Crowdfunding, the go-to money-raising strategy for food
truck operators and app designers, has begun to make inroads
into big-dollar U.S. commercial real estate deals.
The pitch: Affluent individual investors can take direct
stakes in medical offices, shopping centers and other
properties by putting up money online. Proponents predict that
this new way of selling stakes in commercial buildings will one
day elbow out established players such as real estate
Ken Klein, a retired certified public accountant in Boynton
Beach, Florida, has invested in three projects through
crowdfunding platform Acquire Real Estate. It enables the
average Joe to have access to deals that would otherwise be
unavailable to them, says Klein, who put between $5,000
and $50,000 each into an airport hotel in Dallas, a mall in
suburban Chicago and a portfolio of hotels in Atlanta. In his
view, these direct investments are less sensitive than REITs
are to the whims of the markets.
Its not dissimilar to
Uber, says Scott Picken, founder and chief executive
of Wealth Migrate, a crowdfunding platform launched in 2009
thats based in Cape Town, South Africa, and operates in
the U.S. from Alpharetta, Georgia. Were going to
see a fundamental change in the way people invest,
asserts Picken, who points out that non-U.S. regulators have
been quicker to embrace crowdfunding. Its not going
to happen overnight, but anywhere the Internet has come into an
industry, it has led to disruption.
Dozens of real estate crowdfunding platforms have sprung up
in the three years since President Barack Obama signed the
Jumpstart Our Business Startups (JOBS) Act, which allows
companies to sell equity investments online. Customers of
so-called equity crowdfunding sites must be accredited
investors with $1 million in assets or income of more than
$200,000 a year.
For investors who have grown accustomed to managing their
portfolios on the web, purchasing real estate there is an
obvious step, according to Jilliene Helman, founder and CEO of
Realty Mogul Co., a crowdfunding company based in Los Angeles.
People have been buying stocks and bonds online for a
decade now, but I dont think it occurred to them that
they could buy their real estate investments online,
notes Helman, whose platform launched in 2013 and says it has
financed more than 300 properties with a total value of some
Some are skeptical that crowdfunding presents a viable
alternative to established strategies for investing in
commercial real estate. I see crowdfunding as real estate
lending without underwriting standards, or real estate
investing without due diligence, says Thomas Springer, a
professor of finance and real estate at Clemson University in
Clemson, South Carolina. I dont think it will be a
Although each crowdfunding site takes a different twist, a
deal marketed by New Yorkbased Acquire, which began
operating in early 2015, gives a glimpse into how the concept
works. Last March, Katz Properties of New York paid $46.8
million for Pompano Marketplace, a 239,000-square-foot shopping
center in Pompano Beach, Florida. Acquire paid Katz
$369,000 for a small stake in the property, then resold that
share to more than 15 investors for $10,000 to $125,000 apiece,
Acquire chief marketing officer Greg Shugar says.
Like owners of REIT shares, crowdfunding investors are
attracted by the promise of quarterly dividend checks. Acquire
told investors to expect returns of about 7.5 percent a year
from Pompano Marketplaces cash flow.
If Katz sells the center, the crowdfunding investors
will share in any profit or loss. Pompano Marketplace is fully
leased, Shugar says; tenants include Walmart Neighborhood
Market and Stein Mart. We feel comfortable
Walmart is going to make their rent payment, he adds.
Were not promising to make you rich. Were
just promising to give you a nice return.
Acquire, which says it has raised $3 million so far,
isnt the only crowdfunding platform to focus on stable
properties that are creating cash flow. Wealth Migrate targets
medical office buildings, whose tenants are unlikely to move as
often as companies renting space in typical office complexes,
Realty Mogul aims for projects with at least ten tenants, a
strategy that reduces the risk posed by the failure of a single
tenant, Helman says. All three crowdfunding companies say they
avoid land deals and development projects risky
endeavors that can reap big profits or losses.
Investors who want to play the real estate market can
already choose from a plethora of
REITs, so why not just buy shares in one of them?
Crowdfunding players say their single-property approach holds a
certain appeal, even if such investments are less liquid than
REITs and offer none of the same diversification.
They have more control, Helman says of
investors. We allow them to buy properties one by one.
Theres more transparency into the individual property
than they would have with a REIT.
Crowdfunding companies also say they can eliminate some
costs, such as broker-dealer distribution fees. In a normal
REIT there are numerous middlemen between shareholders and
their investment, Wealth Migrates Picken explains.
Of course, crowdfunding platforms extract fees of their own.
Acquire says it collects 2 percent of distribution payments
that investors receive from Pompano Marketplace. If the
shopping center sells at a profit, Acquire will take 5
percent of investors gains.
The mainstream real estate industry, for its part, has
greeted crowdfunding mostly with a shrug. No one tracks
crowdfunding in commercial real estate, so its tough to
gauge how much money is being raised. Some experts told
Institutional Investor that the concept is so new they
have yet to form an opinion.
We dont think crowdfunding is going to replace
REITs, says Ron Kuykendall, spokesman for the
Washington-based National Association of Real Estate Investment
Trusts. With a market capitalization totaling $939 billion as
of October, U.S. REITs have a huge head start on crowdfunding
Even crowdfunding boosters expect a shakeout as the new
business model finds its way. There are 150 real estate
crowdfunding companies, Acquires Shugar says.
Only a few are going to survive.
Jim Costello, senior vice president at Real Capital
Analytics, a real estate data firm based in New York, also sees
a reckoning ahead: This market is a little chaotic with
the number of new entrants at this point.
Still, advocates contend that crowdfunding is poised to take
off. The industry is still in its infancy, Helman
says. But I dont think its inconceivable that
youll see billions of dollars of capital raised this