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National Real Estate Forum

The Real Estate Crowd Fund Project. Providing you with the tools you need to raise money and invest in crowd funded real estate deals. Crowd-funding, typically associated with business start-ups and 'donation' sites such as Kickstarter, has benefited the real estate industry more than any other. Listen to the National Real Estate Forum podcasts where industry leaders, Founders, CEOs, VC's, sponsors and investors share their insights. For the first time since the advent of the internet, you can now raise money and invest in crowd funded real estate deals online. Download the free primer (pdf) at NREForum.org, listen to the podcasts, and become an expert in raising money and investing in crowd funded real estate deals online.
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Now displaying: October, 2017
Oct 17, 2017

Crowd Fund Capital Advisors Group 

Crowdfund Capital Advisors was born with two entrepreneurs, Sherwood Neiss and Jason Best, who, after the market crashed, felt that businesses were really having a tough time raising capital and, having gone through trying to find capital themselves for their own different entities, realized that there had to be a better way to capitalize businesses.  Once the JOBS Act was passed, and while it was wending its way through SEC processes, the principals visited and advised entities in over 41 countries on how to develop meaningful legislation and ecosystems that support the financial growth of their own entrepreneurs.

LISTEN TO THIS EPISODE ON THE SHOWNOTES PAGE

CrowdFunding

Crowdfunding is actually a way to do something that that has been done forever:  It is nothing more than thinking about passing the church hat except that it comes in many forms. It can be through the form of a donation like passing the church hat, it can come in the form of a rewards based prize, or, as in the case of real estate, is can be that you receive a share of something in return for the money that you give.  Until the JOBS Act, unaccredited investors, those that did not have high net worth, were not able to access the kinds of deals that typically high net worth individuals were able to.   It opened up a pathway for both equity and debt investing, that was not available to the common person.

But what crowdfunding really needs is education because so many people out there think that it is as simple as putting your deal up online and the money will start pouring in, but it is far more complicated and involved than that.  Growth of the industry has been steady, which is good because steady healthy growth is a recipe for success.  Speeding bullets are a recipe for fraud.

PLEASE REVIEW US IN iTUNES

The Funding Portals

To be able to raise Reg CF (Regulation Crowd Funding) money, you must do it through an SEC registered funding portal.  The SEC wants to make sure that there is complete transparency and that everything is disclosed to the investing public.   It does not take that much time to get to market, depending on which crowdfunding methodology you use, but timing is not the key issue, marketing is, and you have to have probably 30 or 40 percent of your proposed raise earmarked before hitting the market.  If you do not know precisely where that part of your capital is going to come from before launching, your campaign is likely going to flop.  Even then, you will be raising a lot of money, in smaller amounts from more people than you are used to.   To be able to do that and to have people you do not know or who are once removed from who you do know requires a lot more effort before you ever get started.

Establishing a Relationship With Investors is Key

Lisa’s role is to help companies understand these factors and she has, unfortunately, seen very successful real estate brokers and agents, investors and borrowers, go out onto sites, plonk down their hard-earned money, spend fifteen or twenty thousand dollars, who have done real estate deals all day long and screw it all up because they do not understand some basic principles.  Going to the same old people that they have previously gone to may or may not work because they may not be interested in sharing the deal with a variety of unaccredited and unknown investors.   Think of it this way:  If you have a close relationship with somebody that you have in the past raised money from for a real estate deal and then suddenly you try and put the next deal up on line you are going to be distancing yourself from them in some way. Crowdfunding a deal means you are approaching a different market that requires a different approach.

Not only do prior investors need to be acclimatized to the new methodology, but the entire process needs to start way earlier before you ever worry about the portal.  This means developing a sophisticated social media presence, promoting your project by through podcasts or live Facebook video, through networking.   In short, it involves ensuring that you are out in front of the right people long before you ever need the money in advance, creating a relationship with an audience of people who don't know you and who you don't know.  And from who you are about to ask for money.

From the investor perspective, you must do your homework on a deal before investing.  You have to thoroughly read the prospectuses, thoroughly read the offering, and have all of your questions answered before signing the check.  Investing is a risk, and you can lose all of your money.

