Institutional investors are increasingly embracing real estate crowdfunding, a fledgling but booming industry that has harnessed the Internet to market and sell property investments to the general public.
The influence of institutional capital promises to reshape the platforms, which blossomed amid regulatory changes enacted by the Jumpstart Our Business Startups Act of 2012.
The online marketplaces create real estate ownership syndicates by pooling money from several accredited investors. Those who can qualify are typically individuals with annual income of $200,000 ($300,000 with a spouse) or overall net worth of $1 million, excluding the value of the primary residence. Depending on the offering, they may have to provide proof of their financial standing.
Fundrise, Realty Mogul, iFunding and other real estate crowdfunding companies have largely focused on providing financing for small deals, such as construction loans for fix-and-flip homebuyers, or equity for apartment and retail strip center acquisitions.
Typically, accredited investors can buy into the projects for $5,000 to $10,000 a share, and returns can range from 5% to upward of 13%, depending on the type of financing and deal.
Yet while the platforms enjoyed early success, the fact that deal sponsors didn't know whether they'd raise the cash they needed or how long it would take remained a drawback.
Funds For Crowdfunders
Now, with the backing of deep-pocketed institutions, the platforms themselves can fund transactions upfront, then turn around and offer a stake in the deals to investors online, says Daniel Miller, co-founder and president of Washington, D.C.-based Fundrise, which has arranged $16 million in funding for 32 deals since 2011, according to information on its website. "We've gone toward a business model that's more like investment banking as opposed to a pure technology platform where people post their deals and wait to see what comes in," Miller said. "It has been the biggest fundamental shift in our growth.
Last year, Fundrise raised some $38 million from a group of real estate, technology and financial institutions, including China-based social networking firm Renren (RENN), Ackman-Ziff Real Estate Group and Silverstein Properties.
The platform has also partnered with a $9 billion real estate credit fund that is funneling the firm proceeds for deals, Miller says.
Most recently, Fundrise bought $5 million in tax-exempt bonds to finance construction of the 80-story 3 World Trade Center being developed by Silverstein Properties in Lower Manhattan.
Fundrise is giving accredited investors a chance to buy into the bonds with a minimum investment of $5,000, and it anticipates an annual 5% gross return and a hold period of five years. The amount represents a sliver of the $1.6 billion in bonds issued for the project, but heretofore, individual investors had scant opportunity to buy into such deals, Miller says.
"That's a great example of the power of the crowdfunding model," he added. "We were able to get a piece of that deal, and now we can put it online and see what happens.
Real estate crowdfunding platforms have been some of the most successful early adopters of equity crowdfunding, in which investors can buy into a company or asset.
The concept grew out of crowdfunding sites such as Kickstarter, which provide entrepreneurs a way to raise money to finance projects such as films or new products. But those campaigns generally promise backers a good or product in return for funding.
Additionally, only accredited investors are eligible to participate in most equity crowdfunding deals offered nationwide. The Securities and Exchange Commission has yet to approve a 16-month-old proposal to open up equity crowdfunding to the rest of the population.
Los Angeles-based Realty Mogul last year raised $10 million for corporate growth, chiefly from venture capital firm Canaan Partners, while small business loan fund Direct Lending Investments committed to invest $73 million in the platform's offerings.
Like Miller, Realty Mogul CEO Jilliene Helman says the financing will let the platform fund deals immediately and provide sponsors with more certainty. It has raised $52.6 million to fund 184 properties since launching in early 2013.
Among other deals, last year its platform provided Rosemont, Ill.-based Brennan Investment Group with a total of $3 million in two offerings that helped fund the acquisitions of an industrial park in Indianapolis and an office park in suburban Chicago.
New York-based iFunding, meanwhile, has partnered with a $17 billion family office that is providing the platform with real estate capital, says William Skelley, founder of the platform. IFunding also has received $2.4 million in commitments to finance its corporate growth through a $2 million offering it launched on crowdfunder.com, and the firm is working on securing additional venture capital, he says.
Skelley and other real estate crowdfunding executives say they expected institutional investors and major developers to show interest in the concept, but the rapidity of the commitments caught off them off guard. "I'm shocked at how receptive the industry has been to crowdfunding," said Skelley, whose platform has raised $30 million for some 35 projects. "When we started 2-1/2 years ago, it was next to impossible to get a meeting (with institutions).
IFunding late last year raised $1 million in preferred equity for Phoenix-based developer Bruckal Group to help fund the acquisition and expansion of a townhome community in suburban Denver.
Considering institutional capital's appetite for real estate crowdfunding and the industry's growth, leaders in the space have begun to speculate about the future. The number of real estate crowdfunding sites has increased to around 70 from a handful over the past few years and include companies like CrowdStreet, RealtyShares, Patch of Land and CrowdBaron.
Miller, Helman and Skelley anticipate a shakeout. Skelley predicts that the number of platforms will be whittled to three to five and that one or more could do an initial public offering. Miller suggests that large financial institutions could end up acquiring the strongest platforms.
Regardless of how it plays out, the platforms acknowledge that real estate investing can be risky. So reaching the next level comes down to ensuring that the deals they market perform, the executives say.
"For us, it's not only about originating transactions, but it's also about staying true to credit quality and risk management," Helman said. "While we're building a lot of automation and technology, at the end of the day it's extremely important to have a real human being looking over credit."