University Posts

Welcome to Asset Class: Understanding 4 Different CRE Investment Types

When pursuing introductory information on real estate investing, it’s easy to be inundated with advice from the residential sector: daytime TV tips on raising your home’s value; seminars on making money with ‘fix-and-flips’; or articles on how to buy and rent out a second home.

Starter information on investing in the commercial real estate (CRE) space, however, can be hard to come by. That’s unfortunate for a lot of reasons – not the least of which being that CRE investing can involve far less effort and up-front expense than renovating houses or playing landlord with income properties.

Passive, direct commercial real estate investments through “real estate crowdfunding” offer the benefits of ongoing cash flow and paying tenants without the challenges of hands-on property management. Investors can access deals at far lower investment thresholds than required to buy an entire property (since they’re going in with a “crowd” of fellow investors on the opportunity) and select long-term investments to earn themselves regular distributions over time. Partnering with a trusted crowdfunding platform also adds value, since the top portals in the market vet their deals carefully and work exclusively with experienced real estate sponsors.

Additionally, as the tenants of the property you invest in pay down its debt financing over time, the property appreciates in value and equity is built up in the asset – creating the opportunity for greater returns upon the property’s ultimate sale. Each of the four asset types below, in fact, offers unique benefits to fractional “crowdfunding” investors.

Retail Properties: Consumer spending totals around 70 percent of gross domestic product in the United States – and despite the rise of ecommerce, much of that spending happens in brick-and-mortar retail establishments. Since retail tenants typically sign long-term leases and maintain their spaces with little involvement from ownership, retail properties can offer investors strong cash flow with low operating expenses.

Industrial Properties: The rise of ecommerce mentioned above is a friend to investors interested in industrial real estate, since online retailers of all sizes need to house their distribution operations in industrial spaces. With demand for industrial space currently on the upswing, owners in the sector are also in a great negotiating position with current and potential tenants – helping them reap strong returns to investors.    

Multifamily Properties: Demand for rental housing grew in a big way with the late-2000s economic downturn, and it has stayed high throughout the recovery thanks to changing renter demographics and preferences. Apartment buildings and other multi-family properties benefit from high rental demand (especially in large cities), and their short lease terms and abundant value-add renovation opportunities can make it easy for owners to raise rents regularly to increase overall cash flow.

Office Properties: With our modern economy driven more strongly by healthcare, technology, internet retailing, and service-focused industries than it is by manufacturing or related sectors, office space is important to almost every company. As the U.S. economy continues to improve and companies hire more and more employees, CRE investors will continually benefit from increased interest in office space from stable, growing businesses.

On EarlyShares and its flagship brand Property.com, investors can access crowdfunding investments in retail, industrial, multifamily and office properties – as well as in hotels and other property types. Sign up now to get started!

Appreciation & Cash Flow: Understanding Two Real Estate Investing Objectives

At the most basic level, every real estate investor has the same goal. Whether they fix and flip homes, diversify their portfolios with syndicated (aka “crowdfunded”) commercial real estate securities, or use investment properties to earn rental income, the ultimate objective is to make money – period.

But naturally, there’s more nuance to it than that.

Real estate has a well-earned reputation for helping generate wealth; after all, 77 percent of U.S. millionaires have real estate in their portfolios. But just as there are dozens of different ways to invest in real estate, there are dozens of different ways to capitalize on its value.

Two of the most important of those ways are appreciation and cash flow. The two concepts can, and often do, work in tandem to facilitate successful investments. Yet depending on an individual investor’s goals, it’s important to understand the difference between the two in order to evaluate whether a potential investment aligns with one’s objectives.

The Appreciation Game

Commonly discussed in terms of home prices, appreciation (also referred to as “equity buildup”) is a huge factor in commercial real estate (CRE) investments, as well. Appreciation is the uptick in value of an asset over time; it earns investors money when they relinquish the asset to realize a price increase since purchase. Appreciation comes in two forms in the real estate world: market appreciation and forced appreciation.

Market appreciation is the organic increase in a property’s value due to a variety of factors outside the investor’s control, including local market forces and surrounding property values. Forced appreciation, on the other hand, occurs when the value of the property increases as a direct result of actions taken by the owner or investor: think renovations, additions, or the incorporation of new features.

