Myth 3: Most traditional multifamily operators accept crowdfunding as a viable source of debt or equity.
Despite the recent Wall Street Journal article and attention in the mainstream media, apartment owners still don’t sound too convinced that crowdfunding is truly a viable option for their business. For instance, Sam Zell, chairman of Chicago-based REIT Equity Residential, thought the structure posed too many legal issues to be widely adopted in commercial real estate.
At least Zell is aware of crowdfunding. In his role as managing partner of Los Angeles–based Cress Capital, a privately owned commercial real estate merchant bank, Ryan Parkin meets with many multifamily chieftains, and he’s surprised by how little they care about crowdfunding.
“When I talk to C-level executives at the more institutional-level companies, they are barely aware of crowdfunding,” Parkin says.
Fasulo points to capital calls as a potential issue that could concern owners. Helman calls this a “challenge” in crowdfunding, but she has a strategy: Realty Mogul allows one-to-one dilution, letting the owner bring in additional equity and be diluted. Or the firm will allow for member loans where the owner can bring in debt and the crowdfunding equity becomes subordinate to that debt.
“[Capital calls are] still a risk,” Helman says. “When you run out of capital, it’s not a good thing for anybody.”
Rodrigo Niño, CEO of Prodigy Network, a New York–based crowdfunding provider, wants to eliminate capital-call risk by working only with strong sponsors and assets. “It’s about the underlying asset,” he says. “If you don’t have a strong sponsor, you may require the crowd to come up with additional capital.”
Marquez has never needed to make a capital call, but he’s mapping out a plan for what he’d do after receiving $500,000 in equity from Realty Mogul. “Even if it came down to recapitalizing the asset in its entirety, we’re evaluating other alternatives so we could get around it,” he says.
Most traditional multifamily operators accept crowdfunding as a viable source of debt or equity.