Crowdfunding for Real Estate Investment

so thank you all for coming I'm Marty Berger I'm CEO of Silverstein Properties I'm joined here today by three very serious players in the crowdfunding arena Darren Powderly from crowd Street raise your hand now have at all from Realty shares and King Davidson from fund rise you'll hear from all three of these experts in their field today I know the least about this subject so I'm gonna try to shut up and allow these guys to do what they do best but I'm gonna give you my layman's view of what I know about crowdfunding funding and set the stage so the credit freeze that occurred during our Great Recession really made it difficult to raise debt and equity and the JOBS Act of 2012 which stands for JumpStart our business startups Act allowed credit to flow again it allowed for companies to solicit money publicly for the first time in 80 years and this changed really the whole world of money raising akin to Chara Schwab changing the way investors access the market's 30 years ago this allowed online investing and people were already buying everything online so why not extend that to real estate there's been a lot of technology advancements that have helped make this possible hey everyone migrating online B there was a reduced cost of all these host servers and new software technology in order to create these platforms and it was good for both consumers and providers it was a simple access to these platforms and to other tools there was an article put out by The Wall Street Journal like it was it's called the uber ization of money and they talked about the tech savvy advisors Robo advisors out in in Silicon Valley that we're using algorithms and applying them to portfolios which you know just made it more efficient and using technology to to figure out how to trade also exchange-traded funds are very similar and these eliminate the middleman and required much less theft so it was a cheaper form of investing and this sort of helped lead to the crowdfunding so what is crowdfunding it really started about eight years ago with a company called Kickstarter which was helping artists and creative people raise capital but it wasn't for investment back then it was for donations and then after the JOBS Act the birth of debt and equity crowdfunding really was created and this was putting money to work for a return online capital formation was applied to the Internet was a modern approach of raising money and now it's applied to real estate so investor relationship management this is software that allows for communication distribution personal information offering memorandum and detailed documentation when I first met the fundrise guys they came to my office and they showed me this platform and it was just it amazed me that all this was online that you as an investor can go in and they'll have all your personal information you can see the offering memorandum you could touch the economics of the deal you could see the construction budgets it was a platform that really allowed the little the little guy to feel empowered and then it went to Investment Banking and about an advisory participants everyone started taking notice of this so mortgage companies non-traded reached brokerages like HFF and CBR we tried to get in on it and then some of the larger investment banks and advisers started their own platforms and called it multi-channel fundraising and now we have both institutional and retail investment capital sources so the participants are accredited investors and institutions so there are different platforms and we have representatives of each of these different platforms the first will call direct to invest your technology like crowd Street this which is Darren's company it's really a marketplace or an exchange it allows third party sponsors to be linked with third party investors so a crowd street doesn't own the deal they link the the developer or the investor or the the deal sponsor to the investors the second is an investment management type model like real G shares which is navs company and this is where you have acts as or Realty shares acts as an equity or debt investment manager there the sponsor and you invest you'll buy deal and individual LLC's for each deal and then there's the Eyrie which is fund rise fund risers Kings company they act like a financial manager so it's one offering that you invest in and invest across the portfolio of deals so three different types of platforms and then Darrin remind me is there's also white label software that that their firm is creating so if you are a real estate company and you don't want to have the crowd street name on it you could create they'll create the platform for you and you can put your own name on it so how big is this market right now it's about two billion dollars of year a year so it's about twenty five hundred deals a year eight hundred thousand per per transaction but the potential is so much larger and it's sort of the modern version of friends and family so with that I'm gonna leave it to the experts to talk about it and I'll start with sorry got to do little fancy stuff here with Darren excellent Thank You Marty so Darren Powderly founder of crowd Street thanks for having me here today it is an honor to be up here with my colleagues in this in the field all these guys are innovators especially having Marty here next to us with silverstein and speaking with you about you know the future of capital formation for commercial real estate and so you know and that's really how we look at it we look at you know the word crowdfunding is so misunderstood I mean you can crowd fund for your favorite band or you could crowd fund for poor people in a third world country but you know what we're really talking about here is the modernizing of how we capitalize in commercial real estate particularly you know with this panel and it's it's sort of the what we view as the future of of capital formation and investor relationship management for commercial real estate and it's a very small sliver of the market today but it's growing rapidly and will continue to grow as the years progress and I think 10 years from now we'll see you know it'll be a no-brainer people be like of course I raise capital online you might do it through an eery or an investment manager partner or you might do it for yourself with a direct to investor model and or the next model that that is not represented here today that we haven't even seen yet but there's so much innovation happening so rapidly right now so I was fortunate enough to found the company in 2013 actually I conceived of it in 2012 I had 15 years of