– Franklin D. Roosevelt
From the first settlement in Jamestown, Virginia, to the Land Rush of 1899, real estate ownership has figured prominently in United States history. Investment in residential real estate has very few barriers to entry: Listings are generally public, financing is available based on the creditworthiness of the borrower and the occupancy or operation is fairly straightforward. Conversely, investment in commercial real estate is less available to private investors, most commonly due to the increased equity investment and complexity of its operation. Individuals who wanted exposure to commercial real estate generally had to settle for buying shares of real estate operating companies (REITs) or tenant in common (TIC) syndications. That was true until the emergence of crowdfunding, the technology-enabled and legally-permitted ability to raise capital from a large number of individual investors. But, will this be a lasting source of capital or just a flash in the pan?
Before we can understand how crowdfunding is used today, we must first understand the two contributing factors that led to to this new means of raising capital:
Using the same concept and technology, real estate crowdfunding companies have brought about two significant changes for the commercial real estate industry:
So which comes first, the deal or the capital? Successful companies need both. Real estate companies, who use crowdfunding to raise their capital, all start with real estate professionals. However, they need capital ready to deploy when the opportunity presents itself. Many crowdfunding platforms will make an investment, usually alongside a sponsor and then subsequently sell down the position on their website. This investment is generally structured as preferred equity, although first mortgage and mezzanine structures are also available.
A brief summary of those at the forefront of this industry are detailed below:
While crowdfunding is still in its infancy, it has already created two major benefits:
Will crowdfunding be the ultimate “disrupter” that the real estate industry has been talking about? Maybe. Will online platforms replace traditional brokerage? Unlikely. That said, crowdfunding has become another arrow in the quiver for capitalizing real estate transactions. When it comes to just how big crowdfunding will be, the sky is the limit as the process becomes more normalized for both the investor and the sponsor.
Ben Sayles is a Director in the Boston office of HFF with more than 15 years of experience in commercial real estate. He is primarily responsible for investment sales transactions focusing on office, multi-housing and retail properties.
A graduate of Trinity College in Hartford, Connecticut, Mr. Sayles is the Director of the Commercial Brokers Association and an Executive Committee member of NAIOP Massachusetts. Additionally, he is active in several other notable commercial real estate professional groups, including Urban Land Institute and International Council of Shopping Centers.
Gary Porter is a Senior Real Estate Analyst in HFF’s Boston office. He is primarily responsible for preforming complicated financial modeling, preparing investment memorandum for all capital markets activities and coordinating due diligence and closing process.
Prior to joining HFF in August 2015, Mr. Porter was an Asset Management Analyst at Jamestown Properties, an Atlanta-based private equity investor. Before joining Jamestown, Mr. Porter began his career in the Real Estate Investment Banking group at Jefferies LLC. Mr. Porter is a 2011 graduate of Wake Forest University, where he received a Bachelor of Science degree in finance.