The practice of using crowdfunding to gather investment money for real estate deals has gained steam over the past year, with more and more Web sites offering investment opportunities in property across the country. “There’s massive demand, both from entrepreneurs who want to get access to capital and from people who want to invest capital,” says Scott Whaley, president of the National Real Estate Investors Association in Cincinnati.
The key advantages of these investment arrangements, Whaley says, are that they give investors access to more deals, allow them to invest smaller sums and connect directly with developers to ask questions and research deals.
Richard Swart, who runs a research program at the University of California, Berkeley, studying the intersection of innovation and social funding mechanisms, estimates that the size of the securities crowdfunding market will range anywhere from $4 billion to as much as $200 billion over the coming years depending on the level of enabling government regulation.
But real estate investments are different from other crowdfunding ventures, such as raising money for short films or a neighborhood coffee shop. “When you talk about structured debt or residual cash flows, these are complex and need some curation, or at least someone who can look out for the investor’s interest so that they understand the alignment of interest between borrower, lender, investor, explain how cash flows work, what their rights are,” says Todd Lippiatt, principal of Propellr, a new real estate crowdfunding site.
Unlike traditional brokerage houses and investment firms, whose business is selling, and most crowdfunding platforms, whose lack of financial services expertise makes them little more than electronic bulletin boards, Propellr and AssetAvenue, another real estate Web site started by David Manshoory, actively help accredited investors invest alongside seasoned professionals.
Both Manshoory and Lippiatt bring the requisite expertise to their crowdfunding sites, but use very different business models.
Asset Avenue
Manshoory’s professional experience is in the real estate industry on the investments and acquisition and development side. “Right now, most real estate investments are done offline, meaning all communications are done offline,” he says. “There isn’t a lot of technology powering that industry. What AssetAvenue does, and why I started it, is to bring the act of investing in real estate online. It helps both sponsors and investors with the use of technology.”
AA, which rolled out in late 2013, focuses on commercial properties, reflecting the staff’s skill set and industry expertise.
“The team I’ve built is real estate first, technology second,” Manshoory says. “They’ve come from reputable, well-known companies; they come with a Rolodex of sponsors—prebuilt relationships we’re leveraging on behalf of our investors. We have access to sponsors individual investors don’t have. We have the time, knowledge and wherewithal to underwrite the investment opportunities and screen out the bad investments from the good ones.”
Manshoory says AA has the capacity to raise a portion or all of an investment, depending on the size of the capital raise and on how much the sponsor wants to raise through the crowdfunding site. “It’s also a function of how much we think we can raise and how much our investors want to participate.”
AA posted its first investment opportunity earlier this year—a $485,000 note to acquire a commercial real estate loan backed by office space in New York City’s Trump Palace. “It got funded in less than 48 hours online by 10 investors,” says Manshoory. The minimum investment was $10,000; the highest investor came in for $125,000. The investors in the deal earned a 9% interest rate on the duration of the note. AA had an exclusive on this deal.
AA is a curated marketplace, offering only investments the staff consider appropriate for investors. “The curation process is incredibly important,” says Manshoory. Rather than work through brokers who sell properties, the AA team goes directly to sponsors who have already tied up a property and are sourcing the capital and the investors to participate in the investment with them. Fees and commissions typically paid to middlemen are eliminated and the savings passed directly to investors.
Before the staff looks at investment properties, however, they conduct due diligence on the people behind the deals, says Manshoory. They vet the sponsor, his portfolio, his track record, the success of his previous investments, the markets he’s on, his assets and the returns he’s aiming to provide investors. “We focus on picking winning sponsors, and once we’ve validated that the sponsor is a credible sponsor and knows what they’re doing, we underwrite the asset they’re presenting to us.”
Propellr
Propellr, which launched in February, follows a different business model. The crowdfunding site’s first offering was a real estate deal. But Lippiatt intends the site to be broader—an “alternative asset marketplace. We’re looking for experienced managers to run their individual business lines. We provide what’s called a ‘full-stack solution,’ everything from putting the deal up on the site in terms of an investment and to curating from an investment banking standpoint, making sure it’s a reasonable investment.”
Propellr has its roots in Aristone, a real estate debt platform started eight years ago. The principals are former Wall Street professionals who were involved in structured finance, and Lippiatt serves as chief investment officer.
In February, the Aristone team spun off all its investor contacts and servicing capabilities into Propellr, and Aristone has been culled down to underwriting and asset management teams.
Propellr has been negotiating with two new real estate managers, a Brooklyn residential developer and a national retail owner/developer, to come on board as the second and third verticals. And Lippiatt has also been evaluating two different aircraft leasing managers.
“An investor will come onto Propellr and see several opportunities, some brought by Aristone, some by another real estate development vertical, some by an alternative asset manager,” says Lippiatt.
Propellr’s first Aristone offering—a $5 million bank note that brought in $7.5 million worth of subscriptions—was aborted after the borrower failed to close and the money was returned to investors.
Since then, Aristone has had three successful raises, all in Manhattan. Two were preferred equity structures. The first was a $1 million raise in a $72.5 million hotel/residential property deal in the financial district. It attracted 18 investors in early May and has a 16.5% IRR. The second was a $127 million residential property deal in Chelsea, of which the crowdfunding portion was $1.1 million. Seventeen investors who subscribed between June 24 and July 11 can expect an IRR of 18%. The third raise was the $3 million crowdfunding portion of a $15 million, 15-month bridge loan with an IRR of 14% for a mixed-use property in Harlem. Twenty-two investors participated in the June raise.
Lippiatt notes that the Propellr staff is 100% involved in every aspect of any real estate transaction Aristone does, and the company expects to do the same with other vertical managers. “We’re not necessarily going to audit their due diligence capability, but we have a good feedback channel. People here have worked at investment banks and know what investment numbers should look like, what good and bad deals look like.”
Propellr, as a manager of managers, makes sure that the issuer, the vertical manager, is in every deal for 10 cents of every dollar it raises on Propellr in order to ensure strict alignment of interests between the issuers and the investors. “Skin in the game is incredibly important to us,” says Lippiatt.
And as with AA, fees and commissions paid to middlemen are eliminated.
Accredited Investors
Both AA and Propellr are geared toward accredited investors. When they sign up on the Web sites, investors generally self-accredit, attesting to their own status. The SEC requires those who do this to observe a brief “cooling off” period, after which they can see investments on the site.
Neither AA nor Propellr generally solicits investors, though Lippiatt is considering doing so in the future. The JOBS Act of 2012 allows general solicitation, but attaches stringent requirements—for instance, that investors must provide personal financial information, something many are disinclined to do. Moreover, says Manshoory, “our sponsors want only accredited investors to participate.” UC Berkeley’s Swart adds that many lawyers are advising clients to stay away from general solicitation because the exact requirements are unclear.
None of this has stopped accredited investors from joining the two crowdfunding sites. “We started with 100 investors and have a list of 500 more with very little advertisement on our part,” says Lippiatt. “We’re looking to grow our investors with more high-net-worth individuals, and some smaller funds invest directly with us as well.”
Manshoory says AA started with 500 investors and expects some 5,000 by midyear. In addition, several institutions and private equity groups have approached the company about investing in some of its online real estate opportunities, he says.
