Is crowd funding the answer for developers left without financing from the banks?

The concept of syndicate investment and indirect investment in commercial property through vehicles such as investment funds and REITs is firmly established.

Investors, who may not otherwise have the expertise or financial wherewithal to purchase commercial real estate in their own right, essentially pool their resources and purchase property as part of a larger group. Considering the extent to which technology is advancing and new concepts are emerging, it is conceivable that a new phenomenon may reach us before long - that is the concept of "crowdfunding", which is becoming increasingly popular in real estate in the US and gaining traction in Europe and Asia.

Crowdfunding or peer-to-peer lending is described as "the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet".

There are now several well-established crowdfunding platforms including Kickstarter, Indiegogo, Rockethub, and Crowdcube, among others. Most of these are US platforms that have been expanding overseas into Europe and elsewhere. These platforms enable start-up businesses and entrepreneurs to launch and promote their business ideas online and give investors an opportunity to invest in this idea, often for a relatively small outlay.

It goes without saying that investing in start-ups and early stage businesses, whether through crowdfunding or otherwise, involves considerable risks, including illiquidity, lack of dividends, loss of investment and dilution. Crowdfunding should therefore only be undertaken as part of a diversified investment portfolio.

Property crowdfunding is the fastest growing segment of the market today. Following some regulation changes in the US in 2012, commercial real estate sponsors obtained the ability to broadly solicit and advertise to the public. This opened the door for real estate developers and owners to capitalize on modern digital marketing tools and leverage the reach of the Internet to reach a wider potential investor base. A study from Massolution reported that $2.5bn of crowdfunding occurred in the real estate sector in 2014 and this continues to rise.

A number of specialist real estate platforms are now in operation in the US including RealCrowd, Crowdstreet, Fundrise and Prodigy Network. In fact, the largest crowdfunding campaign ever was a real estate crowdfunding project organised by Prodigy Network. Its founder Rodrigo Niño has predicted that "Crowdfunding will disrupt the status quo of traditional equity investment in real estate."

In 2009, Niño helped build the first skyscraper in Bogota, Colombia, in 40 years. He financed much of the project by attracting small investors who invested $20,000 at a time. By 2013, he had raised over $190m for the BD Bacata project - a world record in crowdfunding. Many of the investors in this project, which has recently been completed, made returns of more than 40pc since purchasing shares. Prodigy Network has since moved on to other successful projects in New York including AKA Wall Street, 17 John and AKA United Nations. Another real estate crowdfunding vehicle Fundrise is currently offering approved investors an opportunity to invest in 3 World Trade Centre in New York.

These specialist real estate crowdfunding entities are targeting up to 10 million accredited investors in the United States who are looking for solid returns on tangible assets that can generate private equity type returns. Accredited individual investors can research the best private real estate operating companies, view current offerings, submit offers, fund investments and manage their commercial real estate portfolios from their personal crowdfunding accounts. The portfolio valuation of the largest real estate crowdfunding platform Prodigy Network's now stands at over $600m. They claim to have over 5,200 accredited investors on their books. Interestingly, they are now reportedly looking for institutional quality investment opportunities in Europe.

However, crowdfunding isn't yet an option for all interested in investing in commercial property. Although the core principle of crowdfunding is affording small investors the opportunity to invest in particular projects for relatively little outlay, many of the well-established real estate crowdfunding platforms in the US have high thresholds for accredited investors. To become an accredited investor and to be able to browse open investments on certain real estate crowdfunding platforms, in some cases you are required to have a net worth of at least $1m and to prove that you have a minimum annual income of $200,000 over a number of years in order to be accredited.

If you meet these criteria, you undoubtedly already have access to direct real estate investment opportunities and may prefer to invest in real estate in this way as opposed to pooling resources with many other investors on a crowdfunding platform in order to achieve a similar rate of return. However, as time goes on, these thresholds are likely to reduce giving a greater pool of potential investor's opportunities to invest in commercial property through crowd funding.

In a European context, Spain, Germany and the UK are expected to follow the lead of Italy, which recently became the first country to implement a law on equity crowdfunding.

