Crowdfunding for Real Estate
Aug. 22, 2014
New Capital Source In The CRE Marketplace
Crowdfund is an acronym based on 2011 United States Senate Bill S 1970 “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure.” This bill, and a host of others, was designed to ease federal securities regulation and thereby facilitate greater investment in United States businesses. On April 5, 2012 in the White House Rose Garden, a modified version of S 1970 and other Senate and House bills with which it was combined was signed into law by President Barack Obama as the Jumpstart Our Business Startups Act, also known as the JOBS Act.
One upshot of the JOBS Act was enhancing the use of on-line “funding portals” to raise capital.
These portals, some of which offer equity investments as well as debt investments, are coming into significant use in real estate investment. Here is how the portals typically work: a portal organizer or syndicator establishes the website, locates suitable properties, performs due diligence, and should sufficient funds be raised, creates a separate acquisition entity, typically a single purpose limited liability company (“LLC”) (to be owned in part by the portal syndicator and in part by the investors), the LLC then acquires the asset and retains a professional management company to deal with day-to-day management issues such as “toilets, tenants and trash.”(1)
The portal syndicator may serve as the managing member of the LLC, and if so, will likely handle all regulatory reporting requirements, investor communications and tax documents.(2) Qualified investors can invest a modest amount or much more significant amounts.(3) Because the typical investment vehicle is an LLC, regulatory laws limit the number of LLC members to 100. Thus, for a $5,000,000 equity raise (4) for a property acquisition with 100 LLC members, each member would invest $50,000. Some online portals enable investors to browse potential investments, review legal documents and due diligence materials, sign legal documents on line and access an “investor dashboard” giving 24/7 access to watch the investment.(5) The investment returns as well as the cash distributions vary from portal to portal and from investment to investment.
How does crowdfunding fit into your commercial real estate business goals?
If you’re a commercial real estate owner with a property for sale, a crowdfund portal could be a source to locate a potential buyer. Likewise, if you’re a commercial real estate investor, a crowdfund portal may have an asset(s) in which you could invest to meet your investment objectives. And if you’re a commercial real estate broker, a crowdfund portal may be a source to locate future clients or a source to help your existing clients find a buyer or a lender.
If you’d like further information about crowdfunding and crowdfunding portals, there are three United States based organizations that have been founded to promote “education and advocacy related to equity based crowdfunding as enabled by the JOBS Act.”(6)
National Crowdfunding Association
Crowdfunding Professional Association
CrowdFund Intermediary Regulator Advocates
Here are some crowdfund real estate portals you may wish to visit for deal specific information:
Realty Shares in San Francisco, California
Co-founder: Nav Athwal
Realty Mogul.com in Seattle Washington
Founder and CEO: Jillian Helman
Prodigy Network in New York, New York
The information provided in this article is general in nature and does not constitute an endorsement of any particular person or company. Rather, the reader is encouraged to obtain qualified investment advice regarding any particular investment.
Crowdfunding is in its early stages. However, due to its simplified structure and the impetus given by Congress, crowdfunding in the CRE marketplace is likely to grow dramatically in the years ahead.
Crowdfunding for Aspiring Real Estate Moguls, Reuven Cohen, (Forbes.com) Jan. 25, 2013 @ 2:25 p.m.
Real Estate Syndication-Realty Mogul, June 19, 2014.
See footnote 1 above.
Regulations may limit the maximum raise to $1,000,000 (for any particular offering) over a twelve-month period; however, the SEC has not yet issued rules covering, for example, aggregation of multiple offerings to exceed the $1,0000,000 cap.
How Does Realty Mogul Work, Realty Mogul, 2014 ( www.realtymogul.com/help)
See footnote 1 above.
About the Author
Roger Spencer, Esq. received his undergraduate degree from the University of Michigan in Ann Arbor, graduated from Northwestern University School of Law in Chicago and for many years was a senior partner in the real estate department of Quarles & Brady (formerly Quarles & Brady Streich Lang) before starting his own firm in early 2005. Roger is an accomplished practitioner with more than 37 years of experience in commercial transactional real estate law with a heavy emphasis on commercial leasing, commercial acquisitions and sales, and commercial real estate finance. He is also an accomplished speaker and lecturer on real estate law topics.
From The Author
If you have any questions on the above article, please contact me and I’d be happy to discuss those questions with my compliments. Also, as a courtesy to visitors to my website, I would be pleased to provide a presentation to the real estate personnel on your staff regarding topics of interest involving real estate law issues.