The Acquire Real Estate crowdsourcing platform allows people to invest in commercial properties owned by developers such as Waltham-based Crosspoint Assoc.’s Middlebury (Vermont) Commons shopping center.
Many small investors are eager to invest in commercial real estate but lack the deep pockets required to buy into a hedge fund or the time commitment to be a landlord. At the intersection of real estate and technology, crowdsourcing is connecting them with developers seeking non-traditional sources of financing.
“What the stock market has done for public companies, crowdfunding has done for the real estate developer,” said Jeffrey Brooks, president of Boston-based multifamily developer Brooks Cos.
More than 1,200 crowdfunding platforms have been launched globally in recent years, where investors can pool their assets to buy into properties from apartment complexes and shopping centers to office buildings, with minimum investments as low as $5,000.
Crowdfunding platforms raised $16.2 billion in 2014 and are on pace to hit $34.4 billion this year, according to a report by industry researchers Massolution.
Crowdfunding Multifamily Development
Los Angeles-based Patch of Land brought its road show to Boston on Wednesday as it hosted a meet-up for a group of 40 developers, investors and those simply curious about crowdfunding opportunities.
Founded in 2013, the group originally specialized in “fix and flip” financing for rehabilitation of residential properties but is expanding its reach into commercial properties, Chief Marketing Officer AdaPia d’Errico said.
“A lot of our institutional investors are asking for it, so what you’re going to see down the line is these companies become all-around financing companies,” d’Errico said.
Another crowdfunding platform, Acquire Real Estate, recently opened a Boston office as it expands its New England presence. Acquire was founded in 2013 by Josh Klimkiewicz, a Harvard graduate and former CBRE/New England executive.
With its management team dominated by former industry executives, Acquire uses those connections to find larger deals from more experienced developers than many of its competitors, Chief Technology Officer Gerry Polucci said.
“We pride ourselves in dealing with sponsors with a 10-year track record and at least $200 million in assets under management,” he said.
Acquire has participated in eight deals so far, three of which are fully subscribed. The partners invest in every deal, with stakes ranging as high as 30 percent, Polucci said.
Minimum investments run as low as $5,000. Addressing concerns about liquidity, the site hosts an exchange where investors can create an online auction for their investment.
New York-based Fundrise has attracted $125 million and deployed $50 million in real estate deals over the last three years. CEO Ben Miller, whose background is in multifamily development in the Washington, D.C. area, co-founded Fundrise in 2013.
Fundrise receives roughly 300 proposals from property owners a week, Miller said. It agrees to fund an average of one, after analyzing the strength of the investment.
“The underwriting side of our house is like any investment fund. You have models, property reports, background checks. It’s kind of a rigorous process, almost something the people don’t expect from us until they do a deal with us,” Miller said.
Once it approves a deal – the average size is $2 million to $5 million – Fundrise prefunds the purchase out of its balance sheet and begins soliciting investments from the public.
Given Miller’s development background, the company specializes in multifamily projects, which comprise about half of its investments. Fundrise particularly likes new construction and value-added urban infill rental projects. Investments include both equity and debt, including high-yield mezzanine financing typically ranging from 24 to 36 months, which offers higher yields than stabilized assets pay.
What’s In It For Developers?
For developers, crowdfunding promises lower-cost equity, faster deal velocity and less red tape than traditional lenders, Brooks said. Fundrise typically demands a preferred equity stake in the deal, consisting of percentage ownership plus a return on investment.
“You get a quicker ‘yes’ compared with going to an institution,” Brooks said.
Since joining Fundrise in 2013, Brooks has listed several development projects on the site to gauge the level of interest from investors, though none have come to fruition yet due to outside factors.
“Through the couple of offerings I floated out there, I know not only do I have the interest, I know that I can go out there and execute very quickly,” he said. Underwriting standards are less stringent than conventional deals, focusing on the individual property rather than the developer’s overall financial picture.
Concerns About Diversification, Liquidity
For investors looking to optimize their portfolio, lack of diversification and liquidity are the two main drawbacks to the crowdfunded model, said John Navien, an adviser for Bay State Financial in Boston. While sites tout their market-beating returns, investors’ returns hinge upon the single property or handful of properties they invest in. Real estate investment trusts (REITs), which pay out income as dividends, typically invest in hundreds of properties.
“The concentration risk there is high,” Navien said. “Investing in a REIT is a safer way to get access to true CRE exposure.”
And commercial real estate – while largely a successful proposition since the recession – carries increasing risk given the continuing rise in asset values.
“Given how high real estate valuations are, there’s a lot more downside risk than upside value in the market, at least domestically,” Navien said.
There’s a place for commercial real estate in most investors’ portfolios, typically from 5 to 15 percent, said Myles Dudley, a managing partner with Woburn-based Pinnacle Private Wealth. For those without at least $5 million to invest in a private placement, Dudley recommends some mix of mutual funds, exchange-traded funds and individual REIT shares.
While crowdfunding platforms promise good cash flow, investors should be wary of their ability to get repaid and research the background of the developer, Dudley said.
“I don’t think there’s enough of a track record to be able to make an informed decision. It’s not for everyone, and for the everyday smaller investors, the associated risks can be too great,” he said.
And Brooks points out that first-time commercial real estate investors may not understand all of the risks inherent in deals, such as having their investment be subordinate to a senior lender.
“It’s good for the developer and also good for the investor, but there’s a lot of technical things the investor is aware of,” he said. “If a project isn’t successful, the senior lender can close it out and they lose their investment because it’s not collateralized.”
