s site makes it easy to read about and compare business equity investments, communicate information with potential investors, and because of their reach. It is the number one ranked equity crowdfunding site on Google, with over 77,000 registered users and $56 million committed across investments-to-date.
  • Further, we have partnered with Accredify to manage verification one’s “accredited investor” status. Investors generally need to demonstrate a certain level of income or liquid assets in order to participate in private securities. The Accredify site allows an investor to either use an easy and private verification of income against tax records, or to upload a verification letter from one’s CPA or attorney. That single verification can be used with a wide range of investment sites, including but not limited to iFunding’s.
  • Finally, our thanks goes to Tommy Hawkins of Hawk IV Productions for producing our introductory video on the investment site.

The iFunding team will continue to work every day on expanding access to quality real estate investments, and providing greater value to you. We welcome questions via 844-367-4386 or investors@ifunding.co.

Who gets to invest via crowdfunding? The evolving definition of ‘Accredited Investor’

Interview with Mark Roderick, attorney at Flaster/Greenberg specializing in crowdfunding

“Accredited investors” in the US control the funds for $800 billion of privately-placed investments annually. The SEC is reevaluating the requirements to be considered an accredited investor, potentially updating those criteria to the most significant degree in 30 years. Since most real estate crowdfunding currently is targeted to accredited investors, iFunding wanted to share thoughts about the future.

In this blog, iFunding interviews a legal expert on crowdfunding, Mark Roderick. He is an attorney at Flaster/Greenberg and author of the blog http://crowdfundattny.com. In a blog post coming soon, iFunding will share our own thoughts on where the definitions might be headed, and how investors should take potential changes into consideration.

First, here is background on “Accredited Investors” and potential requirements changes

Today, “accredited investor” is defined as someone whose income exceeded $200,000 in each of the past 2 years (and is likely to do the same in the current year); or whose income exceeds $300K jointly with one’s spouse, or who has a net worth over $1 million (individually or jointly with spouse, excluding the value of your primary residence). Representatives of banks and certain investment companies also qualify.

The Frank-Dodd financial regulatory reform act specifies the review of the accredited investor definition every four years. On the table this year is the possibility that the net income or net worth thresholds will be increased by a to-be-determined amount. The SEC also has asked for public comments on whether financially “sophisticated” individuals – CPAs, investment advisors, traders or chartered financial analysts, potentially even MBAs or lawyers – can achieve accredited investor status, regardless of their income & net worth.

Q&A with Crowdfund Attorney, Mark Roderick, of Flaster/Greenberg

The interview is best read in conjunction with Mark’s insightful blog post.

Q: Mark, why were the income/asset thresholds set at the levels they were several decades back?As you indicate in your blog, if adjusted for inflation today, then only the ‘very, very’ wealthy would be able to participate.

The provisions about placing private investments to accredited investors was addressed in the SEC’s Regulation D. Today we take ‘Reg D’ for granted. When it was adopted by the SEC, however, Regulation D was a very significant innovation in the direction of allowing individual investors to participate in private transactions. That why the SEC chose such high thresholds, i.e., $200,000 of income and $1,000,000 of net worth. Regulation D was brand new and the SEC didn’t know how the experiment was going to work out. They wanted to limit the experiment to the wealthy, those who would (i) have financial sophistication themselves, (ii) be used to hiring sophisticated advisors, and (iii) have the financial wherewithal to lose their money.

Q: Do you feel that investors are more sophisticated in making their own decisions now?

I believe that over the last 30 years consumers have become more financially sophisticated, although not necessarily by choice. Consumers are now asked to make investment decisions about their 401(k) plans, as well as financial decisions about things like health insurance plans and home mortgages, which was not the case in 1982.

But I don’t think the financial sophistication of consumers is the most important point. The most important point is that the SEC’s 30 year experiment with Regulation D has shown that the danger of opening private investment to individuals is far lower than many people believed. The SEC could have changed the definition of accredited investor at any time without Congressional authorization. The reason the SEC has left the definition alone is that Regulation D as a whole, and Rule 506 in particular, have been pretty “clean,” meaning free of fraud and other abuse, even as the $200,000/$1,000,000 limitations have grown smaller and smaller with inflation. There is no reason to believe that would change if the thresholds were lower.

As the SEC considers its options, it’s also important to understand that investors participating in Rule 506(b) offerings over the last 30 years have been pretty smart. You don’t hear about someone investing his entire life savings in a bad real estate deal. In a country where Walmart is the largest retailer, it turns out that people are pretty careful with their money, after all.

Q: The SEC may incorporate a measure of financial experience into gauging whether someone is an accredited investor. If you had your preference, how would you define experience in a way that’s workable with regulations?

It’s going to be hard for the SEC to draw bright lines. If I were writing the rules, I would reduce the income limitation from $200,000 to perhaps $110,000, a level where the individual is trusted by his or her employer with making management-level decisions. I would also assume that lawyers, accountants, licensed financial advisors, bankers, licensed brokers (including real estate brokers), and other professionals in the financial industry can make their own investment decisions. And to top it off, I would allow anyone to prove his or her financial sophistication to the issuer, perhaps pursuant to a educational program administered by FINRA.

Q: What should many investors dive deeper into about crowdfunding platforms? In your experience, do these investors underestimate or not pay enough attention to certain factors?

As an investor myself, I am interested in (1) the record of the sponsor whose project is listed, (2) the record of the portal in selecting projects, (2) the industry experience of the portal operators, and (4) whether the portal and/or its affiliates are co-investing in the project. Personally, I think most of the early adaptors are pretty sophisticated folks.

