This article also appears in The VIEW, the quarterly publication jointly curated by the three Bay Area chapters of Commercial Real Estate Women (CREW)—CREW San Francisco, CREW East Bay, and CREW Silicon Valley. CREW is a nationwide business networking organization dedicated to the advancement of women in commercial real estate. For chapter news, events, and membership information, visit the Bay Area member organization websites at crewsf.org, creweastbay.org, and crewsv.org.
By Jen Chan, White Tiger Condo Conversion
Until a few years ago, investing in commercial real estate was largely limited to big institutions, hedge funds and high-net-worth individuals. Wealthy investors relied on word of mouth within their elite networks to access quality real estate investments, and participation typically required a minimum investment of $50,000–$100,000.
But this “country club” model of real estate investment began to shift in 2012 when Congress passed the JOBS (Jumpstart Our Business Startups) Act, which enabled small retail investors to enter the commercial real estate market. Since then, dozens of so-called crowdfunding companies have emerged, offering individual investors an opportunity to pool their resources to invest in commercial properties via online marketplaces.
While all these companies operate differently, using different platforms and parameters, they are all powered by innovative new technologies designed to increase efficiency and reduce costs for both investors and borrowers.
“Our mission is to connect capital with opportunity, so that we can unlock the massive growth potential of the commercial real estate market,” said John Minervini, content manager at San Francisco–based RealtyShares (realtyshares.com), one of the earliest and largest players in the crowdfunding sector, with 120,000 registered users across all 50 states.
“Our proprietary technology and workflow management tools support our team of experienced real estate professionals, so that they can evaluate transactions at greater scale and levels of discernment. Our unique marriage of AI and machine learning allows us to more efficiently source quality projects and streamline the underwriting process.”
Real estate crowdfunding sites operate similarly to e-commerce sites, with all transactions done electronically. Investors can go online, sign up and begin shopping for properties within minutes. The platforms are designed to be easy to use and intuitive and require little or no specialized knowledge.
“It’s a lot like buying a book on Amazon, but instead of buying a whole book, you can buy a chapter,” said Robert Greenberg, chief marketing officer for Patch of Land (patchofland.com), a real estate crowdfunding site based in Los Angeles. “We pool capital from individuals to invest in the types of projects that in the past were the realm of wealthy insiders and hedge funds.”
In addition to providing access to a market once reserved for the rich, crowdfunding sites also promise significantly higher returns—anywhere from 8 to 13 percent per year, depending on the platform and the project—than those provided by real estate investment trusts (REITs) or other traditional investment vehicles. And unlike REITs, where investors buy into a pool of properties, crowdfunding sites allow users to invest in individual projects.
Crowdfunding sites also offer advantages to builders and developers. Unlike loans from banks, which operate under stricter regulatory control and typically take months for a decision, a loan from a crowdfunding site can be executed in a matter of weeks—although interest rates are generally higher. “As long as we think our crowd has an appetite for a deal, we will make the loan,” said Patch of Land’s Greenberg.
Crowdfunding sites are clearly democratizing real estate investment, but they are not necessarily open to the average Joe and Joanne. Many sites—including Patch of Land and RealtyShares—require investors to be accredited, which means they must have a minimum net worth of $1 million, excluding their primary residence, or have reported income of at least $200,000 each year for the last two years.
Patch of Land and RealtyShares post new deals on their sites several times a week. Users can then select the projects they want to invest in based on their personal preference, investment goals, appetite for risk, asset class, location and other criteria.
Patch of Land focuses on the lower end of the market, providing loans ranging from $100,000 to $3 million. A typical borrower might be a developer who purchases a rundown apartment building, hotel, or self-storage facility, rehabs it and quickly sells it for a profit. “Our deals typical sell out within hours or days,” Greenberg said.
RealtyShares focuses on the middle market, funding commercial projects with a value of up to $50 million. Since the company was founded in 2013, $730 million has been invested through its platform in more than 1,100 projects across 39 states.
As with all forms of real estate investment, caveat emptor applies to crowdfunding sites. While the promised returns are typically higher, so are the risks. Unlike publicly traded REITs, which eschew high leverage, own vast portfolios of property and are watchdogged by Wall Street analysts and asset managers, crowdfunding sites operate under less stringent rules. Indeed, one expert on real estate finance characterized crowdfunding sites as “the wild, wild West” of real estate investment.
Still, the best-run sites carefully curate deals and vet sponsors. Realty Mogul (realtymogul.com), for example, another Los Angeles–based crowdfunding site, conducts background, criminal and credit checks on each funding applicant and reviews his or her historical deal flow, liquidity and success. The site’s head of credit has three decades of experience in real estate finance.
Both Patch of Land and RealtyShares say they carefully evaluate every deal they offer investors to minimize their risk and maximize their returns, and both companies underwrite the deals they present to investors.
“We underwrite every deal we make, and we won’t underwrite a project that doesn’t meet our criteria,” said Patch’s Greenberg. “If we made the loan, we like the project. We did the due diligence.” But, he was quick to add, “that doesn’t mean that every deal is a good fit for every investor. They have to do their own due diligence.”
Greenberg said very few of Patch of Land’s deals have gone sour, and even if they do, the company has safeguards in place to ensure that investors recoup their original investment. All loans are secured debt, and the company always owns the first lien on the property. “We’ve returned every dime of principal to investors on our site.”
Minervini said RealtyShares accepts less than 10 percent of the projects it reviews: “We are discerning about the investment opportunities we present to our investors.”
Real estate crowdfunding generally focuses on debt financing, whereby investors receive monthly or quarterly distributions from the interest paid by the borrower. However, a growing number of crowdfunding sites are entering the equity market, whereby investors acquire a stake in a property and earn returns through rental revenue rather than through interest on a loan.
Patch of Land takes pride not only in making money for its investors but also in building communities and financing projects that are often overlooked or rejected by banks and other traditional lenders. The company has invested in Detroit, the South Side of Chicago and other economically distressed areas.
“We’re not a nonprofit,” Greenberg concedes, “but we believe we can democratize the availability of capital so that people who want to do good can do good.”
About the Author
Jen Chan, MBA, is the CEO and founder of White Tiger Condo Conversion. Headquartered in San Francisco, White Tiger innovates alternative real estate ownership and wealth strategies by leveraging leading-edge digital technology. Jen’s mission is to revolutionize the American Dream through condo conversion—making property ownership and equity available to more people while at the same time building vibrant communities. She has more than 25 years of experience in residential and commercial real estate and related fields. For additional information, visit WhiteTiger.us.