Crowdfunding eREITs: Predictions and Conversations with Top CRE Crowdfunding Platforms

Tuesday, October 18, 2016

Real Estate Indicators from Thomas Foley, HFF San Francisco capital markets and investment sales team member and founder of two previous crowdfunding platforms, and Kevin Freels, HFF Houston debt placement team member. 

Much has been written about the commercial real estate crowdfunding space and how it could disrupt the industry. The concept that non-accredited, accredited and institutional investors will be much more active participants sound significant, but the world is still waiting for this to happen on a noticeable scale.

The Challenges of Real Estate Crowdfunding

When it comes to the various challenges one faces in crowdfunding real estate, it's important to keep in mind that: 

  1. Most individual investors were not as interested or able – possibly too busy – to spend the time required to actively participate in the demands of investing on a deal-by-deal basis;
  2. Most investors worked with a financial advisor (who is precluded to the products that they can invest in by their CIO) or a registered investment advisor (who is often unwilling to risk their overall client relationship in order to try out a new, unproven investment opportunity that will ultimately be a very small portion of their portfolio); and
  3. The sub-institutional deal size would be the most likely beneficiary of the development of this space because of size challenges preventing institutions from participating (too small) and making it challenging for individuals from funding themselves (too large).

The Pivot to Non-Traded Crowdfunded REITs

Given the above, it should not be a total surprise that we are seeing a pivot from individual deal syndication to the launching of non-traded REITs.

"The move toward eREITs by two of the industry’s most established platforms {Fundrise and RealtyMogul} shows a clear bifurcation between investment vehicles tailored to accredited and non-accredited investors. In the near term, accredited investors looking for maximum diversification may find room in their portfolios for both kinds of investments. In the long run, the success of platforms like Fundrise, RealtyMogul and EquityMultiple will depend on selecting good projects that deliver strong returns to investors, regardless of whether investors participate project-by-project or through an eREIT." –

This makes a lot of sense to us; the ability to drive down costs through online, efficient syndication is a major differentiator from the current non-traded REIT space. Our take is that this trend will continue and we will see more “eREITs” launched by these groups and others, likely specializing by product types and more specific geographies.

Longer-term, we wouldn’t be surprised if we saw some of these platforms becoming intermediary syndicators and competing head-to-head with the broker-dealer networks that currently charge seven to 15 percent to sell initial REIT shares.

Q & A with Key Real estate Crowdfunding Players

Over the past week, we were able to catch up with some of the pioneers in the real estate crowdfunding space from Fundrise, RealtyMogul and RealtyShares . Here’s how company representatives responded to our questions:

What’s the actual reason that some of these groups are doing the private REIT play now and what’s your take on it?

Fundrise:  There are new possibilities within the traditional REIT model thanks to recent legislation, namely the implementation of Title IV of the JOBS Act, which makes it easier to raise capital. We are now able to access accredited and unaccredited capital in a much more efficient capital-raising vehicle, which we call an “eREIT™ä.” We launched the first eREIT™ä in December 2015, kicking off a new era for real estate crowdfunding.  – Max Kirschenbaum, Fundrise head of Business Development

RealtyMogul:  With the level of excitement and interest in online investing in real estate, it makes sense for us to launch a Reg A+ REIT. With this vehicle, we can accept capital from non-accredited investors, as well as accredited investors, making our investment opportunities available to everyone. We have over 80,000 investors who have joined and, historically, only accredited investors could invest. With changes in regulations, it now truly makes sense to raise capital in a more wide-reaching way, offering access to all investors nationwide to participate in real estate investments. Therefore, we started looking at the REIT model and are pleased to offer investors the ability to invest in cash flowing commercial real estate for as little as $2,500. With lower investment points and more potential investors, we should have more capital to put out into quality real estate opportunities across the country. While the REIT model is a good fit for cash-flowing projects, we still offer our platform for JV equity to value-add transactions provided to sponsors through private placements. – Elizabeth Braman, RealtyMogul chief production officer

RealtyShares:  Because it opens up a whole new channel of liquidity – non-accredited investors. These REIT’s are being created through a new exemption to the securities act of 1933 called Reg A+ that was passed under the JOBS Act. Through Reg A+, an issuer can raise up to $50 million of capital without having to go through a formal S-1 process and can sell securities publicly to accredited and non-accredited investors.