Confluence of Three Industries

Crowd funding real estate platforms have to be experts in three industries:  They have to function within a strictly regulated framework; they have to be expert in tech and online marketing (not trivial), and, last but not least, they have to be real estate experts.   That said, crowdfunding is a modern solution to an old technique that increasingly our world has forgotten which is sharing your knowledge and investing in our community and partnering with people who you know and with their friends. 

Regulation CF – Crowd Fund

To issue an offering under Regulation CF, a developer has to work through a portal registered with the SEC, and can decided whether or not they will accept the developer’s deal [Subscribe to the podcast at www.nreforum.org  so that you do not miss my guest Eve Picker, Founder and CEO.  Eve owns the SmallChange portal, which is of one of the only registered portals doing Reg CF for real estate deals].  Portals charge various levels of fees, all regulated.  A lot of times people think that a portal will bring them the investors which they may not.  So far, Lisa says, the data has proven that investors typically will invest in a deal or two in a space or a project or that they know really well, and then they will not invest again. Consequently, assuming that the portal will bring you investors, while true, is not the beginning and end of the process of raising capital.  You still have to do your own marketing.

The Clarinet

Lisa wears another hat.  Over the last few years she has been very focused on trying to create jobs and finds that the music industry needs more of them too.  Consequently, she has been developing musicians into consultants to sell clarinets – the sales model is very flat with Amazon.  Her website is https://www.lisasclarinetshop.com/ and she is working with a few different manufacturers to sell direct manufacture to consumer really high-quality instruments.   Check it out and I hope you enjoy the sounds of Lisa playing in today’s episode.

Crowd Fund Capital Advisors

Lisa’s Clarinet Shop

Oct 17, 2017

LISTEN TO THIS EPISODE FROM THE SHOWNOTES PAGE

The First Mini IPO and Regulation A+ Origins

It was from a background of being a real estate sponsor, being an operator and having to raise money that the idea of Fundrise was born.  Prior to the 2007/2008 downturn, Miller was raising capital from private equity and insurance fund partners, and in 2008 one of his big financial partners, with some $250 billion in assets, went bankrupt.   Coming out of the 2008 recession feeling like there had to be a better way, Miller founded Fundrise with the idea that utilizing JOBS Act Regulations he could raise capital online and not be dependent on the institutional players.

Miller’s work, however, and insights to why this methodology could be effective predates the JOBS Act by two years.  Together with his partners, he conceived of the idea of raising equity capital online as early as September 2010 and first approached the SEC in 2011 to propose that they permit it. 

PLEASE REVIEW US ON iTUNES

Before Regulation A was reformed to become Regulation A+, Miller worked with a former general counsel the SEC to figure out a way of raising money for a real estate deal at $100 a share; a process which paved the way to informing the SEC that the idea generally it worked.  Initially, it was very difficult to navigate through the SEC because, while these things are now taken for granted, they had not previously been contemplated.  Questions that had to be answered included, how does somebody buy a security online, what forms do they fill out, how is SEC staff expected to oversee the applications, what kind of language has to be used?  Working with the SEC to take, what was effectively the first online deal through the system, Miller and his team created the initial protocols for what was eventually to become Regulation A+.

It was a painfully slow process and essentially the deal was like a mini-IPO .  They raised $320,000 at $100 a share a year and it took us almost two years to put all the components together.  In the beginning it was very intensive and slow going but in time they were able to spin it off and scale it, and eventually it became Fundrise – the first company in the industry to be a real estate Crowdfunding platform.

GET YOUR FREE REAL ESTATE CROWD FUND PRIMER (PDF)

Miller’s team concluded just one deal in two years working with the SEC – and this was after they had already bought the real estate.  But the deal they worked on was just five six blocks from the SEC's headquarters.  The helped, not only the process in some way, but by making it easy for SEC staff to actually see the deal first hand, they became intimately familiar with the concept as a tangible case study.  Consequently, the issues were real and immediately apparent to all and this helped to illustrate the concept and flesh out the solutions.

