Crowdfunding firms are still a relative newcomer to the real estate financing arena. But these companies aren’t wasting any time in setting their sights on investors with deep pockets.
Crowdfunding was founded on the premise that firms could harness the power of the “crowd” to raise significant capital by getting even nominal amounts of money from a large pool of investors.
Firms such as Realty Mogul, CrowdStreet and GroundFloor have focused on raising capital only from qualifying accredited investors. Although minimum buy-in amounts of $1,000, $5,000 or $10,000 are common, some investors can access crowdfunding deals for as little as $100. Now some crowdfunding firms are aiming higher.
The Carlton Group announced the launch of its real estate crowdfunding platform in April. The global real estate investment banking firm is targeting accredited investors from around the world. However, Carlton is upping the ante by setting a minimum buy-in on some of its offerings at $1 million.
“We are making a very specific statement by using $1 million as a minimum,” says Kevin Swill, chief operating officer with The Carlton Group. “We are specifically targeting the informed accredited investor who wants to invest in large real estate deals, but cannot afford to take down the entire deal.”
While some crowdfunding firms act as a financial intermediary to help sponsors raise capital, Carlton will purchase the real estate for its own book of business. Although the firm has yet to close on its first deal, Swill says that Carlton executives have spoken to or are corresponding with hundreds of potential of investors. “Many of them have reviewed or are reviewing their due diligence materials and we anticipate a purchase closing shortly,” he notes.
Since its inception in 1991, Carlton has completed more than $100 billion of commercial real estate transactions.
Point of differentiation
Carlton is taking a big step to differentiate itself from the growing field of real estate crowdfunding firms by going after big capital. Other crowdfunding firms are eyeing a similar strategy, albeit at a much lower scale. They are casting a wider net for potential investors that include high net worth individuals and family trusts, as well as investment funds and institutional investors.
“The next phase of the business is to bring institutional acceptance to real estate crowdfunding,” says Benjamin Miller, co-founder and CEO of Washington, D.C.-based firm Fundrise. Fundrise recently announced that it has raised more than $31 million from a consortium of investors led by Renren Inc. and Marty Burger and Tal Kerret, the CEO and CIO of Silverstein Properties, the New York City-based real estate investment and development firm. Renren operates a large social networking platform in China.
Appealing to institutional investors is a challenge and takes a more concerted effort on the part of crowdfunding firms. Institutions are not known for being “early adopters” of new concepts, notes Miller. Typically, they want to see an investment track record of three to five years at a minimum. “They want to make sure that the business is going to still be there over the 10-year life cycle of a real estate deal,” he adds. In addition, getting approval for new deals from institutions and their advisors can be a complex process.
Yet the crowdfunding platform is starting to pique the interest of bigger investors. To date, the minimum investment amount for Fundrise varies between $100 and $5,000, depending on the transaction. The company has also been successful in attracting bigger investors that have put as much as $300,000 in a single deal.
“When you read The Wall Street Journal and The New York Times and you see big companies doing (crowdfunding), the larger scale capital starts to pay attention,” says Miller. Fundrise is one of the pioneers in real estate crowdfunding. The company introduced its first offering in 2011.
“The first year, people thought we were crazy. The second year people thought it was novel and now people say to me ‘It’s inevitable,’” he says.
This article was republished with permission from National Real Estate Investor.