Crowdfunder Vets Partners, Participates In $3.7M Shopping Center Deal
I’ve written here before about the phenomenon of crowdfunding in the commercial real estate market. A fast-growing new source of investment capital enabled by a last year’s relaxation of SEC regulations, crowdfunding in commercial property might conjure up images of a “wild west”-style marketplace, where dubious solicitations sent to any Tom, Dick or Harriet hide giant risks, buried in promises of glittering payoffs announced over a bullhorn to whoever shows up to participate.
As it turns out, that would be the wrong image, at least in one case. Reaching out to the crowd for capital can go hand in hand with prudence, caution and expertise, as exemplified by a recent equity deal financing a 62,000 sq. ft. shopping center outside of Kansas City.
First a quick video describing crowdfunding in general terms.
Not Just Banging A Drum, Vetting A Partner
One implication of crowdfunding is a new kind of direct relationship between investor and solicitor. No longer bound by regulation governing the qualifications of investors, crowdfunding solicitors and investors now face, it might seem, a lower bar of caution and diligence than before.
But that isn’t the way the above shopping center deal went. Instead, the crowdfunding website that raised a portion of the capital for the South Greystone Center equity deal, Realty Mogul, brought not only the crowd and its wallets to the table, it brought its own business acumen and diligence.
In Emily Behlman’s piece at Wichita Business Journal, we find diligence was baked into the shopping center deal through vetting and partnering.
A group of 23 investors came together on the real estate crowdfunding website Realty Mogul, which got started in late 2012, to invest in the property. The shopping center was acquired by Block Real Estate Services of Kansas City for just under $4 million, with Realty Mogul providing a portion of the equity capital.
I wrote earlier this month about crowdfunding’s potential as a source of capital for entrepreneurs, but at the time, I didn’t consider the financing mechanism as a way to fund real estate deals.
I talked today with Realty Mogul co-founder and CEO Jilliene Helman about the concept.
Her site and a couple others like it allow accredited investors (people with $1 million in net worth or $200,000 in income generally qualify) to join together and invest in real estate deals through loans or equity. The company says its online platform makes investment opportunities more accessible, and the minimum investment, $5,000 on some deals, is much lower than in many traditional real estate investment scenarios.
The company vets partner businesses and properties before making deals available to investors.
In the case of Greystone Shopping Center, the partner business was Block Real Estate. Helman says Realty Mogul ran background checks on all Block principals and studied the company’s track record, among other things. Then, Realty Mogul staff studied the property itself, looking for things like diversification — the center has 18 tenants so it’s not reliant on one — and neighborhood — Lenexa is relatively affluent and growing.
Realty Mogul has invested in 55 properties so far, and it’s done about $12 million in transactions.
An Evolution In Crowdfunding
When I compare the above details to other high-traffic crowdfunding sites such as Kickstarter, what sticks out in this case is that Realty Mogul’s practice here outstrips other crowdfunding models in terms of diligence.
When, for example, an artist or software developer goes to crowdfunding giant Kickstarter to fund a project, there is no similar vetting of the project nor the solicitor’s ability to deliver a completed project. Kickstarter currently stays mum on that issue, and hands all the risk of donation to the donor.
By stepping forward and addressing, rather than ignoring, the risks of deregulated solicitation, Realty Mogul may be showing the way forward for this new commercial real estate capital source to mature — fast.