While the first deal took nearly two years to complete, now Fundrise is trying to close a real estate deal a week.  Scaling became possible because Congress and the SEC and the President [Obama] recognized this as an opportunity to innovate. And they did.  That said, the JOBS Act was oriented primarily to tech companies and the benefits that have accrued to real estate have been, in a way, accidental yet becoming increasingly influential.

Why CrowdFunding Real Estate Works

Looking back at e-Commerce in 1999 everybody thought it was going to change the world and then, when it blew up in the early 2000’s everybody came to think it was overblown and not likely to do anything, or have any kind of major impact on the economy or society.  The same is likely true of the crowdfunding space; in the beginning it is having this tremendous impact on the way deals are being financed and, those getting involved are evangelizing future transformational changes.  The next downturn will cause people to turn off the idea, and then it will re-emerge to dominate how capital is formed in real estate.

It is similar to the way that people thought about e-commerce in 2001 when the bubble burst.  The market predicted that Amazon could not have that big an impact and their shares dropped 94 percent to around $7 a share – trading today at over $1,000 a share.  What makes the impact of crowdfunding so difficult to contemplate, is that lots of things, especially in the modern era where you have technology in particular, are non-linear.  That is the nature of a lot of technology.  People tend to underestimate growth rates and the growth in crowdfunding will likely surprise everybody.  Looking out 20 years, it is not inconceivable that all fund raising, all investing, will be, in a way, a form of crowdfunding.

Deal Aggregation

Fundrise has taken to aggregating deals and offering different return profiles and different risk profiles to investors through debt platforms with different characteristics, rather than offering individual equity deals, one by one.  In Miller’s eyes, equity investments do not make sense unless you are in a pool vehicle.   Investing in a single deal, say an office building, and crowdfunding it is a disaster waiting to happen.  In every deal Miller has been involved in – and this is commonplace across the real estate industry – there is always the need for more capital than originally budgeted.  In each case, Miller has made zero percent loans personally.  Once you pool these kinds of deals, there are more sources of capital, more diversification, and better cash flow streams.  In short, in a pool there are more ways that you know you can borrow against it if need be.

The Liquidity Premium

But buying into a REIT is not a prudent move for most investors interested in diversifying into real estate.  A share of a public REIT is really just a piece of paper that is a secondary trade.   The derivative that is a public REIT is so separate, so different, from the real estate itself it that it does not act like the same asset.   In fact, buying a public REIT, the investor is paying t has at least a 20 to 30 percent premium.  Consider this:  In a public context, buying into a public REIT, you are getting daily liquidity, a wholly liquid asset.  That liquidity is not free.  The building underpinning the share in the REIT is not liquid.  It is not possible to pay the same price for a building that is illiquid and a piece of paper that is liquid.  What do investors pay to make an illiquid asset, liquid?  Whatever that is is the liquidity premium.  The transaction costs on a piece of paper is almost zero, but the cost to sell a building is much higher than the cost to sell a piece of paper.  This begs the question, if you are going to buy something and hold it for in retirement or for 5, 7 years i.e. if you are a buy and hold investor, why buy a REIT and pay a liquidity premium for something you have no need for liquidity on?

Eliminating the Liquidity Premium on Fundrise

If you invest a dollar on the Fundrise platform, that dollar goes directly into buying a property.  Because Fundrise is closing on real estate transactions on a continuous basis, the process is happening very close to real time.  Investors demand certain return profiles, and so Fundrise creates buckets of deals that match the profiles investors are looking for.   Ninety nine percent of the population do not know whether, in any particular deal, they would be better off doing mezzanine as an investment in, say, a particular apartment deal, or JV equity, or a whole loan doing 100 percent of stack. What is the right way to do it in this deal in this geography with this real estate operating partner?  Fundrise makes these calls navigating based on investor goals.

Quicker to Raise Capital

Prior to the JOBS Act, if you wanted to raise capital, you had to go have coffee and lunch and meetings to raise the money, and to go on a road show for your institutional investors. Or you could go to the country club.  A lot of time spent for a normal developer would be consumed just raising capital and it could take on average 15 months to raise a fund. 