commercial real estate and a five years of technology experience and today we're a VC funded company based in Portland Oregon we have 13 employees and you know we have a lot of commercial real estate advisers so we were born out of a commercial real estate firm and and that it gave us this you know experience to realize that you know gosh fundraising hasn't changed for commercial real estate in like 25 years and particularly in our view of the world you know friends and family you know fundraising the syndication it is so old-school on that we really felt like if we could apply technology to it and you know modern tools that that we could greatly advance it and it could be a global opportunity so we basically stopped doing our day jobs or I stopped doing my day job and went after this this entrepreneurial startup opportunity and you know we really do have deep expertise in commercial real estate as well as private equity and Internet software and we've learned a couple things the last like four four years or so really really three years since since we launched but um you know from our view again because we focused on commercial real estate owner-operators developers and what we call sponsors who who do capitalize their deals via syndication they don't only syndicate they have great lender relationships and they have you know great private equity sources that they raise capital from but they like the syndication model and they're interested in growing that piece of their business but it's difficult it's been difficult it's it's a viable method but it's been difficult as well as you know meeting new investors is totally challenging and never mind once you know if you were able to grow your investor base then managing those investors is a burden that that many sponsors are not equipped to handle and then clearly technology is is is disintermediating disrupting uber ization of finance as The Wall Street Journal calls it you know clearly this is happening in every industry and it's almost shocking that it hasn't happened more rapidly in our industry here in commercial real estate but it is it is happening so some of the questions that we were posed as as panelists were just to kind of explain you know our different versions and and of the business and so the question was you know how does the how does the funding work what's the model for operators for those of you who are commercial real estate owner operators developers and the first way that we deliver our solution to you is by a a software-as-a-service it's a cloud-based solution that enables you to set up your very own funding portal on your website I for the people that you already know your investor members your friends and family as well as it gives you an opportunity to attract new people to your website to build your brand and build your business with with a whole pool of individual high net worth investors in our world their high net worth accredited investors only but also you know private equity firms and funds and family offices and you know institutional investors of a wide variety can now do business with you directly and we deliver that solution via our software called sponsor direct the second way and probably what we're more known for is our marketplace we do have and we're very passionate about this direct to investor model where you know we connect accredited high net worth investors directly to the sponsor right there's pros and cons to these different business models and our business model the pro is that you know it's a very efficient relationship that's being built there and hopefully once we forge a relationship between sponsor and accredited high net worth investors or institutional capital that that relationship starts and then you know is repeatable over time and really has a really strong lifetime value in our market places is certainly proven to be successful we've done over 40 deals we could have done 400 but our marketplace is highly curated highly highly curated it's our own form of risk management and in cya if you will and in this new and pioneering world so we've had we've been fortunate to have a high success rate when we set expectations for our marketplace for our sponsors we've been able to set them low and reasonable and so we've exceeded expectations by about 114 percent most of our deals are equity and the average raise is around eight hundred seven hundred fifty thousand dollars eight hundred fifty thousand dollars so that's how that's how you know the model works for operators and then you know what are the scenarios and where where a real estate investment manager comes to us well the first the first scenario is that you know they have all these existing investors but you know they don't know the right tools they're not managing them efficiently it's spreadsheets and it's email and and then they also you know don't really have an efficient way to grow that investor base so they come to us for the marketplace and sponsor direct on to do so the second scenario is that they want to raise more money faster and they want to do it at a lower cost and so they they can utilize either sponsor direct on it on its own and you know people to their website or they can post a property on our marketplace and meet people that they don't know we maintain the community of 7,000 investors at this point again accredited high net worth investors and that's growing it's something we spend a lot of time cultivating our investor community and we spend a lot of resources and money to build that but mostly it's about trust it's about integrity it's about introducing them to operators that we have a high degree of confidence in that can take care of them and then last one is like you know investor communications and management they might have a lot of reports and information but they're having a difficult time of communicating with these people 24/7 in a manner that they are accustomed to be you know receiving reports I mean fidelity Charles Schwab any any other other accounts of course you have access to your information and the real-time basis anytime you want to so why not for commercial real estate and pride in the private commercial real estate space we deliver a solution that helps companies do that so our ideal customer another question that the the organizers put together is like who's the ideal operator because for my colleagues here they have a different ideal operator and often times you know we'll talk about the pros and cons and we'll share some some some in some cases will share some clients and you know some cases it's a better fit for my friends here but for crowd Street the