Q: How would you suggest investors become even more sophisticated about investing, especially crowdfunding and real estate? Some learning comes with experience over the long haul of cycles, true?

I think education is very important for the future of the industry. As the trickle of investors becomes a flood, the market is going to demand and produce a mechanism to educate investors.

With that said, we know that very few crowdfunding investors will have the tools to evaluate individual projects with the expertise of a real estate professional. In response, the market will offer “mutual funds” of projects – for example, a fund consisting of apartment complexes in the Southwest. Most individuals invest in mutual funds rather than individual stocks today and there is every reason to believe the Crowdfunding market will develop in the same way.

Investors should familiarize themselves with the basics of real estate investing – the terminology, the risks, the relationship with the deal sponsor, the historic ups and downs of the real estate market. Like it or not, however, for most investors the decision will come down to one variable: the track record of the portal. That places an enormous burden on the real estate portals. Providing transparent reporting of investment progress and results is a valuable step in the right direction.

Re-building New Orleans and profiting from challenging home refurbishments, with Justin Mills

Q: How did you get started in real estate investing, Justin?

I got into the real estate business in 2005. I’ve always been open to business opportunities and locations with great potential – the book Rich Dad, Poor Dad was an early inspiration – so I decided to move from western Louisiana to Orlando, Florida and received my broker’s license. I focused on a lively niche in Florida, mobile home parks, and sold several for over $1 million.

My first house renovation had a clear, profitable exit. Someone held a property with a main home and a separate, spacious guest house, about 60 feet down a narrow alley. The owner had the idea that someone should be able to split it into two lots, and fix them both up. He didn’t want to invest the time or effort himself. After researching this possibility with the city zoning commission, the deal was very viable. This prior owner had purchased the property for $190K and I bought it from him for about $250K. After a few thousand dollars in legal fees and filings to rezone, some painting and floor finishing, plus a separate driveway, my profit on the two separated homes was roughly $110,000. The deal reinforced for me the value of building relationships with local real estate participants, and I’ve stayed in touch with the original owner ever since.

Q: When did you begin home projects in New Orleans?

My real estate career actually began a few months before Hurricane Katrina. At that point, of course, Florida was a better market to address. By 2012, my wife and I decided to move back to Louisiana. There were probably thousands of homes in New Orleans that were in need of repair – abandoned, suffering from water or termite damage, etc. They took time to be addressed in terms of ownership status and financial situation with the banks, and were coming back online in the market. We saw a major opportunity to be part of that turnaround, and I set up Mig Fund as my development company.

Q: What makes these attractive investments?

A lot of it is location: New Orleans will always be an attractive place for families, professionals, and students, not to mention tourists. A huge hospital facility is being built in downtown, in New Orleans parish. It will cover many city blocks, employ thousands of people and is getting closer to completion.

Because we are at an upward turning point for the city, timing and neighborhood are key investment considerations as well. In one neighborhood, Lake View, an average home that might have cost $90K a few years ago could now be worth $400K. The positive developments and energy in that neighborhood are feeding on themselves. Lake View was always a decent place to live, but now the largest, new construction homes might go for $800K or more. It’s attracting the families of professionals, such as doctors and lawyers, and great restaurants are appearing on more corners. It still feels suburban, but Lake View is just 5 minutes ride by local highway to downtown New Orleans. The Uptown Market district, south of St. Charles to Tulane Ave, is also in demand. These are the types of hot spots I look for.

Q: How do you manage projects involving older homes that may have been exposed to the elements?

I specialize in refurbishing older homes in New Orleans; they can have great potential. I’m fully committed to these types of projects; not many others are. There are many benefits to this approach.

Because there are few buyers for these properties, they often can be acquired for the cost of the land.

You need a good team to plan and budget properly. Given these houses are older vintage, you may be replacing terra cotta pipe with PVC, or completely updating the wiring. I’ll reserve funds wherever needed to replace wood beams, too. My contractors are very familiar with what needs to be done. Some are specialists in terms of skills and related city inspections. Others are experienced handymen that help me with a variety of tasks, from flooring to walls and bathrooms. I always serve as the general contractor, to think creatively about the big picture of beautifying a home, while controlling costs.

We’ll reorganize the floor plan wherever it makes sense. Because older homes here originally didn’t have air-conditioning, they were build railroad style, with no separators between the living areas, bedrooms and kitchen/dining areas and a need to walk through the bedroom to get to the kitchen. We’ll introduce hallways or sliding doors to guide activity in the house, and place the kitchen in the middle, next to the dining/living room area.

Materials are used that make sense for New Orleans today. Exteriors historically were made of wood. Today, the most accepted material is Hardie brand cement lap siding, which gives you a variety of wood looks, at an attractive cost, that weathers conditions well.

Finally, we add modern amenities like granite countertops in the kitchen, and expand the bathrooms.

The financial reward is of course driven by the difference between acquisition and construction costs, versus sales potential. I can usually build additional space at $40/square foot and sell it for $150/square foot. I’m looking at a deal now, where we can add a second story to a home, for a nice potential profit. I’ve had another successful project, a five-plex home, where we reorganized the floor plans of two units, modernized the others, and I’ve held onto it as a rental.

Q: What’s your interest in crowdfunding?

I feel I have a good handle on how to do the projects I’ve mentioned. My next goal is to expand my capabilities, especially access to financing, to sustain several projects at the same time. I’m doing one home flip right now, closing on a single family next week, and planning to close on a four-plex by the end of July. Crowdfunding can help with this vision.