Why Appreciation? For long-term buy-and-hold investors, appreciation – especially market appreciation – is the magic of real estate investing: The chance to make money on an asset as it simply sits there.

Why Not? No matter how strong a given market, no investor can put too many financial eggs in the appreciation basket, since solely doing so amounts to speculating that the market will increase in value.

“Some people buy real estate expecting it to appreciate a lot over time,” says David Reiss, a professor of law and research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School. “But it can be risky – or even foolish – to pay so much for a property that you’re losing money on an operating basis just because you think it will appreciate.”

Cash Flow is Key

In fact, making money on an operating basis is where cash flow comes into play. With real estate investing, cash flow is the result of proceeds from rent payments.

Investors can earn returns from cash flow on an ongoing basis, either as owners of a given investment property (i.e, as “active” owner-investor landlords) or as pooled “passive” or “crowd” investors in an income-generating property. For the latter, cash flow results in regular cash distributions from the investment – whether distributed monthly, quarterly, semiannually, or annually.

Why Cash Flow? Unlike appreciation, the potential cash flow of a property can easily be calculated in advance of a purchase and packaged to investors in clear investment terms. Positive cash flow also presents owner-investors with an opportunity to more easily refinance (or pull cash out of the property) if necessary.

Why Not? As with all else in real estate, cash flow involves a lot of unknowns – think issues like repairs, maintenance costs, non-paying tenants, and all the rest – and failing to properly factor in the impact of such variables can be a costly mistake.

“Many beginning investors do not account for the unknown, because they really want to make a deal work,” writes Mark Ferguson of Invest Four More. “If you really want to make a deal work and you fudge the numbers to get everything to line up correctly, you may end up with negative cash flow every month.”

Investments on EarlyShares are subjected to a sixteen-point eligibility check assessing cash flow and return projections. To find your next investment, click here.

 

Disintermediation: What Does it Mean for Real Estate Investing?

If you’ve paid any attention to the rise of the real estate crowdfunding industry, you’ve undoubtedly heard a few notable buzzwords used to describe its impact. Crowdfunding is disrupting the commercial real estate (CRE) industry by giving sponsors new tools to fill the capital stack. It’s also democratizing access to real estate investments that have previously only been available to institutions and ultra-high-net-worth investors.

It’s also disintermediating the landscape of real estate investing. Except… what does that even mean?

While it may sound to some like just a piece of tech-industry jargon, “disintermediation” is actually a hugely important element of the value of real estate crowdfunding at large. How so? By eliminating fee-driven middlemen from the capital formation process, crowdfunding is injecting greater efficiency into the commercial real estate market and driving down investor costs as a result.

An ‘intermediated’ present of CRE investing

Like most aspects of private finance, commercial real estate investing has traditionally involved a wealth of third party involvement. Nowhere is this more apparent than in non-traded REITs.

For decades, REITs or “real estate investment trusts” have been the primary vehicle for accessing investments in commercial real estate. A REIT is a type of security that invests in real estate through property or mortgages. Some trade on exchanges in a manner similar to publicly traded stock, making them “liquid,” whereas “non-traded” REITs are purchased by investors and only relinquished when the sponsors of the funds liquidate them through a sale, merger or public listing, returning cash to shareholders.

To be certain, REITs have their value; they pay dividends and can be accessed fairly easily by investors looking for a professionally managed asset. But “professionally managed” is exactly the problem. Like mutual funds, non-traded REITs often come with hidden costs. As the SEC’s Office of Investor Protection puts it:

Non-traded REITs generally have high up-front fees. Sales commissions and upfront offering fees usually total approximately 9 to 10 percent of the investment. These costs lower the value of the investment by a significant amount.

And the fees may be even greater than that. The Wall Street Journal reported in 2014 that most nontraded REITs come with front-end fees ranging from 12% to 15% and could feature other fees over the life of the investment. An April 2014 study found that, after fees and expenses, the average annual rate of return for nontraded REITs was just 5.2%.

