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Crowdfunding picks up for real estate investments

Growing interest in crowdfunding may prompt University of San Diego's Burnham-Moores Center for Real Estate to offer additional, in-depth programming.

Crowdfunding as a viable capital source for real estate was the topic of a panel at the center’s 19th annual real estate conference this month.

“Some of you are interested because of curiosity, and some of you are here because of fear,” said Norm Miller, the panel’s moderator and real estate professor at USD. “You’re wondering, ‘What if this becomes an important source of capital and I don’t know jack about it?'"

So far, real estate has seen little online investment, said Lewis Feldman, a partner in law firm Goodwin Procter's Real Estate Capital Markets Group.

However, crowdfunding has been growing swiftly. In 2012, $2.1 billion worth of investments were made through crowdfunding, followed by $5.1 billion in 2013. Last year, there was about $10.4 billion; the figure could double this year.

But real estate took only $200 million online in 2014, Feldman said, and of the nearly 9 million investors, only 3 percent are active in investing in real estate.

Crowdfunding is a type of disintermediation, or elimination of the middle man, Feldman said. The federal JOBS Act (Jumpstart Our Business Startups), which became law in April 2012, allows small businesses in all kinds of industries to advertise and raise funds from the investing public as long as they meet certain income limits — more than $200,000 per year for an individual.

“With that kind of wealth, and the online adoption that we’ve seen in our lifetimes, this to me is just a continuation of it,” Feldman said. “You remember when a trade was a couple hundred dollars for 100 shares.

“Now you can go to E-Trade, Ameritrade, Schwab, and those guys will do it between $4 and $7.95. Purely because you can go online and you don’t have to call up that guy who’s had the two-martini lunch and is the subject of The New York Times cartoons, and you’re just able to make a click.”

Plus, crowdfunding allows investors to find a more attractive deal than they may in traditional investment models.

“There’s a certain amount of millennial love for disrupting current market leaders in the capital space,” Feldman said. “People like to get a better deal. They like to say, ‘This bank is offering X, Y or Z,’ or ‘This private investment deal is offering X, Y or Z and I got it for a couple hundred basis points less or more.'"

Feldman said he believes Title III of the JOBS Act will be passed this year, which will lower access points for crowdfunding investments. This could be good for many industries but isn’t particularly necessary for real estate, which needs sophisticated and educated investors.

Crowdfunding may also be beneficial for community buy-in for new developments.

“If you can get the surrounding community involved and be an owner of the property, rather than just somebody who’s there and needs political support, it changes the dynamics drastically in development deals,” Feldman said.

While bankers are just starting to wonder how they’ll move into the crowdfunding arena, Feldman says everyone else is moving fast and it’s becoming a worldwide phenomenon.

Ian Formigle, vice president of investments at CrowdStreet Inc., recently had an investment fulfilled start-to-finish in three weeks after beginning the conversation, and typically sees money raised in 30 to 60 days once the opportunity is posted.

Crowdfunding is like retail circa 1997, Formigle said, and there are lots of questions about how to go about it and how to manage it.

“We’re excited about helping investors get access to deals that they couldn’t have any idea about unless they had certain relationship,” Formigle said.

“The Web presence gives you the power to convey the message fast and in a transparent manner. If you are a reputable company and have a good track record, the investor can figure that out in 15 minutes online, if you have a portfolio, you have relationships, you’re in the news. You don’t need to sit down with everyone.”

Miller said he expects to start planning more educational sessions on crowdfunding soon.

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