Online marketplaces for real estate investing have to date been mostly focused on selling securities to accredited investors through Regulation D, Rule 506(b) or (c). There are approximately eight million accredited investors in the U.S. compared to a total population of over 300 million. Using Reg A+ allows these platforms to open their doors to all investors and thus unlock a lot more liquidity. The REIT structure is a favorable structure to use under Reg A+, as it avoids UBTI for benefit plan investors and results in 1099s rather than K-1s for investors. – Mark Masterson, RealtyShares director of Investments

How might your firm play in this space?

Fundrise:  We view the eREIT™s as the future of real estate crowdfunding, and plan to focus on raising through these vehicles for the time being. The dynamic fundraising ability of the eREIT™s means more quality capital available for deals. – Kirschenbaum

RealtyMogul:  We launched our first Income REIT, MogulREIT I, to target cash-flowing investments. Our sub-debt products – preferred equity and mezzanine debt – fit particularly well into our REIT. We fund $1 million to $5 million off of our balance sheet and then place these deals into the REIT, where we make distributions. Our REIT differs from the traditional REITs because we have no commissions paid by investors and a lower overall fee load, in turn. Our online platform enables investors the ability to invest at any time without having to use a third party. We feel that that the combination of both the REIT and private placements on our platform offer a breadth and depth of capital options to our sponsors, as well as a range of opportunities for our different investors. – Braman

RealtyShares:  I think it has a lot of promise, and we’re definitely evaluating the creation of a REIT vehicle under Reg A+ at RealtyShares. We have a very robust base of accredited investors (over 30,000 using the platform to invest) but we have three times as many non-accredited investors that have signed up but can’t invest today. Reg A+ will allow us to unlock a lot of that latent demand.

At RealtyShares, our capital markets strategy has always been based on maximizing diversification. We started with accredited investors in 2013 and, earlier this year, expanded to larger capital sources including hedge funds and family offices, and, in 2017, we hope to focus on the retail non-accredited investor via Reg A+. Through a diverse base of investors, we can finance a diverse set of projects including debt and equity for residential and commercial assets. – Masterson 


What are the biggest lessons you have learned so far?

Fundrise:  As a pioneer in a new market, a key piece of the equation is to remain agile and aware so that we can take advantage of new opportunities and leverage them for growth. If you had asked us two years ago if the new legislation prompted by Title IV would be a game-changer, our answer would’ve been “maybe.” Now, the dynamic fundraising capability of our eREIT™ structure is clear and has contributed to our vision of the future of real estate crowdfunding.

It is important to understand what sponsors and brokers are looking for in a capital provider in order to source high-quality real estate investment opportunities. We have designed our capital to be quick, reliable and relatively inexpensive when compared to most institutional capital providers.

We’ve found that brokers continue to be a great source for high-quality deals. We closed a transaction late last year with HFF’s Matt Stewart in your Los Angeles office. Recognizing the importance of strong broker relationships, we moved to implement a new model – balance sheet funding – in 2014. For the past few years, we have closed all of our real estate investments on our balance sheet to keep things simple for our broker partners and sponsors. Our sponsors don't have to worry about any syndication risk or added complexity from the “crowd.” Unlike most crowdfunding platforms out there, we operate like an equity fund, underwriting in-house and closing with our own proprietary capital, catering to a quick and dependable process. – Kirschenbaum

RealtyMogul:  The biggest lesson we have learned is that we want to partner with top sponsors in the industry. Experienced sponsors have the track record to show they know how to get themselves through difficult markets, as well as the relationships to find exceptional deals that offer strong return potential. We have been very fortunate to work with some of the biggest names in the industry. Brennen Investments has been an early supporter of our company, and we have since done multiple deals with them, each time our check sizes getting bigger and bigger. We have raised over $13 million for the MHP Fund, the largest privately-held mobile home park operator in the country. We did a heavy value-add deal with Bascom in downtown Chicago that had no projected cash flow for the first two years, which sold well in large part due to the strength of the Bascom name.