ideal operator for sponsor direct is anybody that wants to have their own funding and investor management portal they want to have a direct relationship with the investor and they believe in the future of that relationship in this day of you know uber and airbnb and we work and so forth oh pardon me I just clicked a couple of buttons okay there we go and then you know they really embrace what we call multi-channel fundraising multi-channel fundraising is is I think a new concept not for retail in retail everyone's talking about multi-channel retailing any commerce and so forth to apply that to the fundraising space you know you've got your banks you've got your private equity firms and now you're going to have your own direct to retail investor you know a channel the internet channel and then that's response or direct which is the SAS model for spawn for marketplace again it's highly curated it's a very high bar two and a half percent of the companies that we're talking to actually make it on our marketplace so there's very low volume but high quality and we intend to keep it that way so a case study is is denn halts associates we were referred to this group it's a it's a sixty year old company out of New Jersey an existing client of ours referred them to us and they had a big portfolio about 25 existing properties that they currently owned and they wanted to load up in you know deal rooms for these to report to their investors they have over 250 investors of their own and so they're utilizing the sponsor direct solution to do that and then every one of their new deals for like a new offering there is in capital for is posted on their website of course and the selecting deals are posted on our marketplace but not all only the ones that they want that sort of funding boost or they want to like meet new investors and grow their investor base with a specific offering so I'll show you one of those deals was called 100 East pine down in Orlando it's a value add office property and and there's a great business plan around this the property been struggling for a number of years you really hadn't come out of the Great Recession just yet I'm and this K&N halts acquired it for a very low basis and put together a very achievable business plan with investor friendly returns to come in as basically preferred equity participants so they do this as a model offline and they chose to partner with us to sort of you know try out the the internet side of things and it was very successful we were able to help them raise about seven hundred and fifty thousand dollars seven hundred thousand dollars pardon me with from 15 new investors that took us about four weeks to do so and the returns were very favorable to the investor so you know the one thing as you know finishing up on crowd Street is that you know this is this is not like what's going to happen in the important part of it and thank you for joining us to sort of see like the you know the experiences that we're all going through but you know some really great companies have already become customers what we're very grateful for so you know we're paying deep attention to these companies that are innovators themselves that are early adopters that are looking toward the future of sort of online capital formation and how it's going to help them you know grow their business give them an unfair advantage and you know position themselves for success in the next in the years ahead so thank you I appreciate you you're listening my name is nav app while founder and CEO Realty shares just a little bit about myself before diving into what Realty shares is I spent about a decade in real estate prior thank you so much it's been about a decade in real estate and prior to founding the company started starting my career as a real estate broker and then transition into real estate loss then about three and a half years prior to founding the company as a real estate attorney in San Francisco representing mostly large client large institutional real estate clients like Avalon Bay SKS Investments Equity Residential related etc etc in 2010 I was heavily investing in real estate great time to buy as most you know and you know go through the motions of trying to raise capital and just realizing how inefficient raising debt and equity even debt capital at that time because banks were really pulling back an especially equity capital to friends and family going through those motions really gave spawned the idea of creating an online marketplace to provide more efficiency in capital markets for the small cap real estate space and when I started working as an attorney at a lot of friends who were fellow attorneys looking to get exposure to real estate they were accredited investors were heavily invested in stocks and bonds and bonds were very low yield and stocks were experiencing a heavy level of volatility so the idea for Realty shares really came through those experiences and we set out when we set out to build realty shares in late 2013 our mission was really to transform how real estate investing works for both passive investors looking for real estate exposure what that haven't have become a landlord and directly operate the asset as well as active investors operator sponsors that are looking to raise capital more efficiently than they are able to do in the offline world so really our mission and it still holds true today is to create efficiency transparency accessibility on both sides of the market place for both constituencies by leveraging technology so we have a two sided marketplace you know on one hand we have investors the value proposition there is really opening up real estate as an investment for their portfolio really providing them with a way to invest smaller amounts into real estate having a more streamlined investment process getting data at their fingertips through their laptop or tablet that's really what we provide these investors we have over 20,000 accredited investors using our platform today and looking at deals and that number is growing by two thousand a month so it's really exciting just to see these investors you know it come to the platform get really excited about what we're offering and invest in in multiple properties in any given year the other side of our marketplace is our operators or real estate companies and the value proposition there is is really recruiting efficiency that doesn't exist in the offline world or on average we're able to raise capital in about a week once that deals listed on our platform and we are full stack so we can provide both debt and equity capital so really it's all about efficiency