4.28.17: Raising Real Estate Capital in the Digital Age

In the past, raising outside equity for small- and mid-sized real estate operators to purchase commercial real estate was dominated by investment advisors who would pitch deals to their clients. The minimum investment amounts were fairly low, in the $25,000-$100,000 area, and investment advisors successfully sold deals to thousands of individuals seeking regular dividends and distributions that were higher than bonds or dividend stocks. The problem was that the fees to the advisors and related parties were eating up to $13 of every $100 invested, so investments made by individuals were only worth $87 when the deal closed. Worse, fees were not disclosed.

New disclosure rules effective in 2016 have halted this method of fundraising. Now, fees must be disclosed, and rather than have clients upset at the perceived high fees, advisors stopped pitching these deals altogether. This left small- and mid-sized real estate operators with limited alternatives to raise outside equity for real estate projects.

Luckily, new technology-based fundraising methods with very low fees are evolving rapidly to fill the void. The concept, known as crowdfunding, is a web-based platform on which real estate deals are posted and marketed directly to individual investors in $10,000-$50,000 amounts rather than through a fee-based middleman such as an advisor. As a result, roughly $97 of each $100 gets invested in the project. In addition, these web-based platforms have nationwide/worldwide reach, far superior to the largest U.S. advisor network. This exciting new method of fundraising has been made economic through the assistance of the Jumpstart Our Business Startups (JOBS) Act. JOBS simplified SEC regulations for selling securities for real estate projects, which has helped propel crowdfunding.

“I have a client who we are looking to take through the crowdfunding process,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We just completed a $28-million CMBS loan and will be looking to sell 49% of the equity position, which is allowed under the loan documents. We expect to raise $5 million to invest in new projects. I will let you know how it turns out.”

This entry was posted in Commercial Lending, Commercial Real Estate Loans, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , . Bookmark the permalink.

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