The big crowdfunding story of 2014 is all about real estate. The major on-going challenge for real estate developers has always been to quickly find financial partners to make deals happen. To facilitate their deals, developers often have relationships with a handful of lenders and a handful of ultra-high net worth investors (like family offices or equity funds). Instead of limiting their financial partners, more and more experienced real estate professionals are turning to the Internet to raise money.
Before September of last year, it wasn’t legally permissible for a company raising money to advertise their offering. A company was limited to getting money from investors that it already had a pre-existing relationship (which was extremely limiting) or through the broker-dealer network (which could be prohibitively expensive). But now, the JOBS Act provision that permits general solicitation of potential accredited investors is in full swing.
As a result, a number of Internet platforms have come into the market promising an easier way for developers to tap into new investors for their projects. Even with the fees charged by the platforms, developers enjoy the ability to adjust their own returns to meet the larger market rather than their existing (and often demanding) financial partners.
There has been quick success of peer-to-peer lending platforms like LendingClub.com, which completed in excess of $1 billion in transactions during the second quarter of 2014. Because of this success, the venture community has flocked to back real estate funding platforms. In March, Realty Mogul raised $9 million in venture capital to expand its reach. The Florida company boasted nearly 20,000 investors in its database to entice Canaan Partners – a leading equity firm in the crowdfunding area. Fundrise, a Washington, D.C. company that is specializing in neighborhood investments, raised $31 million in capital from prominent technology and real estate funds in May.
Now is the time that savvy developers are finding ways to increase project profitability by adding crowdfunding investors into their capital stack. In exchange, the investors are receiving healthy returns on their money and becoming involved with great real estate deals.
The true power of crowdfunding comes from tapping into the “crowd” – not just the approximately 7% of Americans that are defined by the SEC as accredited investors. However, the proposed rules for the new law permitting true crowdfunding will limit the amount of equity raised to $1 million – insufficient except for skinny portions of the cap table of most real estate projects. In the meantime, savvy developers will be tapping into the power of the Internet to expand their base of investors to fund projects quickly and inexpensively.