At Fundrise they do it in days.

 

Fundrise is Not Institutional

Although Fundrise is beginning to act as institutional investors or private equity funds, they are more efficient because they are acting online with tens of thousands of investors rather than over lunch and golf.  And there is also a cultural difference. Generally the financial industry maintains margins. There is not a culture of competing to lower fees among financial industry players.  Instead, while fees have remained constant for decades, more or less, an issuer will be sold on other benefits. 

That is not the culture of tech where there is a relentless drive for change.  They are not motivated to because their institutional clients don't necessarily find it attractive.

The Fundrise Model

The company takes a 0.85 percent as a management fee, instead of 1.5% to 2% as is typical with a private equity fund.  They also take an origination fee of 1% to 2% on the close, which is amortized over the normal life of the deal, say five years.  So Fundrise’s total fees total around 1.25% a year, which is a flat fee. And they take no carried interest.

Carried interest, Miller says, is an incentive for developers to invest recklessly.  The ‘natural’ rate of return on real estate is around 12%, but carried interest structures typically require far higher returns for everyone to be incentivized through their carried interests.  In these structures, developers are like a car with only an accelerator because they have such an asymmetric reward system. You have to recognize that even the best of developers will behave in ways that they really should not if it were not for the incentives. And that is why this system blows up.

Fundrise as a Technology Solution

Fundrise basically functions as a marketplace where investors and developers come together to transact.  The platform maintains a minimum level of quality where they do not pick winners or losers.  That said, unlike the straight venture capital approach which is solely looking for patterns to disrupt, Fundrise has to blend these ideas, as a tech company, with expertise in real estate.  In Miller’s words, Fundrise is both a tech company and a real estate company, it has ‘to have a spliced DNA.’

The Next Real Estate Downturn.

Most platforms will blow up unfortunately and Miller worries about how to protect his platform and their investors every day.  During the next recession there will be a wave of opinion that the real estate crowdfunding idea categorically did not work.  And then there will be a few models, a few companies, that will emerge from it proving that it did work. And by that point the industry will probably be 10 years old, with a billion of equity and three billion in real estate or more and will, basically, be institutional.

And that's when things will really get interesting.

Oct 17, 2017

THE JOBS ACT

The JOBS Act – Jump Start Our Business Startups –  was passed in April 2012 but it was not until March of 2015 that Title IV Regulation A+ was announced.   The intention of the Act was to make it easier for small companies to raise capital.  The first effective component of the Act was Title II which went effective in September of 2013, extending Regulation D to allow companies to market themselves to raise money from accredited investors via the internet.  The biggest change under Regulation D was that it allowed for public solicitation, whereas before only solicitation from investors with a pre-existing relationship with the sponsor was permitted.

LISTEN TO THIS EPISODE FROM THE SHOWNOTES PAGE

There are some nuances in Reg D that restrict the number of accredited investors depending on the specifics of the structure and approach that a company is taking.  A borrower can market an offering broadly on the Internet but can only accept investments from accredited investors. The thing that 506 (C) requires though is that the issuer, the company raising money, must take reasonable steps to verify that the investors are in fact accredited. You cannot take their word for it. In 506 B, the pre-JOBS Act version, borrowers were limited to soliciting from people they knew but there was no accreditation verification requirement. If they say they're accredited that's enough. An investor would have to sign off on it, but that was enough.

REGULATION A+

Reg A+ took the old Reg A and expanded upon it dramatically. That little plus sign kind of understates how much it changed.   With Reg A+ private, companies can raise money privately and raise up to $50 million a year and in some cases, more specifically in real estate cases, more by doing multiple offerings simultaneously for different geographies.  

There are two types of Reg A+ offering:  Tier 1 and Tier 2. A major issue is that investments can be accepted from investors worldwide at any wealth level. They do not have to be accredited anymore. And when they state their income and net worth, and whether they are accredited or not, the company selling the stock is allowed to take their word for it.  They don't have to prove what the investor states.

