Crowdfunding, quite simply, is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. Crowdfunding gained substantial popularity over the last several years via popular websites such as Kickstarter where investors are able to make cash contributions to a project as a donation or in exchange for some kind of reward. Filmmakers, musicians, inventors, politicians among others have raised money through crowdfunding despite being able to offer nothing more than a free t-shirt in return. Despite the success, the crowdfunding platform was limited in scope as entrepreneurs could not solicit funds from investors in return for equity or debt. In April 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law which now makes it legal for start-ups and small business to sell securities over the internet subject to regulations implemented by the Securities Exchange Commission (SEC). This now allows real estate developers to publicly advertise and market their projects to “accredited” investors (i.e. a net worth of at least $1 million and an annual income of at least $200,000). Once all of the SEC regulations are in effect, any investor, regardless of new worth or annual income, will be allowed to join in crowdfunding.
The door will be wide open but what kind of impact will this have on commercial real estate? It is hard to imagine crowdfunding revolutionizing the commercial real estate industry on a grand scale but one can see it has significant potential. Real estate investment is a “high touch” business in which investors like to see the real estate they are investing in and know the principals involved in a project. Historically, our country’s cities and downtown areas were created based on the needs of the local economy and development was backed by local wealthy families and companies long before Wall Street and institutional and foreign investors infiltrated. Look at almost any city and you will find a handful of famous real estate families that were integral in shaping that town. There is a very personable feel to investing in commercial real estate but for the average investor the only access to commercial real estate was investing in a REIT which is similar to investing in a mutual fund rather than an individual stock. Rarely do you hear someone brag about their mutual fund investments but you almost certainly will hear from them if a stock they own hits it big. While mutual funds and REITs are solid financial investments, direct investment in a single piece of real estate, like a stock, offers a higher sense of ownership along with a bigger risk-reward profile.
“If you build it, they will come” (Field of Dreams). With the crowdfunding platform opening for commercial real estate investment, you can bet that developers will be lining up to get a piece of the action. The most immediate impact will most likely be on projects that are simply too small or outside the box of traditional real estate investors. These days “Support Local” is a popular mantra and in Dallas, like many other cities, we have seen the rise in popularity of “mom and pop” restaurants, craft breweries, boutique shops and other small businesses. Real estate is an integral part of the success of local businesses but this type of development has historically been difficult to finance as traditional investors prefer the “brand name” stores over “mom and pop” stores. However, there are people everywhere who would love the opportunity to invest directly in their own neighborhood. These are investors who know what their neighborhood needs and what should be built. Now with crowdfunding, they have the opportunity and developers will seek them out. These types of deals could be the ones that ultimately become the catalyst to spur larger investments resulting in the redevelopment of a blighted neighborhood
Crowdfunding may not be a game changer but it will find its place in commercial real estate finance. As with any new source of capital, MCA will be monitoring it closely and understanding how we can assist clients with crowdfunding opportunities. If you have a project that might be ripe for crowdfunding, contact Brandon Miller at email@example.com