The property industry is now fully au fait with syndication and REITs and the concept of collectively investing in large and diversified portfolios of commercial real estate across different geographies and jurisdictions. However, the likelihood is that technology will alter current models and streamline investment processes over the next few years with accredited investors increasingly evaluating the merits of investing in particular funds or schemes via highly supportive data rooms and websites in the first instance and making their actual investment via transparent crowdfunding type platforms. Over the last few years, technology has eliminated middle men and increased efficiencies in a plethora of different industries and it has the potential to do likewise in the real estate industry. Real estate crowdfunding has seen exponential growth over the last few years and is likely to continue to grow over the course of the next few years, particularly as the regulatory framework becomes more developed in many jurisdictions.

First crowdfunded real estate project paying off

When Ben Miller decided to use crowdfunding as a means to rehabilitate a beaten-down building in one of Washington, D.C.'s transitional neighborhoods, he didn't really know crowdfunding was a thing, That's because it wasn't, at least not in real estate, yet.

But Miller and his brother Dan were raised in both a real estate family and in the social generation. Their goal—to give everyone the opportunity to invest in commercial real estate—was just intuitive to them. Previously, commercial real estate was a playground for large-scale investors only.

"We didn't know it would become a movement, and that the movement would be our business," said Ben Miller, standing in the finished project—an open, modern/industrial-style space called Maketto. "We raised $350,000 from 175 people at $100 a share, and now the industry will do a billion dollars a year, and we're doing a project a week and raising probably half a million dollars a day."

Fundrise is an online crowdfunding platform offering individual investors a chance to buy shares in a commercial real estate project. The returns come from both rental stream and the appreciation of the property itself.

That was what was so enticing about the first project on H Street, a transitional neighborhood just east of D.C's Union Station. Not only was the neighborhood on the verge of big growth, but it also begged for an anchor destination to get the ball rolling.

When you first walk into Maketto, it's not immediately clear what the place is—and that is literally by design. It is a bar, a designer coffee house, a bakery, a retail clothing and sneaker shop, and a restaurant with a James Beard-nominated chef. Independent vendors all feed off each other, literally, under one roof. By sharing the space, the rent is cheaper, and therefore the profit greater.

"The whole idea was to do something different, to do something that the neighborhood wanted, so the space is both a restaurant and high fashion, it has a cafe," Miller said. "It's called Maketto meant to be a communal market, and the people invested in this project not only own a piece of the real estate but also a piece of the restaurants."

Miller may call it a market, but really it is a floor plan for the future: A social network of retail and restaurant on three levels, with communal seating everywhere (even in the chef's kitchen), and open-air spaces on the roof. It is what the millennials moving into this now-trendy new neighborhood expect.

"The point is to get people in there from the minute you wake up in the morning for your coffee through your nighttime cocktail and to meet people while you're there. It invites you to chat," said Gina Schaefer, one of the "crowd" investors in the project. 

Schaefer and her husband own 10 hardware stores in the District and in Baltimore, but they lease all their properties. Owning real estate was way beyond their means until Fundrise approached them with the crowdfunding platform. They bought into it, investing $10,000 in the project. Last year, they received their first dividend check.

"I think for us it was just being part of the sharing community and the movement, and even if it was just a piece, to say that we owned something," Schaefer said. "We never in a million years would be able to afford to own a property in Washington, along H Street, where everything is starting to grow."

On a sunny Friday, midmorning, Maketto was already humming.

Toward the back of the main floor, just past the well-stocked bar which, for now, is spread with an array of breakfast pastries, one patron sits alone, wired up to a conference call. She is sipping something from Vigilante Coffee, a vendor that has set up shop on the second floor. At a longer, communal table upstairs, two suited patrons appear to be in the midst of an interview.

Just past them, across the first roof garden where a young man sits reading on his laptop, you can see workers in the glass-enclosed kitchen preparing for the lunch crowd. On the outdoor third-roof level, a group of young women is hashing out a business plan over laptops, something that involves dancing. All this as an older couple walks into the front of the main floor, tempted by pastries on the bar, but stopping to browse the $100 shoelaces.

For Christopher Vigilante (that's his mother's maiden name actually), it was the opportunity to share in something bigger than his tiny coffee company.

"For business, it helps create a lifestyle brand. Folks that typically want to drink a high-end coffee can understand what really fine cuisine can be like, can also appreciate fine clothing, a shirt that might cost you a few extra dollars but will last you 10 years—these folks all kind of run in similar circles," said Vigilante, standing behind three glass spheres of bubbling brews, heated by Bunsen burners. "I think when you have the synergy of all these businesses, you get that lifestyle brand."