PLEASE LEAVE A REVIEW IN iTUNES

Investors anywhere in the world can be accepted at any wealth level into a Regulation A+ and the SEC considers the shares sold through the offering to be liquid for the purchasers of them. If the company doesn't lock the shares then the shares can be traded someplace depending on whether the company lists, where it lists, or whether it provides some other form of liquidity.  Options for listing include one of the OTC markets like the QB or the OTCQ or the OTCQX. These come with reporting requirements that are considerably less onerous than listing on the Nasdaq.  The issuer can also retain the option of not listing at all or even locking the shares and then providing a redemption system.  This has been done by some real estate companies raising money using Reg A+.

COSTS ASSOCIATED WITH A REG A+ OFFERING

An attorney providing the legal services required will charge $50,000 and up depending on the complexity of the offering. That is a front-loaded cost.  In addition to this, there are marketing preparation expenses, and if it is a Tier 2 offering, the issuer will need to have an audit that goes back as long as the company has existed or two years. So those are the downsides: upfront cost and it is not a certainty that you will be able to raise the money which is basically true in any kind of capital raise. There are no guarantees.

REAL ESTATE A MAJOR USER OF REG A+

Real estate has become a very large segment of Title 2 capital raises.  This is probably because investors understand the nature of real estate.  Many investors would like to own more real estate but do not have the time or enough capital set aside to do so.  Many of the real estate offerings already issued are paying a reasonable dividend rate or a preferred return which is also very appealing in today's low interest environment.  Another reason real estate has taken off in Reg A+ offerings is that in regular business offerings under the Act, it is hard to get investors to pay attention unless they absolutely love a company. In the case of real estate, the industry has a critical mass where regular investors feel comfortable with the asset class and so more inclined to invest.

Reg A+ is not for a sole developer who has a deal in town that needs money for it; it is for established, experienced teams that have a track record and that can demonstrate that not only to the market but also to investors, platforms, marketplaces, and broker dealers.

MARKETPLACE UTILIZATION OF REG A+

The marketplace platform, Fundrise, [subscribe to the Podcast to hear Ben Miller next week, Founder and CEO of Fundrise as my guest speaker]  is using a Reg A+ as a completely central part of that platform.  They have three parallel Reg A+ offerings going on simultaneously because if you can divide territorially like that, and Fundrise has divided the US into three geographic regions, you can raise money simultaneously for each one, raising up to $150 million per 12 month period.

OPTIONS FOR DEVELOPERS RAISING CAPITAL

  1. A company like Fundrise aggregates smaller developers deals, adding layers of screening, to create a platform for capital generation. Developers list on the platform and use its’ resources to raise money.
  2. A developer prefers to retain closer control over who sees and decides to go it alone to generate the marketplace interest in their offering. Here they will not use a third party platform for the issue, it is conducted entirely internally.

THE CROWD AS INVESTOR; THE CROWD AS WATCHDOG

Typically, term structures in a Reg A+ offering will resemble those traditionally offered to friends and family, or to private equity, but economic terms may change as will certain key decision-making rights.  In a Reg A+ offering, for example, there is no requirements that issuers have skin in the game.  In pre-JOBS Act times this was also true, but investors typically expected it of the developer.  In the current environment with relatively unsophisticated investors entering the market – no matter how the SEC defines ‘sophisticated’ – sponsors are listing deals where they have no risk equity of their own.  Other terms highly favorable to the sponsor are commonplace so it is very important to be watchful of the fine print.

One of the big concerns about the JOBS Act from before the get-go was that there would be rampant fraud. Countering this concern is the idea that the online offering model is so transparent and so public that the likelihood of this is mitigated.  When you have thousands of people examining an offering and examining the social media profiles of the principals on the transaction, word will spread quickly if something is skewwhiff.   It is like having surveillance cameras in a neighborhood.  It puts thieves off because they would rather go somewhere else where they will not be recorded in a similar way.  That said, while the transparent access we have through online funding platforms is really good, the crowd will act as a crowd, and people tend to go with the herd, believing that if everyone else is doing it, it must be OK.  And sometimes that can lead off a cliff.

