\u201cLast year was a real turning point, because real estate crowdfunding deals got so much bigger and the industry became more mainstream<\/em>,\u201d said Mark Roderick, an attorney who specializes in crowdfunding and fintech at the Lex Nova law firm in Cherry Hill, N.J. \u201cThe platforms started out raising money for single-family home \u2018fix-and-flips,\u2019 and now they\u2019re raising $15 million for commercial properties.\u201d<\/em><\/p>\n And fundraising through Internet platforms appears to be just beginning. Palo Alto, Calif.-based RealCrowd, a marketplace that primarily connects investors with equity-seeking sponsors, saw a threefold year-over-year increase in the amount of capital it raised in January, said Adam Hooper, the platform\u2019s CEO. He anticipates raising $300 million this year, which would match the total raised by the firm from 2013 through 2019.<\/p>\n Meanwhile, CrowdStreet, a similar marketplace, brought in $500 million for sponsors in 2019 alone, doubling its total volume to roughly $1 billion since its April 2014 launch, reported Tore Steen, co-founder and CEO of the Portland-based platform. \u201cCrowdfunding is raising only a tiny fraction of the $300 billion that\u2019s flowing into commercial real estate on an annual basis,\u201d<\/em> he said. \u201cI hate to liken it to ecommerce in the 1990s, but that\u2019s where we are.\u201d<\/em><\/p>\n Origin Investments has partnered with Cedar Street Investments to develop the $64.5 million Pilsen Gateway, a 202-unit apartment project in Chicago’s Pilsen neighborhood. Origin Investments provided some $16.5 million in equity through its QOZ Fund, which is focused on new developments in qualified opportunity zones. Photo courtesy of Origin Investments.<\/em><\/p><\/div>\n Though the JOBS Act allows sponsors to solicit the general public, the U.S. Securities and Exchange Commission restricts participation largely by wealth. Only accredited investors with a net worth of at least $1 million, or who can meet a high income standard, can participate in Regulation D private placements, while investment in Regulation A+ deals is technically open to anyone.<\/p>\n The number of crowdfunding sites has shrunk considerably from the hundreds that popped up in the months immediately after the Jobs Act took effect in 2013. Proponents estimate that only 10 sponsors or so are doing the vast majority of today\u2019s real estate deals.<\/p>\n Most platforms raise equity, while a smaller number raise debt. Some that started out by offering single-property investments have created funds. The platforms also tailor their offerings to specific investor types, either by limiting them to accredited investors or opening them up to a broader audience, although they occasionally cross those lines. Regardless of the strategy, real estate crowdfunding operators see huge growth potential.<\/p>\n \u201cTraditionally, institutional real estate funds have raised money from pension funds\u2014but are pension funds growing today?\u201d<\/em> said Ben Miller, co-founder and CEO of Washington, D.C.-based Fundrise, which has raised $1 billion in equity across some 20 funds. \u201cAll of the real estate platforms are moving to retail investors, because in order to grow, they have to find new capital sources.\u201d<\/em><\/p>\n In September, CrowdStreet raised $25 million in equity in three hours to help finance Parkway Properties Investments’ $80 million acquisition and rehab of 100 Edgewood, a 306,000-square-foot office building in Atlanta. The asset is in an opportunity zone, and sponsors are targeting an internal rate of return of 15 percent and hold period of 10 years. Photo courtesy of CrowdStreet.<\/em><\/p><\/div>\n For all their early success, however, it is worth remembering that crowdfunding platforms have prospered during an long real estate expansion. Crowdfunding observers acknowledge that the strategy must still prove that it can weather a slump.<\/p>\n \u201cIn a downturn we\u2019re going to see deals that were underwritten too aggressively or that took on too much leverage\u2014all kinds of variables that we just can\u2019t see right now,\u201d<\/em> predicted Ian Ippolito, a tech entrepreneur turned real estate investor who founded Real Estate Crowdfunding Review, a Tampa, Fla.-based firm that tracks the industry. \u201cThere will be a round of consolidation, and the players that emerge will be the strongest.\u201d<\/em><\/p>\n To put investors in the best position to endure a recession, crowdfunding executives contend that they\u2019re exercising extra vigilance in this extended period of peak property prices, approving only deals that meet an institutional investment standard. <\/p>\n \u201cWe\u2019re definitely passing on more deals,\u201d <\/em>said Allen Shayanfekr, co-founder and CEO of Sharestates, a Great Neck, N.Y.-based firm that has provided some $2.3 billion in loans to sponsors since 2015. \u201cWe probably saw $5 billion worth of deals last year and closed about $800 million in loan volume, whereas in earlier years we were closing a higher ratio.\u201d<\/em><\/p>\n Similarly, real estate fund managers using crowdfunding to solicit capital have become more risk-averse when selecting assets. \u201cIt has been a challenge, but we remain disciplined,\u201d<\/em> said Michael Episcope, principal and co-founder, Origin Investments, a Chicago-based fund manager that has raised $400 million across three funds since adopting a crowdfunding model. \u201cA deal that we project to be a 12 or 13 percent return may pencil out at 22 or 23 percent by another sponsor, so I think some investors are going to get caught.\u201d<\/em><\/p>\n In October 2017, investors using the ArborCrowd platform provided $3.2 million in equity to renovate and rebrand Quarry Station, a 306-unit apartment complex in San Antonio. The property was sold two years later for more than $49 million, generating an internal rate of return of 20.3 percent. Photo courtesy of ArborCrowd. <\/em><\/p><\/div>\n Crowdfunding supporters are quick to point out that money has always been made and lost in real estate, and deals on their platforms don\u2019t always perform as expected. But some crowdfunding firms are advertising risky deals without proper due diligence, warns Adam Kaufman, co-founder and COO of ArborCrowd<\/a>, a three-year-old New York-based platform that has raised more than $30 million in nine offerings. The platform provides equity for select sponsors that borrow debt from its Arbor Realty Trust affiliate.<\/p>\n \u201cThese deals are just starting to life-cycle, and in the next two, three or four years, they\u2019ll start to go down,\u201d<\/em> Kaufman predicted. \u201cIt will be interesting to see how the SEC or consumer protection agencies react.\u201d<\/em><\/p>\n In some cases, platforms that are backed by venture capital funds are under pressure to show rapid growth, Kaufman said. But such expectations don\u2019t align well with real estate investment, which requires patient research to uncover quality deals. Observers suggest that the RealtyShares platform, which collapsed in the fall of 2018, couldn\u2019t scale up fast enough to convince venture capital funds to keep backing it.<\/p>\n Some crowdfunding executives come to real estate investment with a technology background and may lack the expertise to understand the problems with an asset or deal structure, Kaufman said. Nor do Individual investors typically have the sophistication to spot them, he added. What\u2019s more, while many crowdfunding firms offer a plethora of educational tools for investors, some platforms still put too much emphasis on returns and not enough on risk, which could turn out badly for investors, RealCrowd\u2019s Hooper argues. He\u2019s hoping to avoid that outcome.<\/p>\n![\"Origin](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2020\/02\/pilsen-rendering-facing-north-east.png\")
<\/a>Joining the club<\/h2>\n
![\"In](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2020\/02\/CrowdStreet-parkway_100-Edgeway.png\")
<\/a>The Key Test<\/h2>\n
![\"](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2020\/02\/ArborCrowd-Quarry-Station.jpg\")
<\/a>Cautionary Signs <\/h2>\n