A brand that is solidly Millennial—shared—right down to the funding. 

"A hundred companies have followed us into this space," said Miller, who has grown his crowdfunding company Fundrise from three to 30 employees. Fundrise recently raised $35 million for its technology platform, and Miller said he is hiring an employee a week.

Fundrise began raising money for the H Street property in 2012. Back then, Miller talked about how they had to work through an arduous process with the Securities and Exchange Commission in order to make this first-of-its-kind online equity offering for a real estate property happen. Now Fundrise is crowdfunding projects across the country. 

Maketto is very nearly a visual manifestation of the philosophy behind its fundraising; put simply, a social structure grown out of social financing. 

"You can tell when you interact with customers, who maybe put in that first hundred dollars to get this project off the ground, that they feel connected to the space in a different way than say any other coffee bar," Vigilante said.

As such, it is already transforming the neighborhood around it.

"We've created an anchor down this side of H Street, so it's drawing more people here," said Miller of the neighborhood, which, along with several new restaurants and fitness studios, will soon be home to a Whole Foods and more than 1,000 new apartment units. "It's probably the coolest project tin the whole city, and that's making it a destination. The real estate growth from this neighborhood has been sensational."

Miller estimates that the building itself has appreciated between 50 and 100 percent since the crowd brought it back to life. For the neighborhood, its contribution appears, so far, invaluable.

GROUNDFLOOR Emerges To Disrupt $240 Billion Commercial Real Estate Finance Market

Summary:  North Carolina crowd-sourcing startup GROUNDFLOOR closed round one funding.  This new company connects real estate entrepreneurs directly to otherwise depositors, who are looking for a better return on their savings.

Battle-Tested Team Closes Initial Seed Funding to Open Access to Direct Real Estate Investing

Raleigh --(Digital Journal)--
GROUNDFLOOR, a progressive real estate crowdfunding startup based in the Triangle, announces the initial close of its first round of funding led by investors Bandwidth Labs and the American Underground. Harnessing the breadth and scale of the Web, the company connects independent real estate entrepreneurs with early-stage loans funded online by mass-market savers and investors. The seed capital will allow GROUNDFLOOR to bring a series of pilot projects to market in late 2013 and early 2014.

"The Web has a message for Wall Street," says Brian Dally, Co-Founder and CEO of GROUNDFLOOR. "Real estate innovators and doers frustrated with the bank underwriting status quo are ready to be unleashed. Banding together, depositors and self-directed investors can do everything traditional lenders do, but better—to the benefit of a broader base of people well beyond accredited investors and powerful incumbent financial institutions."

Leadership and Advisory Board
Co-founders Dally and Nick Bhargava built GROUNDFLOOR on a common interest in commercializing radical technologies designed to disrupt entrenched incumbents. John Austin introduced the duo in October 2012 through NC IDEA's Groundwork Labs. Dally, a 15-year veteran of technology startups based in Silicon Valley, Boston and London, most recently engineered the launch of Bandwidth.com's Republic Wireless, a provider that successfully battled the big four cellphone carriers to enter the smartphone service market. Bhargava lends expertise in securities law innovation earned during his role in developing Title III of the JOBS Act, in which he fought to ease securities regulations for unaccredited investors and bring the concept of equity crowdfunding to the mainstream.

The company also announces the addition of new advisory board members including Michael Goodmon, Vice President of Real Estate for Capitol Broadcasting; Jason Widen, a real estate developer and Executive Director and Co-Founder of HQ Raleigh; and Chris Matton, a prominent figure in the Triangle angel investor community and General Counsel at Bandwidth.com.

"Bandwidth has a culture of taking on big challenges and supporting people we believe in," says Scott Barstow, Head of Bandwidth Labs. "GROUNDFLOOR is a huge idea and we are proud to back Brian and his team, as well as creating opportunities for entrepreneurship to grow here in the Triangle."

About GROUNDFLOOR
Based in the North Carolina Triangle, GROUNDFLOOR champions democracy, transparency, speed, efficiency and freedom as the path to building a new kind of finance. The company harnesses the breadth and scale of the Web to disrupt antiquated black-box models of financing asset-backed transactions. The innovative GROUNDFLOOR platform reduces dependence upon large financial institutions and accredited investors, while making direct real estate investing a viable addition to any savings and investment portfolio.
http://www.groundfloor.us/press