accessibility and speed and that's what we're really setting out to do with with Realty shares and the entire industry in general in terms of our back history so again I mentioned we started in in late 2013 we launched her first deal in summer of 2013 we then and since then we've raised about 32 million in venture capital most recently we closed her Series B round that was 20 million earlier this year and that was led by Union Square Ventures their heavy FinTech investor of an investment and Lending Club as well as non fin tech companies like Twitter now we're about 50 employees were based out of San Francisco and you know we've really been able to use that capital that we've raised and add a lot of bench strength a lot of our team members have been in real estate private equity and real estate investment companies or VP of investments formerly was a VP at Blackrock so really building brand strength on the real estate side to more accurately assess and under ideals but also on the technology and product side to continue providing a great user experience for both sides of the marketplace so we're really excited to have great venture partners as well as a great team to help accelerate the growth that we've already experienced we also just hit a new milestone we we raised our 150 million through the platform we just hit that milestone in March that was in the last 15 months and we're doing about 15 to 17 million a month of capital formation through the platform so really exciting to see that growth and that's really through the accredited investor base that we have today so you know there are misconceptions about what is crowdfunding and I just wanted to go through what we are and what we aren't so you have a really clear understanding of what this concept of online syndication at least through Realty shares is again my fellow panelists may have a different view and you've already heard Aaron's view you know here King next so one is you know again we're only open to accredited investors so we're not catering to retail investors or non-accredited investors we do have a constituency of family offices and larger investors using the platform to get exposure to middle market real estate but again they're all accredited to is you know when we set out to create this company we really wanted to address the part of the real estate market where capital and efficiency is the greatest right so doing you know three million dollar raises for 100 million dollar real estate deal isn't really moving the needle so it's really those deals that need anywhere from half a million up to five million of equity capital and we're slowly inching higher than that is what we're really focused at on so we call that you know the sub institutional middle market small cap there's a lot of names for it but that's really what we what we address that's the market we're going after you know on the we're not I come from land you say I was a land use attorney and I used to work in San Francisco it's the most infamous for getting development projects done so I learned you know from those experiences that be it's very the process of going through entitlements is just too uncertain for the constituency of investors we have today so all of our deals either have to be cash flowing or have to be fully entitled ready to put sticks in the ground you know we are a curated marketplace so there is a vetting process you have to go through prior to being able to list deals through the Realty shares marketplace and then finally you know we've only do us projects most platforms do and we've done deals in about 60 markets we've mostly focused on secondary markets again that's right thing more of the sub institutional small-caliber real estate is so high-growth secondary markets where there's a little bit more yield potential and that's what what they're really looking for alright oh let's going backwards now okay so in terms of the products we provide so for commercial most of our products are equity so we provide two types of equity products a preferred equity product as well as a JV equity or common equity product we're pretty broad focused in terms of product we've pretty much done every food group from multifamily to retail to hospitality as well as self storage and industrial most of our deals have been multifamily and retail but again we've done we've done it all on the preferred equity side you know actually on both sides were up we're typically able to raise anywhere from two and a half to three million that's where we top out today our average deal size on the commercial sides typically a million and a half that's what we're raising on a per transaction basis on average investment durations on the preferred equity typically top out about six thirty six months although at times we can go a little longer than that and the return requirements that we've seen work on the platform are shown there and we can fund up to ninety percent of the total cap stack on the preferred equity so if you have a first lien loan that's you know seventy percent or 75 percent you need additional bridge capital we can provide that with the cap return structure on the common equity side very similar in terms of transaction types you know and investment size a little bit more flexibility around duration you know we can we've done deals that are seven to ten years long but we typically like to keep them at five years or less and those are some of those for the waterfall terms that we'll see that are most typical we can fund up to ninety percent of the total equity required we always require a ten percent net Co investment but we're very flexible I think one of the benefits of online platforms and and you know real teachers in particular is flexibility so we can be part of the LP capital stack we can be a majority LP so we're very flexible we always want to find a way to work together as long as it deals good and the sponsorship is good so we you know we don't turn down deals just because they don't squarely fit within our structure so one thing to mention although most of our products have been equity we we also can funf debt that's a new product for us mostly bridge loans is what we're funding so you know if you do have needs meet on the debt side we can couple an equity transaction with with the debt with debt capital as well so that's something to keep in mind in case you're looking for a full stack solution in terms of how the platform works so two-sided marketplaces I mentioned before let's start with the investors so we actually verified the accreditation of each investor prior to allowing them onto the platform we are affiliated