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The Pros and Cons of CRE Crowdfunding

posted Nov 25, 2014, 1:09 AM by J Shaw   [ updated Nov 25, 2014, 1:10 AM ]
ORANGE COUNTY, CA—There are pros and cons to any type of capital raising in commercial real estate, but crowdfunding—the rookie player—has been getting its fair share of scrutiny from the industry. spoke with several executives familiar with crowdfunding about both the positives and negatives to this form of fundraising. Stay tuned for an upcoming feature on crowdfunding’s progress in our sister publication Real Estate Forum. What are the pros and cons to crowdfunding in commercial real estate, as you see them?

Ryan Smith, SVP, RCS Capital/We Are Crowdfunding:Greater accessibility is both the main pro and con to crowdfunding real estate. Accessibility allows investors to potentially access institutional-quality investments as well as high-quality financial advisors. However, greater accessibility also lowers the barrier-to-entry for untried sponsors and untested deals. For this reason, we give invests on We Are Crowdfunding the ability to learn through our educational content paired with access to nearly 10,000 financial advisors.

Adam Chapnick, principal, Asset Avenue: Crowdfunding makes investing and borrowing easier and faster for both sides of the commercial real
estate market. It gives both sides more ways to profit from the lending ecosystem. Borrowers are able to access the capital they need through our platform by accessing new avenues of capital, and investors are able to get access to a variety of loans that are tied to commercial real estate property. For centuries, the savviest investors have preferred investing in commercial real estate debt because of the tangible asset, and thus a path of recourse, securing their investment. At Asset Avenue, we’re excited about the opportunities that come from investing in debt and its straightforward premise that isn’t based on a myriad of performance projections that come with equity investments. Investing in tangible assets means easy-to-understand investment terms that stay constant and have recourse possibilities from being in a first-lien position. The only challenge to CRE crowdfunding is the simple need for education around the word “debt.” Investing in real estate debt isn’t something that people have necessarily heard of before, so there’s a definite learning curve to explain that investing in debt means investing in the note that is tied to the property.

Gary Tenzer, principal and managing director, George Smith Partners: For sponsors seeking equity in amounts below what is typical of institutional investors, crowdfunding can provide an alternative to friends and family. One of the biggest negatives is that the sponsor of the transaction does not know for sure if the money will be there to close a transaction.

Joe Elias, co-founder/COO, From a platform’s perspective, the management of dozens, if not hundreds of individual investors for every deal can be a bit challenging, but it enables us to become more efficient very quickly. However, this also provides incentives to syndicators—as crowdfunding platforms, including Loquidity—to help solve more than just the issue of finding capital, but the management of investors, SEC regulations, reporting and all the other little nuances that come with raising funds from outside investors. For investors, the advantage is having access and investing in individual deals directly. Crowdfunding allows for increased transparency and the ability to cut out additional middlemen (i.e., costs) that increase the cost of capital, which would lower returns to investors. Even though we do our own extensive due diligence on our offerings, we strongly encourage our investors to do their own due diligence on every project prior to investing, since every investment carries its own risks.

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