Our sponsors like diversifying their sources of capital, they like the institutional nature of the diligence we do on the transaction and they like the fact that we offer programmatic and repeatable capital. I can’t say there is one reason these big names have chosen to partner with us, but it is rarely a “one and done;” the majority of clients come back to work with us time and time again. – Braman

RealtyShares:  That the internet and technology are very powerful tools when it comes to creating capital efficiency for middle market real estate. We’ve now raised hundreds of millions of dollars of capital through our online marketplace for commercial real estate assets located across the U.S. Using technology, we’re connecting thousands of investors to high-quality real estate sponsors and companies that have historically been limited to friends and family for their capital needs. – Masterson

How do different investors fit in your model?

Fundrise:  One of our goals is to provide democratized access to real estate investments; using our eREIT™ä structure, we are able to provide superior access to quality real estate for all three investors – non-accredited, accredited and institutional. – Kirschenbaum

RealtyMogul:  We started the company three years ago with the goal of raising capital online for borrowers and sponsors with private placements. The company has definitely evolved since then, but the same concepts hold true – by democratizing the capital raising process online, we give people the opportunity to access real estate investments across the country and provide sponsors access to capital up and down the capital stack. Accredited investors can self-select individual real estate investments, whereas accredited and non-accredited investors alike can access a diversified real estate opportunities with the REIT. – Braman

RealtyShares:  For us it is all about capital diversification. As a marketplace, you don’t want to be overly concentrated with a single investor type. Retail investors (both accredited and non-accredited investors) are sticky and are important to a robust marketplace. Institutional investors are important to scale. All three investor types are important to our business model both current and future. – Masterson

Where does sub-institutional versus institutional deal flow fit?

Fundrise:  Our focus is squarely on deals with institutional sponsorship. We look for the best brokers and sponsors to partner with and create ongoing relationships to provide quick, reliable and relatively inexpensive capital for their projects.

That said, our current deal focus is on (a) cash-flowing multifamily acquisitions and (b) multifamily development projects that are more than $20 million in total capitalization. – Kirschenbaum

RealtyMogul:  The REIT provides us the capital to invest in more institutional quality deals with greater stability and consistent cash flow potential. These deals are a strong fit for our REIT. Our platform focuses more on value-add transactions in less core markets where cap rates offer opportunity to find appreciation and yield. – Braman

RealtyShares:  We’re focused on middle-market commercial real estate opportunities because that is where capital inefficiency is greatest. There is plenty of institutional capital flowing into large deals in core markets like San Francisco, New York City, Los Angeles, etc. For equity checks of $3 million to $7 million, however, institutional capital is relatively nonexistent. We’re focused on providing equity capital (both preferred and common) for these deal types. Additionally, we’re focused on high-growth secondary markets, where there is greater potential for yield for our base of institutional and individual investors. – Masterson 

About Thomas Foley

Thomas Foley is a Real Estate Analyst in the San Francisco office of HFF with more than 10 years of experience in finance, technology and venture capital. He is primarily responsible for performing financial and market analysis, preparing offering documents and coordinating the due diligence process for the investment sales and capital markets teams. Mr. Foley joined the firm in September 2015. Prior to joining HFF, he co-founded and led multiple venture-backed, financial technology companies, including Venovate, an alternative asset investment platform; CapRally, a CRM for company fundraising; and Xpert Financial, a private company fundraising and trading platform.

Mr. Foley was an All-American Water Polo player, and was part of UCLA’s 2004 National Championship award-winning team. He also went on to represent the United States on the Men's Junior National Team and won a Silver Medal at the U20 Pan American Games. Mr. Foley graduated from UCLA and has held leadership board positions at Menlo School, the Olympic Club and the BizWorld Foundation.

About Kevin Freels

Kevin Freels is a Real Estate Analyst in the Houston office of HFF. He is primarily responsible for performing financial and market analysis, preparing offering documents and supporting the due diligence process for HFF’s debt placement group.

Mr. Freels joined the firm in June 2015. Prior to joining HFF, Mr. Freels had six internships in the real estate industry exploring a variety of sectors, including capital markets, development, landlord representation and construction. Mr. Freels attended Texas A&M University, where he received his BBA in finance and his MS in real estate. 

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