INVEST LIKE AN INSTITUTION – BUT THESE ARE NOT INSTITUTIONAL DEALS

Institutional investors take a very detailed look at a sponsor and their capabilities and add multiple layers of not only due diligence but also management oversight on top of that, on an on an ongoing, real time basis for any sponsor.  In Reg A these layer has been removed.  Now investors are investing directly in the developer itself and so although small investors now have opportunities to invest where before they could not, they also do not have the same skillset that an institutional investor would have.   

While it is true that the SEC goes through these offerings with a fine tooth comb to make sure that they are real, that the companies are real and that they are legitimate, it does not validate the merit of an investment in any way.  If there's a broker dealer on an offering, or an online marketplace is making the offering, especially a platform which has a good reputation, then maybe this adds some credibility to the offering.

Bottom line:  Do not invest anything that you cannot afford to lose.

Regulation CF – Crowd Fund

Reg CF is also known as Title III and is the most recent of these significant JOBS Act announcements.  It went effective in June 2016 and is geared to raising capital of sub-$1 million from non-accredited investors.  Reg CF issues are made through SEC approved portals that collect fees under various highly regulated formulae.  The issuer must undergo background checks via the portal, and submit GAAP level annual audits; a more stringent standard than otherwise might be usual.

[Coming Soon:  Listen to the National Real Estate Forum trifecta podcasts – Reg CF Portal Small Change CEO, Eve Picker, a sponsor on her site Jonathan Tate, and an exclusive interview on the Forum, the first ever CF investor Bill Bedell.  Coming up soon.  Don’t miss it; subscribe now on any one of these platforms]

Manhattan Street Capital

Manhattan Street Capital is essentially two things in one. The company focuses primarily on Reg A+ offerings but will do select Reg D offerings where they feel they can add value.  They are also a platform which enables companies to more easily raise money through using advanced technology.  The company accepts crypto-currencies as investment methods.  This expands the ease with which international investors can participate in a Reg A+ offering.   The company is essentially a concierge service where they introduce clients to all the different service providers needed, in order to get an offering out to market. 

Oct 13, 2017

LISTEN TO THIS EPISODE ON THE SHOWNOTES PAGE

Crowdfunding is sort of a misnomer.  It describes a format by which investors can pool money with other investors and that capital can then be put to work in a group method to take down larger assets than the individuals alone could manage.  The concept is better described as a private, technology enabled marketplace and almost like a wealth management platform

RealtyShares specifically is geared towards a high net worth investors and institutions.  The company has changed the medium that capital uses to access deal flow from the old family-and-friends sourcing methodology – and that medium is the Web.

REVIEW US IN iTUNES

Investors, who historically may have had no access to real estate or limited access, now have access to a much broader set of deals located across different markets, different product types, different operators.   These marketplaces are accessible for both investors to deploy capital across a broad diversified set of deals as well, as developers to raise capital at record speed through a network of investors they otherwise would not have had access to.

It used to be that either you knew somebody that was doing a deal, or maybe you might have gone to a local mortgage guy to find deals to invest in.  Now we have basically taken this process and put it on the web.  Before, an investor would have been compelled to put $100,000 to work in a single asset, single market, single operator with a lot of concentrated risk.  And this presumes that the investor actually had the personal network to actually know an operator.

GET YOUR FREE CROWD FUND REAL ESTATE PRIMER

Now, with the Web, the investor can take that same 100,000, and with RealtyShares’ minimums being as little as $5,000, put it across a much broader diversified pool of assets.

One thing that is a little unfortunate in real estate is that there is traditionally very little transparency.  An investor investing in a country club deal is being charged certain fees to the project that they are investing in.  They do not know if they are getting a good deal, a bad deal, what's market what's not market.  Online this changes because investors can now see multiple deals alongside each other and compare relative fees.  Indeed, RealtyShares has standardized the fees sponsors can charge, and have transparently disclosed those fees and structures to investors.

