Developers turn to crowdfunding to seed real estate deals
MIAMI – You can support entrepreneurs' apps, gadgets, clothing creations, restaurants – you name it – through the exploding phenomenon of "crowdfunding." But what can you show for your investment? A drawer full of T-shirts, tote bags and other tokens of appreciation.
Not the kind of rewards most serious investors are looking for.
For wealthy funders – so-called "accredited investors" – some crowdfunding platforms offer an ownership piece of the startup venture they are funding. If the concept becomes the next big thing rather than the next big flop, they could reap a giant return.
Increasingly, those wealthy crowdfunders are turning to a tried-and-true investment class they can see, feel and understand: real estate.
Until crowdfunding platforms came along, only a small fraction of the nine million U.S. accredited investors – those with a net worth of at least $1 million or $200,000 in annual income – had participated in private-investment opportunities, said Joanna Schwartz, chief executive of EarlyShares, a Miami crowdfunding platform aimed at those very investors. Typically, she said, "they didn't have access to them unless they knew someone (in the deal), and this is especially true in real estate. This really is about giving direct access to investors in ways they never had before."
Crowdfunding started with popular donation-based websites such as Kickstarter, where supporters can fund enterprises as disparate as a company that makes mermaid outfits and a film about Churchill's Pub in Little Haiti. In the past few years, crowdfunding has become increasingly popular for nonprofit causes and microlending.
Equity-based crowdfunding is more complex – and more controversial.
Though the 2012 federal JOBS Act legalized crowdfunding as a means to raise funds for startups and other ventures, the rules governing such transactions have been released in waves. In September 2013, the U.S. Securities and Exchange Commission modified securities rules to allow advertising of such deals, which opened the door to crowdfunding platforms being used by more sophisticated, accredited investors. The final rules governing ordinary investors are expected later this year, but the SEC wouldn't comment.
EarlyShares, founded in 2011, and dozens of other companies around the country took aim at accredited investors. By the end of last year, the company had launched its first online fundraising campaign for the Miami-based peer-to-peer boating company Boatsetter, which has already has raised more than $1 million on the platform and is seeking $2.25 million. A dozen more campaigns are underway for technology, film and entertainment companies and other firms around the country.
And now, real estate deals.
The Wall Street Journal reported last month that dozens of real-estate crowdfunding sites have popped up in the past year, including FundRise and Realty Mogul. Already, these companies have raised more than $135 million in debt and equity for real-estate deals, according to The Journal's calculations. While that is tiny compared with the more than $700 billion market value of publicly traded real-estate investment trusts, it is the fastest-growing category in the crowdfunding arena, according to Crowdnetic, a firm that tracks crowdfunding data.
That doesn't surprise Schwartz. "Where else can investors go with a few clicks and get a potentially 7 or 9 percent return on a project that they understand? We're not saying its riskless – nothing is riskless – but they get it," Schwartz said. "Real estate is intuitively understood in a much different way than startup companies are. Investors are chasing yield."
What will probably prime the pump for real-estate campaigns on EarlyShares is its recent exclusive marketing partnership with Property.com. That's one of the websites run by Miami-based eRealEstate Holdings, which also runs Condo.com, Houses.com and Location.com. With more than 5 million listings combined, they are a national real-estate marketplace for listing, searching, buying, selling and renting single-family homes, condos and commercial property.
"We think we can rapidly scale the crowdfunding platform on (Property.com)," said Richard Swerdlow, chief executive of eRealEstate Holdings. Property.com now has 500,000 commercial listings and 150,000 monthly visitors.
Swerdlow's company is shifting Property.com from its current mission as a search site to a one-stop shop for commercial real estate; the partnership with EarlyShares offers a service it wants to feature. Once the platforms are fully integrated later this summer, visitors will see a prominent "Invest" tab, where they can view and potentially participate in crowdfunding-powered real estate deals on the EarlyShares platform.
"We see (crowdfunded real estate development) as a growing market that is only going to get bigger," said Swerdlow. "We also think there is a big opportunity in Latin America."
Jay Massirman, a Miami real estate developer and investor in multifamily projects, is testing crowdfunding for an Orlando project, but admits he doesn't know quite what to expect. "I've been very curious about how it will all work," said Massirman of Rivergate Cos., who has been in real estate for almost 30 years.
Since he offered investment opportunities in an Orlando multifamily apartment community about a month ago on EarlyShares, he has had interest from 50 to 75 qualified investors. He also held a webinar session through EarlyShares to present the project and answer questions. He is trying to raise $2.7 million, with an investor minimum of $100,000.
"It's bringing a new access point for capital," said Massirman, who has fielded investor interest from surgeons from Texas, high-net-worth investors from the Midwest and businesspeople from both coasts. "Now with the advent of crowdfunding, you can log on to these sites and find sponsors like myself who have a track record, expertise. ... It's attracting yield-minded people who are looking for vetted investments."
New methods for doing business often come with a learning curve – much like the advent of online stock trading in the 1990s, Schwartz said.
"If you look back at online stock trading 20 years ago, all of the same kind of early adopter concerns people raised are the same here," she said. "Will there be fraud? Will people know how do to it? Will they adopt it?'
Still, she expects the time-saving and financial advantages eventually will prevail. "Going direct, there are a lot of fees we are saving for both sides here."
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