with a broker dealer partner that does three different checks on each of our investors they do a Novak check they do a suitability check to make sure the type of investments were offering highly illiquid investments or suitable as well as an accreditation check so the investor needs to go through all three checks before they're allowed on the platform to start investing through through through the marketplace on the sponsor side on the next slide we'll take you through a pretty robust funnel that a sponsor needs to go through before being able to list deals on our platform but essentially once that sponsor and dealer approved and it's launched onto the marketplace the transaction the transacting between the two sides happens directly through the marketplace then I think one sort of differentiate or difference that we offer is again we try to do as much of the legwork as possible both on the front end when we're raising the capital you know we pretty much your job ends as an operator once that deal is approved and then we come back to you at the closing table and say look we you know we obviously keep you informed during the process but hey we've raised two million or two and a half million you know who's your what's your wiring instructions we review the operating agreement before the deal launches so we're pretty efficient and really allow you to keep your eye on the ball which is getting that deal to the finish line rather than having to worry about the capital formation element and then we're also an ongoing partner so you know we help service the investors and the way we do it is we actually set up a separate single purpose vehicle it's an LLC it's managed by our subsidiary and that entity is the entity that pulls the investors that participate through our platform at 5k check sizes and up on average you'll see investor participating at about fifteen thousand dollars but five thousands of minimum and then that SPV is a single investor in your deal level entity whether it be Ana limited partnership or limit live the company and that way it shields you from the you know potentially dozens of investors that participate through our platform and we sort of take care of the headaches of K ones and distributions directly through our platform for that base of investors so again it's it's the marketplace of transacting that the fundraising as well as a servicing component that we do provide so here's a just a high-level review of our funnel and our vetting process each month we're getting about 1500 applications from from operators a lot of them were rejected right off the bat off the bat because you know they don't have the track record requirements were looking for we're looking really looking for operators that have a pre-existing track record and really are trying to scale their business and need more capital access to do that or just need more efficiency around raising capital so we'll prequalify that's a pretty automated step once that deals pre-qualified one of our investment team members will be in touch to just collect documentation and data on you as well as your deal that deal will then proceed to an underwriting will be improved approved by of investment committee that consists of our chief credit officer or vp investments or vp vasa management myself and then that deal will proceed to be listed onto the platform and funded and enclosed all in for a commercial transaction from start to finish we've seen around 25 days is what it's taking the fundraising portion of that is about a third of that timeframe and the rest is really the diligence and underwriting for repeat operators we can even be even quicker because we typically have all the data already at least on the operator and the principles of the company I want to take you through three quick case studies and I could stop with this are we I'm like good okay so this is a this is the case is this is a very sort of representative transaction in terms of size of deal this was a retail deal in Las Vegas the purchase price was around thirteen point seven million whole carry projection projection was five years it was 92 percent occupied with credit tenants like Chipotle Subway etc we funded a portion of the third party equity so that the capitalization structure was you know 10 million a day three hundred eighty k 10 percent sponsor equity and then third party equity and we were a portion of that we were about a third of it so we were a million dollars in this transaction and that just goes to show the flexibility of being one LP or the only it really just depends on what you need the waterfall structure there was an 8% preferred return a 60/40 split above that and quarterly distributions made by the sponsor during the whole period so that's one example of a JV equity deal we've done this is a much smaller transaction but it's a representative preferred equity transaction multi-family deal in Oakland this was a purchase price of 2.8 but with all the rehab work it was a total cap of around three and a half we funded a million in a preferred equity structure and that structure was 8% current pay during the hold and then Elza monthly or quarterly actually and then a 7% of crude dividend at exit so as a cap return with us providing a million of preferred equity and then finally this is an example but transaction we actually funded early on one of our first transactions mixed-use chase anchored building in Phoenix there that was a five million dollar purchase the projected hold was two to five years but ended up being a little less than three years actually and less than one two years it was 93% occupied at time of exit the capitalization there was about 50% debt and the rest was in the form of equity and we funded again a portion of that equity so that just shows some representative transactions again we have done over 300 transactions now across 150 million dollars raised we also do Residential's that makes a large portion of that but yeah it's really what our our motto is is continue building leverage for the operating partners and the investors and our goal really is to continue moving that check size right so we want to be able to provide you as an operator a single source of capital at five seven million today we're around two and a half three and we've doubled that every year so we're hopefully by the middle of 2017 we'll be closer to that goal and thank you for all thank you all for listeners you

Channel: Urban Land Institute

Views: 9,613

Rating: 4.8965516 out of 5

Keywords: ULI, land use, real estate, cities

Id: CF8VnDwc1gk

Length: 32min 15sec (1935 seconds)

Published: Mon May 02 2016