Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/475894
35 March | April | 2015 CCIM.com Powderly: We're experiencing an average funding time of 30 to 45 days from online property posting to closing of the transaction. T e biggest surge of investor interest comes in the f rst three weeks and the remaining time is used for transaction management leading up to the deal closing. We're solving the problem of aggregating a high volume of investors with the use of our technology. It's certainly possible for an attractive deal to be fully funded within a few days. T at's the power of our online marketplace. What are the due diligence requirements for investors on crowdfunding deals? Braman: At Realty Mogul we underwrite very similarly to how a conventional lender underwrites a deal. We look at the strength of the sponsor and its track record in the same asset class and market. We look at the market to see if the fundamentals are there and the trends are positive. We look at the asset and how it has performed historically in the past and add stressors to future performance. And f nally, we look at the deal structure proposed by the sponsor to see if it is favor- able to our investors and something that will sell on our platform. Hooper: Of utmost importance — and this is an area that I fear many investors don't spend enough time and attention on — is doing their diligence on what the collateral of their investment is. What are they actually investing in: the real estate or a synthetic investment product that's been structured by the crowdfunding company? If the crowdfunding company fails, what happens to their money? A lot of the crowdfunding companies are now of ering "property dependent notes," which, for investors, provides no security to the underlying asset. At RealCrowd, we believe that 100 percent of investor dollars should be invested in the actual real estate, not invested into a crowd- funding entity that bleeds fees and doesn't provide direct ownership of real estate to the investors. Beyond that, it's customary due dili- gence: who is the sponsor, what's its track record, are its projections reasonable, and what has it done during the last downturn. Powderly: Since our sponsors are best in class, they are profession- als at due diligence and underwriting. T erefore, when we request due diligence documents, we of en receive a full set of documents that are then uploaded to a property posting for investors to view. Crowd- Street follows a professional due diligence process based on industry best practices. If necessary, we will hire third party consultants to help us complete due diligence on a sponsor's project. We've had success partnering with CCIMs in secondary and tertiary markets where they are the local experts. When it comes to the investors, we build relationships with our investor members. It's important to us to understand their invest- ment goals, so we survey their investment preferences and maintain regular contact with them. T e success of our individual investors and the health of our overall investor community are of paramount importance to CrowdStreet. What are the investor exit strategies on crowdfunding deals? Braman: T e beauty of a platform like Realty Mogul, as opposed to a fund, is that we don't have required end terms. With a fund, you might have to sell even if the market is not positioned for that to be the best investment decision. For us, we ask for the sponsors to give us an estimated hold period of three, f ve, or 10 years. We underwrite to the estimated hold period, but if it is not in the inves- tors' best interest to sell, we will allow our sponsors to hold longer. Alternatively, if the sponsor gets an amazing of er to sell one year into the hold they have the f exibility to do that as well. Hooper: Right now, most exits are determined by the real estate sponsor according to the business plan for the asset. On some of the funds that have raised capital through our platform the investors enjoy quarterly redemptions (meaning they can request their initial capital to be repaid quarterly). Eventually we will see the development of a secondary market emerge as a natural extension of these platforms. Powderly: Investor exit strategies vary from deal to deal. T e exit strategy on a particular deal should be clearly presented in the sponsor of ering materials. T ese are private of erings, so unlike investing in a publicly traded real estate investment trust, there is no secondary mar- ket (yet) to create immediate liquidity. Investors should plan on having their money invested for the entire term of the investment or longer. Anything else investors/service providers should know? Braman: T ere are many dif erent structures in how the crowdfund- ing platforms can invest. We have chosen to take on the capital rais- ing responsibility for our sponsors by becoming their single point of contact; we create an LLC for our investors to be limited partners, and then invest as one limited partner into the ownership structure so that the sponsor has one Schedule K-1, one distribution, and one quarterly report. We can come in alongside other investors, and/or provide up to 90 percent of the required equity in a deal. We also of er debt on transactions, so we can be a true one-stop shop for the entire capital stack. One f nal thing of note is that we are selling securities, so sponsors should be careful to only work with companies on the equity side that either are a broker deal or are af liated with one. Hooper: Investors should double or triple check to make sure they know what they're actually investing in. Look at the pedigree and background of the founders and team on these crowdfunding com- panies, and do your diligence as an investor as you would with any other investment product. Overall, if done correctly, this is a great vehicle to get direct access into real estate investments. Powderly: As a CCIM-founded company with deep expertise in the investment real estate market, CrowdStreet knows how to evalu- ate sponsors and deals prior to posting them on the marketplace. Once an investment is made, investors receive regular updates via an online investor room where they track all of their active investments. Investors, for the f rst time ever, are empowered to build a diversif ed commercial real estate portfolio without high middlemen fees or the management responsibilities of direct ownership. T e future of commercial real estate capital raising is online. I'm proud to have applied my CCIM knowledge and network in the cre- ation of CrowdStreet. Sara Drummond is executive editor of Commercial Investment Real Estate.