“Nontraded REITs are costing investors, especially elderly, retired, unsophisticated investors, billions,” Craig McCann, a former economist with the SEC, told the Wall Street Journal. “They’re suffering illiquidity and ignorance, and earning much less than what they ought to be earning. No brokerage should be allowed to sell these things.”

Alternatively, real estate crowdfunding is creating a new avenue for direct investing and boosting investor returns as a result.

On EarlyShares, the investment returns (as projected by the Sponsors) are the actual net returns to investors (assuming the transactions perform as predicted). Currently, the average annual preferred equity returns across the deals on the platform are 7%, with 18% internal rate of return (IRR) projected over the life of the investment.  We lower costs for all parties involved in a real estate transaction by simplifying the investment process to make it more efficient – creating value for both investors and issuers.

When it comes to commercial real estate investing, disintermediation is the rare buzzword that deserves the buzz. To learn more or start diversifying your portfolio with a return-driven real estate, go to EarlyShares.com now.

 

Reg A+: Meet the Latest Way to do Real Estate Crowdfunding

j0439513Because it’s such a fast-growing industry, it can be easy to forget that real estate crowdfunding is still in its formative stages. Changing laws and regulations are helping investors gain increased access to real estate deals, but amid the evolution there’s convolution, since the various JOBS Act rules have been implemented slowly and in phases.

In fact, with Title III crowdfunding joining the regulatory mix real estate crowdfunding is getting harder to explain and (for some) even harder to understand. In any given conversation outlining the new real estate investment market, there’s a lot of yes-and-no involved:

“Yes, it’s crowdfunding. But no, it’s not like Kickstarter.”

“Yes, it’s very similar to traditional real estate investing. But no, it’s not about buying property.”

“Yes, crowdfunding gives more investors access to real estate deals. But no, not everyone is eligible to participate in every deal.”

To sum our industry up, real estate crowdfunding enables investors to pool their funds alongside others to buy shares of the equity or debt financing for properties. The shares are passive, buy-and-hold investments.

Yet real estate crowdfunding can’t be discussed without caveats. The biggest “but” surrounding the industry has been the last of the three quotes above – the limitation that has plagued our emerging sector the most.

Until recently, the only way for real estate developers and sponsors to publicly crowdfund their commercial real estate deals has been to conduct Regulation D Rule 506(c) capital raises under the rules governing the public advertising (or “general solicitation”) of private investments, which became legal in late 2013 via Title II of the JOBS Act. Under those guidelines, only “accredited investors” have been eligible to invest through equity crowdfunding.

Who’s an accredited investor? Any natural U.S. person with annual income exceeding $200,000 ($300,000 joint) or with a net worth of $1 million or more (individual or joint, excluding the value of primary residence). For the SEC’s full definition, click here.

Given that stipulation, industry observers have long awaited the implementation of Title III – the portion of the JOBS Act designed to help non-accredited investors access private investments – and after a three-year wait the Securities and Exchange Commission issued a set of final Title III rules on October 30, 2015. But while we wait for the Title III rules to finally take effect in early 2016, another equity crowdfunding option has been put actively, officially in play: Reg A+.

The recently implemented rules for Regulation A+ allow for capital raising, with some stipulations, of up to $50 million in a 12-month period from both accredited and non-accredited investors. The exemption – being referred to as a “mini IPO” – is an update to the previous ‘Reg A’ rules that allowed issuers to only raise $5 million per year and came with onerous compliance obligations, including state-by-state filing requirements.

All of the paperwork required the old Reg A made it very costly for issuers to utilize the rules. Real estate pro Steve Sadler, for example, leveraged the old Reg A exemption in 2014 to raise capital for his real estate management firm. The business successfully raised $5 million from 107 investors, but 15% of the funds went to bankers, lawyers, accountants, and other expenses.

“It wasn’t a great way to raise a few million dollars. Not at all,” Sadler told the Wall Street Journal, citing fees, SEC paperwork, and the expense of filing with nine separate state securities commissions where investors had bought shares. Sadler plans to use the new Reg A+ in the near future. (Sadler knows a thing or two about crowdfunding, given that he has also leveraged 506(c) to raise real estate capital on EarlyShares.)