On the RealtyShares platform, developers go through an online digital application process to request financing – for both debt and equity, which sets RealtyShares apart in the market.   Once a developer is prequalified as being eligible for financing they undergo a 20-point underwriting system.  This involves data collection on the deal, a financial model, an appraisal if applicable, an environmental report and due diligence on the sponsor.   Once the sponsor’s track record has been verified and market and deal numbers crunched, RealtyShares determines if, from a risk adjusted return perspective, it fits the marketplace and the appetite of the marketplace. 

RealtyShares only select about 10 percent of deals that come to the marketplace.  They seek best in class operators.  Sometimes this might be a first-time operator who has done transactions a principal investor or to a larger shop and now who are now breaking away. Typically, underwriting standards require seven years’ minimum, although many have twenty years’ experience. 

Deal preferences are for value add in core plus deals with the potential to generate yield quickly if not immediately, and in high growth primary or secondary markets.  Tertiary markets are not liked as RealtyShares looks to certain population minimums and employment growth numbers to mitigage potential loss scenarios.  So far, 80% of transactions have been in the multi-family sector and 20% have been across different commercial assets including hotel, retail, suburban, office, industrial, and self-storage.

Investors today are yield oriented.  This is driven primarily because they are not getting yield anywhere else, not from the stock market, not getting it from the bond market, and certainly not getting it from bank deposits.  On the RealtyShares platform, cash on cash returns are typically six to seven percent or higher, and on an IRR basis it can be kind of mid-teens.

To satisfy investor preference for yield, most RealtyShare deals are existing assets with in place cash flow, or fully entitled construction deals where prefs can be paid current, at least in part, and time to market is not going to be delayed by planning issues.

Deals are stress tested to determine what would happen if there was a drop in NOI, or increase in vacancy and a resulting drop in NOI, and benchmarked against the ability to meet debt service coverage.  While there are no guarantees, these measures serve  to mitigate the risk of technical default in the event that there is a market correction.   The platform also ameliorates risk by offering one of the most diverse online marketplaces for real estate Investing, providing debt and equity options, and deals across both commercial and residential multifamily classes.

POST CLOSE ROLE

RealtyShares is a full cycle investment platform.  Investors can monitor the performance of their deal portfolio via a dashboard where they can see how rehab is going, get earnings updates, updates on the asset, and robust quarterly updates directly from the developer.  Tax and legal documents also are all available through the dashboard.

The platform actively tracks how deals are performing relative to budget and pro forma.  The data this kind of analytics produces is valuable because it provides real time feedback on individual markets and asset classes which help with underwriting future deals.

In the event a debt deal goes bad, RealtyShares retains foreclosure or a deed in lieu rights.  For equity deals, investors can select from preferred and common equity, there are triggering events like defaults or a failure to pay that will allow RealtyShares to take over the underlying entity.  For common equity there is typically a management replacement right built in.  

Being a tech company, not a real estate private equity company, RealtyShares does use third party vendors to do workouts when needed.  Using third party vendors for these kinds of functions allows the platform to focus on their core strength which is really sourcing deals, underwriting deals and providing a very efficient marketplace to deploy capital in those deals.   

BIGGEST HURDLES

The real estate crowd funding industry needs to better educate investors and developers like around what this is and how it actually creates value for both. This is a very nascent market and the concept of online capital formation and investing for real estate is novel to most people.


LONG TERM VIEW

Ultimtaely, Athwal is aiming to build a wealth management platform; an online wealth management platform or digital wealth management platform for the private real estate market.  Part of that thesis is in giving investors options to invest in different types of vehicles.  This might be through direct access to deals and the ability to pick the exact asset, the exact zip code, the exact sponsor, an investor wants to work with, but also through creating a programmatic access to deal flow through development of an index fund.  In this case, instead of having to invest in every individual deal investors can get exposure to a diverse set of deals set by the platform.  Strategies might include income or growth, debt versus equity.  Ultimately the company’s vision and goal is to provide diversified vehicles for investors to get exposure to different types of investment options and the fund structure is just one kind of part of that evolution.

