The core concepts of crowdfunding have been around for decades–sponsors are always searching for investors to raise capital on projects. But the improvements made in technology and social media have eased the process and widened the pool, providing more opportunities for sponsors and investors alike.
“Traditionally a deal sponsor might be someone who’s well known in their community and is the proverbial developer who belongs to the country club,” says Steve Lefkovits, president of Emeryville, Ca.-based Joshua Tree Conference Group. “[They] source investors from members of the country club.”
Of course, you’d have to already have the social standing and connections to join the club and get access to those investors, he adds.
By bringing crowdfunding into the multifamily space, fundraising sites that mirror the popular but consumer-driven Indiegogo or Kickstarter are providing financial opportunities to reach investors that sponsors might not have been privy to. And it opens up another asset class to smaller investors, thanks to the lower minimum required to invest.
“Those [multifamily] assets have been privy to large institutions and private investors for the past eight years,” says Rodrigo Nino, founder and CEO of New York-based Prodigy Network. “That levels out the playing field in every possible way, because the smaller investor is in a very low-yield environment right now. They only have access to three asset classes [stocks, bonds, and cash].”
The streamlined process of crowdfunding allows accredited investors to inject funds into their preferred projects, while allowing sponsors to make one comprehensive sales pitch in one sitting.
But for a while, crowdfunding wasn’t possible from a regulatory standpoint, and those concerns still remain one of the biggest challenges for these sites.
“The challenge is making sure everything is done with investor protection in mind and also to that effect, making sure we’re compliant with SEC regulations,” Nino says.
At Beverly Hills, Calif.-based Realty Mogul, the staff has to qualify investors themselves, triple-checking accreditation statuses, and actively restricting the number of investors under SEC rules.
The now one-year old company attributes the site’s viability to its risk-mitigation factors. For instance, only cash-flowing properties are allowed to participate in the fundraising. If for any reason Realty Mogul went under, for instance, there’s already cash flow on the property so that another company with the same fee structure can facilitate transactions on the project, creating a safety net. If the investment goes under before the full life cycle of the property completes, another company can still manage the entity, and keep track of the moving parts of the investors.
“No matter where the market goes–up, down or sideways–you can rest assured that if you need to make a decision to hold onto that property for a little while longer, you can,” says Justin Hughes, CTO and co-founder of Realty Mogul. “Then you can choose to exit at a more opportune time when market conditions are favorable.”
The challenges are also a matter of scale. With such low minimum buy-ins set at $5,000, there are a greater number of investors, creating a larger overhead when it comes to accounting. Realty Mogul developed technology to make the process more efficient without creating unnecessary burden on the project's cash flow.
If an investor wants to exit their shares, they have to tackle the SEC requirement for the minimum hold period; securities cannot be transferred in less than a year. They would then need to find a buyer for their share, and Realty Mogul is able to help process that transfer of ownership.
Big Data Opportunities
Marketplace sites like Prodigy Network and Realty Mogul are now privy to the most sought-after information that gives insight on the actual performance of such investments. Every deal that transpires over the web adds to a growing database of transactions.
There’s very little accurate and current information on investment performance today, creating a huge information gap.
“We’ll have greater insight over time of how private equity investments in multifamily actually perform and who’s providing those returns,” Lefkovits says. “That greater transparency will be a great benefit to investors, and a great benefit to sponsors who are offering deals, who can make promises they can keep.”
And the possibilities to use such big data are endless.
So far, Prodigy Network has raised about $200million from their site, with their most recent project in New York City alone reaching about $20 million, with a cut-off date in July. They have projects in New York, Philadelphia, and Colombia, where they started as a retail equity syndication firm.
About $14.6 million has been invested with Realty Mogul, funding 58 properties totaling more than $104 million. Investors on the site have been returned close to $1.6 million, showing signs that crowdfunding may be a viable trend that’s here to stay.
“Fifteen years ago we said no one would date online, that was obviously wrong,” Lefkovits says. “Clearly crowdfunding of investments is going to be a function that grows because it’s solving a problem for a lot of people.”