And in his plan to utilize Reg A+ in the near future, Sadler is far from alone. The new Reg A+ rules just took effect in June 2015, so they haven’t been utilized on a large scale just yet. But we’re likely to see the regulatory opportunity become popular, since the ability to publicly raise funds from non-accredited investors presents a great deal of value for many real estate sponsors. And due to some inherent limitations of the Title III rules, Reg A+ may be a smarter fit for the real estate market overall than Title III crowdfunding ever will be.

In any case, Reg A+ and Title III are huge steps forward for the landscape of private finance. Since they’re both tools for helping issuers access capital and for small investors to generate wealth, we at EarlyShares predict that both investment vehicles will create win-win opportunities for the public at large.

3 Keys of Real Estate Crowdfunding: Understanding New Capital Formation Options

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Through new capital raising regulations implemented in September 2013 under the JOBS Act, “real estate crowdfunding” has become a highly active sector of the private finance market. According to a recent report from Massolution, a research and advisory firm serving the crowdfunding industry, over $1 billion of capital was infused into the real estate space through various crowdfunding platforms in 2014.

Crowdfunding – the practice of raising funds from a group of people, leveraging online tools – has evolved beyond its origins in donation-based fundraising into the world of sophisticated equity and debt capital raising. Through so-called “equity crowdfunding,” business owners can raise investment capital online from individual investors who pool their funds with others to buy shares in private ventures.

Real estate is the fastest growing sector of the emerging equity crowdfunding market, and its attractiveness to “crowd” investors is unsurprising. Though the JOBS Act – short for “Jumpstart Our Business Startups” – was originally designed to increase capital allocation from individual investors into early-stage companies, the high level of risk inherent in startup investing has made investors hesitant to participate in growth opportunities under the new regulations. Real estate, on the other hand, is a more tangible and familiar asset for investors to understand.

“When investors are presented with different opportunities on a crowdfunding platform, I believe the majority prefer to co-invest with a sponsor who has been in business for a long time, rather than in a start-up business,” Jack Glottman, President of Saglo Development Corporation, told CRE Finance World. Saglo is a Miami-based retail shopping center investment and management company that owns, leases and manages 800,000 SF of shopping centers and provides third party management and leasing for an additional 230,000 SF of commercial property in Florida. Saglo conducted two successful $3+ million capital raises on EarlyShares.

“They’re not without risk, but real estate investment opportunities come with firm time horizons and yield projections,” Glottman continued. “When investors can get 7-9% returns on a project that they can invest in online, that’s a pretty appealing prospect for them.”

Crowdfunding’s appeal for investors is matched by its appeal for capital raisers. Most real estate developers, project sponsors, and operators are already well-acquainted with deal syndication – the process of pooling investments from a group of investors to finance a portion of the equity for a project. Today’s crowdfunding (or “private investing”) platforms provide tools, resources, and services designed to make the syndication process more efficient.

It’s crucial, however, to understand the background and nuances of the new real estate crowdfunding market before utilizing it as a tool for real estate capital formation or investing. This includes gaining familiarity with the current regulatory environment, the types of platforms in the market, and sponsors’ options for raising capital – all of which are highlighted below.

#1: Regulations: Making the Private Market Public

The real estate crowdfunding industry has arisen thanks to the enactment of Title II, which is one of the seven titles of the JOBS Act. Enacted in September 2013, Title II lifted the ban on the public advertising or “general solicitation” of private investment opportunities.

The regulatory exemption for general solicitation is Regulation D Rule 506(c). Prior to the rule’s implementation, all real estate syndications were traditional private placements under the longstanding Rule 506(b) securities exemption. 506(b) stipulated that capital raisers (“issuers”) could only raise funds from those investors with whom they had “substantive, pre-existing” relationships.

As such, the pool of investors for a given real estate deal was largely limited to the sponsor or developer’s network. With general solicitation, however, dealmakers can now solicit investments from any accredited investor. The key stipulation is that the issuer is required to verify that all investors qualify as accredited according to the SEC’s income or net worth criteria – $200,000 in annual individual income ($300,000 joint) or $1 million in net worth, not counting the value of primary residence.

