Players in the nascent commercial real estate crowdfunding sector are looking to expand into the commingled fund business.
Sponsors in the sector have generally raised capital from individual accredited investors and invested that in single properties, < often through operating partners. They identify potential investments, raise capital from screened investors and manage the distribution of investment returns to investors. They’re now expanding into real estate funds.
Realty Mogul of Los Angeles has been leading the charge and has already raised equity that was invested in a number of funds. For instance, it raised $3 million of the $20 million raised by a fund, Affordable Housing Community Fund 4 LLC, that was sponsored by Dave Reynolds, a Cedaredge, Colo., mobile-home park specialist. It buys manufactured housing communities across the country.
Jilliene Helman, Realty Mogul’s chief executive, anticipates expanding to include raising capital that would be invested in funds pursing opportunities in the multifamily, office, retail and self-storage sectors.
She expects Realty Mogul to raise $2 million to $5 million of equity for each of the funds in which it would invest.
Investors participating in Realty Mogul’s offerings would become members of a limitedliability company that then would invest in the funds it targets. So, although each LLC could represent dozens of investors, the funds that get their equity would deal with only one investor.
Since the investment funds that Realty Mogul would back could be as small as $20 million in total equity, its commitments could account for a sizeable 10 percent or more of their total equity. However, Helman expects to ultimately also raise equity for some slightly larger funds as well.
“We’ll be able to get those funds to reach out to thousands of investors they could not reach otherwise and we’ll be letting our investors get further diversification,” she said.
Realty Mogul, with about 10,000 accredited investors registered on its site, has raised some $25 million of equity for real estate investments since it was founded early last year.
Among its individual property deals, it provided $3.5 million, or 80 percent of the equity that a San Francisco area investor used in a $15 million acquisition of a shopping center in that city, and it provided $1.5 million or 17 percent of the equity used in the purchase and renovation of a Palm Springs, Calif., hotel. CrowdStreet Inc., another crowdfunding operation, plans to soon start targeting investments in funds. Darren Powderly, co-founder of the Portland, Ore., company, said it soon will raise equity that would be invested in one property fund and would be raising equity for others.
It will likely raise $1 million to $2 million for the funds in which it would invest. It would raise its capital in increments of $25,000 to $50,000 from its registered investors.
Both Powderly and Helman are looking to raise equity for real estate investment managers that have at least about $100 million of total assets under management. CrowdStreet may make exceptions for smaller managers that have funds with distinctive investment strategies.
Their success with funds could pave the way for other crowdfunders to expand in that area.
Crowdfunders typically are paid fees by the sponsors of the investments for which they raise equity.
However, there are less than 20 established real estate sector crowdfunders, by most accounts, while only a handful have completed deals and most have been for small amounts.
Among the established players, Fundrise of Washington, D.C, is in the market raising equity for deals that include a planned $450,000 investment in a mixed-used redevelopment in Brooklyn, N.Y.
Despite the relatively small amounts of equity being raised, the market of accredited investors is vast. There were 8.6 million households in the United States with net worths of at least $1 million in 2011, according to Spectrem Group, a Chicago research firm.
Meanwhile, the crowdfunding market could dramatically increase in size as a result of a regulatory proposal that would allow even non-accredited investors to participate in sponsored investments.
Crowdfunding, which also is used to raise equity for investments in other types of business projects, was provided for by the Jumpstart Our Business Startups, or Jobs ct of 2012. The law’s final regulations, including the expansion to non-accredited investors are being prepared by the SEC.
The final regulations could also make crowdfunding tougher by requiring sponsors of investments to disclose additional information about their operations, and setting requirements for crowdfunders that opt to also market to non-accredited investors.
Whether accredited investors will flock to crowdfunding sites in order to invest in commingled funds remains to be seen. Many funds already reach out to them directly and through registered investment advisors or financial counselors.
“As an investor, it’s a question of who do you want to take your advice from in deciding which funds to invest in,” said Shawn Haghighi, a partner in the real estate practice of the Sklar Kirsh law firm in Los Angeles, whose clients include crowdfund operators and investment fund managers. “Crowdfunding sites are for the most part new to the game, and the question would be whether they have the right professionals to pick the best fund managers, or do you go to an investment consultant who’s been doing this for some time.”