REAL ESTATE AS ALTERNATIVE TO STOCKS AND BONDS

One of the vision elements of RealtyShares is to build a global stock market for real estate:  To put real estate as an asset class on even footing with stocks and bonds.  Athwal is committed to bringing more transparency and trust in, and standardization and liquidity to, real estate.   A key component in this will be creating a market for third party validation of deals and platforms that does not exist today in private real estate.   There is still a lot to do to bring the level of analysis seen in other publicly traded securities like stocks and bonds and third-party validation is just one of those elements.

 

 

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Oct 2, 2017

Professor Syverson looks at what has been going on in retail over the past decade or two.  He discovers that, while a lot of the mind share in the industry is focused on the effect of e-retail, more important than e-retail is the rise of the warehouse club and super center format size. While e-retail has, of course, had a great impact on retail, on several dimensions the warehouse club and super center has even more so moved the needle on the way that retail looks, and how stores are configured, since the year 2000.   

See these notes and more in the Shownotes to this episode

Economists are reluctant to make predictions, not exactly having a stellar reputation for predicting the future. But having some fun with the data, Syverson looked at the penetration of e-retailing and in various product categories and projected them out into the future.  Some that you wouldn't be surprised about are essentially dominated or close to dominated by e-retailing.  But some, drugs, health, and beauty, and food and beverages are two that are not.  These are both massively large sectors in terms of their share of retail sales – somewhere in the neighborhood of $400 billion dollars of sales for drugs, health, and $700 billion for food and beverages in the U.S.  And in both of these sectors there is still a huge chunk of retail sales – there is very little relative penetration of e-commerce in either of those two sectors.

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Some factors like regulatory restrictions on prescription drugs distribution is going to set limitations.  However, for the typical CVS or Walgreens in terms of revenue share, things that aren't prescription pharma is still a significant proportion for those stores.  So while there remains a continuation of the development of bricks and mortar building activity going on, to some the bulk of the warehouse club and Supercenter build out has happened already – and consequently you might expect that to slow down and for e-commerce to pick up some.   

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Given enough time, there is likely to be the full penetration of e-commerce, with some upper bound, for example in prescription drugs that might never become fully e-commerce, and there might be other reasons in other product classes where it is never going to get to one hundred percent.  The predictions in the paper are, therefore, quite bold in saying that various categories could possibly even get to ninety, ninety-five, or one hundred percent.

WHEN EVEN BIG BOXES VANISH, WILL WE THE CROWD BE FINANCING THE LOCAL NICHE STORE?

In the long run, e-commerce will likely replace the base currently supplied by a lot of the big boxes, and what will be left will be a throwback to the small niche type retail operations that used to be the typical thing several decades ago.  To survive in a retail world where most retail is e-commerce stores are going to have to be specialized in something obviously that e-commerce cannot deliver. It will either be some particular product category that has attributes that do not work well with e-commerce, perhaps something where tactility is hugely important and where the customer actually needs to hold the thing in their hand or look at it physically before they are willing to purchase.  Or maybe it is simply this need for personal service from someone you know, where not only do you want a salesperson there to walk you through how the product works, but also because you simply want to support their business. Maybe you invested $1,000 in the business directly; maybe you invested $10,000 in building the store is situated in.

And the future of the high street?  Retail will be dominated by small, niche shops that provide a social and highly localized service or product.  This requires that demand will be sufficient to support the local niche store once again as it did in the past.  But how will this be financed; how will these kinds of stores, or the developers that build the buildings in which the reside, finance their existence?  Well, that is precisely where crowd funded real estate will facilitate this change.  Real estate is fundamentally a local phenomenon.  The reason we have the large box stores and chains is because institutional underwriting likes the copy and paste efficiencies of scale.  Not so the crowd.  The crowd as a gathering of neighbors wants to support itself, locally and financially, and it is the crowd that will fund the next generation of retail – the small, niche, local product, owned by people who live locally and who support their community by sitting on local associations and councils.  As institutional capital has institutionalized our lives in every aspect, it will be we the people, we the crowd that will fund the next generation of retail.  And it will look a lot like it did a generation or two ago when you knew the shopkeeper and patronized the store because her kids went to the same school as do yours.

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