By moving the capital raising process online and broadening issuers’ access to potential investors, 506(c) “crowdfunding” is helping facilitate an evolution for the real estate industry. Bringing dealmaking out of the country club and into the 21st century is a significant change for the industry – one that may have the potential transform the real estate finance landscape.

#2 Platforms: Powering Real Estate Through Technology

Despite the relative newness of the real estate crowdfunding market, investors and sponsors can already choose from a multitude of platforms to fit their needs.

At their core, most platforms offer largely the same tech-driven features and benefits. For deal sponsors (“issuers”), platforms help streamline capital formation through deal monitoring tools, transaction management functionality, privacy controls, and access to a database of registered investor users. For investors, they provide transparent access to all of the tools and the information needed to review, evaluate, and invest in a variety of opportunities.

Yet that doesn’t mean all platforms are created equal. Beyond the technology benefits, platforms vary across seven key variables:

Focus: Does the portal concentrate on a specific type of real estate asset or a particular geographic region?

  1. Due Diligence: Does the platform vet its deals? If so, how? What are its investment selection criteria?
  2. Products: Does the platform offer debt or equity investment opportunities?
  3. Regulatory Profile: Does the platform operate as a registered broker-dealer or just an intermediary?
  4. Service Range: Does the platform help issuers craft their investment offerings or is it self-service?
  5. Deal Structure: Do investors receive notes or make direct investments into the deals on the platform? Or, are investments pooled into a special purpose fund?
  6. Portal Compensation: Is the platform paid via profit participation, points, or a flat fee?

Issuers and investors should research a platform to understand its niche in the overall market before investing or pursuing a capital raise. The most reputable platforms – among them EarlyShares, RealCrowd, Fundrise, and several others – offer a wealth of educational materials and resources to help you make the most of their products and services.

#3 Capital Raises: Options for Streamlined Syndication

Given the vast number of real estate crowdfunding platforms on the web – now estimated at over 100 – there are variety of fundraising vehicles available to developers and sponsors to help them capitalize on the crowdfunding trend. Investors and issuers alike should understand the different options, since they can impact the structure of the investment offerings.

Private Raise-506(b): Leverage technology to conduct a tech-powered private placement

Many platforms offer issuers the option to utilize their transaction management and deal tracking tools without making the deal public (and thus incurring the legal requirements that come with initiating a 506(c) raise). With a private raise, sponsors can leverage the benefits of technology without having to go through the investor verification process. Issuers simply invite members of their existing networks to view and invest in their deal(s). The drawbacks: no marketing exposure beyond their existing network, and no investments from new audiences.

Direct Crowdfunding: Raise funds publicly and directly from accredited investors

In this model, an issuer posts a deal to a platform – triggering 506(c) – and accepts investments from members of his or her network and new investors who contact the issuer through the platform. The sponsor publicly syndicates a portion of the debt or equity (usually between $1 and $5 million) and accepts 5-40 new investors into the deal (on average, depending on offering size and minimum investment). Typically, the platform takes care of investor verification and furnishes the sponsor with documentation for his or her records.

‘Fund’ Crowdfunding: Raise capital into a fund and share profits with your platform

This option is largely the same as the one above, but involves slightly different structure. The platform will pool all investor commitments into an LP or LLC and then use the fund to invest directly in the issuer’s deal. As such, the sponsor only has one new investor in the offering: the fund. Some platforms pre-fund the deal by underwriting it up front and syndicating it to investors after the fact. Others open the fund directly to investors and close the offering once the target goal is reached. The platform typically acts as the fund manager and shares a percentage of the profits after investors receive their take.

No matter which approach appeals to you, it’s a smart move for all constituents in the real estate market to familiarize themselves with the concept of crowdfunding, given its growing popularity and its potential to fundamentally change the way real estate dealmakers do business. Now is the time to act, because the real estate crowdfunding industry is expected to grow to more than $2.5 billion in 2015.

This post by EarlyShares CEO Joanna Schwartz originally appeared in CRE Finance World-The Voice of Commercial Real Estate Finance.

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