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Crowdfunding poised to grow real estate investments

About $2.5 billion worth of real estate investments could be raised via crowdfunding this year, industry reports say, a great increase from last year’s paltry $1 billion.

“Extrapolate that out a few more years and it might actually be something really significant,” said Professor Norm Miller of Burnhan-Moores Center for Real Estate. “More than that, it might be significant to smaller investors.”

Three professionals in the crowdfunding arena spoke on a panel moderated by Miller on Wednesday morning as part of a Burnham-Moores Center breakfast lecture series.

The event was at the Joan B. Kroc Institute for Peace and Justice Theatre, on the University of San Diego campus.

By a show of hands, few, if any, attendees said they had used crowdfunding.

About 150 portals -- a portal being a platform somebody is trying to set up for crowdfunding -- are up and running now, with three more joining the crowd each month, Miller said.

“Of those, it’s the Wild West on who to work with and who they are,” said Miller, who anticipates about five to 10 portals truly lasting.

The increasing number of investments made via crowdfunding is also moving faster.

What used to take months can now take days, said Richard Weintraub, founder and managing partner of Weintraub Law Group PC and also a founder of Community Leader Inc., a white-label software and service provider.

Weintraub likens the traditional real estate syndication to a “herding cats” ecosystem – “basically, a very inefficient way to raise capital,” he said. “You couldn’t use general solicitation or advertising to attract investors unless you had a pre-existing relationship with them that was substantial. You used email, you used Federal Express, you used checks – everything was fragmented and took forever.”

The JOBS Act (Jumpstart Our Business Startups) of 2012 made crowdfunding a viable and legal alternative to attract investors and to match investors with transactions.

The online ecosystem is much more efficient at raising capital, Weintraub said.

For instance, one recent transaction raised $1.5 million in less than a day, said Tom Lockard, vice president of real estate and institutional sales for Fundrise, which organized in 2010 in Washington, D.C., as the sons of a well-known real estate developer shaped a project on H Street Northeast with community input and investment.

“We are now more of a platform -- we are not a registered broker-dealer, we are not a registered investment adviser, we’re merely a platform for online syndication of [Regulation] D 506(b) offerings," Lockard said.

Lockard, who is based out of San Francisco and leads company efforts in California, was previously a partner at the California investment bank Stone & Youngberg and a managing director at Stifel Nicolaus.

“Investors on the site look a lot like investors we had in municipals,” Lockard said. “They recognize it’s a speculative investment, and they’re looking for yield. So you have to be very careful with the investors. If you put something up that’s 18 percent return, it flies off the shelf. If I put something up with 8, it’s going to take some time.”

Currently, Fundrise is offering investments in 3 World Trade Center, which will be the third-tallest building on the World Trade Center site with 2.5 million square feet of Class A office space.

The Class 1 bonds, held by Fundrise, are senior secured with a 5 percent tax-free return. Potential investors must log in to the site to view more information.

Crowdfunding companies are also keeping track of investors’ moves – literally. They monitor behavioral information on their website, such as how long potential investors stay on a page and where they move their mouse, Lockard said.

Robert E. Lee is the director of capital markets for La Jolla-based Silver Portal Capital, which works with five to six clients a year to raise $50 million to $300 million. He leads the firm’s crowdfunding efforts through Silver Portal Direct, which the firm built.

“We built it ourselves because we wanted to protect the investor information,” Lee said.

Lee said consolidation between portals is likely as the industry adapts.

“What’s scary is there are a whole lot of rules once you have someone’s dollars in a deal,” Lee said. “There’s a lot of things that can go wrong, there’s a lot of things that people just don’t know.”

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