Crowdfunding returns as developers seek new sources of equity

by MMC
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The Walbrook Junction Mall in Baltimore is being redeveloped with partial funding from crowdfunding.

Commercial corridors can be the proverbial gateways to neighborhoods in the United States. However, when visitors or potential investors are met with blight, it can discourage future construction or home purchases.

It’s a problem that developer Lyneir Richardson is trying to solve in a number of urban neighborhoods, and he’s testing a relatively new financing mechanism to do it.

Made possible by a series of changes to US SEC (Securities and Exchange Commission) regulations as part of the US JOBS (Jumpstart Our Business Startups) Act, crowdfunding allows promoters to raise capital from a large number of of non-accredited and accredited investors to help finance residential projects. and commercial efforts.

It was signed into law in 2012, but it took years to write the regulations and publicize this new development and investment vehicle.

More recently, crowdfunding has been gaining traction in the real estate industry, with the emergence of several online platforms that seek to level the playing field for people of all races, genders, socioeconomic groups, and geographies.

Its growing use, including risks and rewards, was the subject of a Sept. 28 ULI webinar titled “Americas YLG: Crowdfunding for Real Estate.”

Hosted by the ULI Americas Young Leaders Group and moderated by Mark Bhasin, assistant professor of finance at the NYU Stern School of Business, the event brought together the CEOs of two platforms: Groundfloor Finance co-founder Brian Dally and SmallChange.co founder Eve Picker. The two companies apply different securities regulations to accomplish their missions.

While investors often turn to crowdfunding because they have difficulty obtaining venture capital or loans from banks, Richardson, co-founder and CEO of The Chicago TREND Corporation, says they chose SmallChange.co to democratize ownership of two shopping centers located in predominantly black neighborhoods. west of Baltimore, Maryland.

Building on investments large and small from more than 300 people, Richardson purchased Walbrook Junction Shopping Center and Edmondson Village Shopping Center in 2020 and 2023 respectively.

Walbrook Junction, which is approximately 50,000 square feet (4,645.2 m²), and the much larger Edmondson Village were both dilapidated at the time of the purchases. He has since secured grants from the city and state to begin redevelopment.

“We were looking to make a social impact in these communities by allowing residents to own a part of their community,” says Richardson. “More than 330 people have invested as little as $1,000 using the SmallChange platform. »

“Fifty-one percent of our investors are low or moderate income, 42 percent are women, and 53 percent are African-American,” Richardson says. “I am very proud of these statistics.”

Richardson says a strong commercial corridor can increase property values ​​and attract new investment, adding that people are more likely to take pride in their community and patronize businesses in which they have an interest.

“After all, how often do investors knock on your door and ask if you want to own part of the local grocery store in your neighborhood? he asks.

This is just the beginning of Richardson’s campaign, which he hopes will one day include 20 malls.

“Over the next three years, we hope to create ownership opportunities for up to 1,000 community investors through crowdfunding platforms,” says Richardson.

Expanding opportunities for minority and female developers and investors in a predominantly white male industry is an important goal for SmallChange.co.

Founded in 2016, SmallChange.co uses SEC regulations, including crowdfunding regulations, to help developers raise debt and equity funds for residential and commercial projects.

Anyone aged 18 or over can invest, but a number of rules must be followed.

“It’s important to us that the projects listed on our platform have meaningful impact,” says Picker, which the company measures using its proprietary Small Change Index.

“The impact can take many forms,” says Picker. “Maybe the project sucks or maybe community ownership is an important goal.”

A project may also be carried out in a neighborhood that has not received investment in some time, or it may involve a team led by blacks or women.

“For us, all of these elements add to the typical financial results of a project, providing a value return in addition to the financial return,” says Picker.

“Ultimately, we hope to play an important role in alternative financing,” says Picker. “To date, 63% of the projects listed on our platform belong to minorities and/or women. It is clear that there is a need. »

While SmallChange.co focuses on assisting those whose projects will have a positive impact, Dally says Groundfloor seeks to make real estate investing more accessible to everyone, including non-accredited investors, also known as retail investors.

“We are creating an alternative to the stock market that allows people from all socio-economic backgrounds to invest and save for their future through real estate,” Dally said.

The company was the very first to be qualified under Regulation A by the SEC to offer debt-based real estate investment opportunities to accredited and non-accredited investors, Dally says.

Today, it has over 230,000 registered users, who use its platform for short-term, high-yield investment opportunities.

“We offer fractional real estate investments,” Dally said. “If someone is into house renovation or new house construction and needs capital to start the project, we will give them a loan and sometimes we will also partner as an equity investor . »

“We create and offer retail investors the opportunity to invest through our platform,” explains Dally. “When the project is completed and the home is sold or refinanced, investors are repaid their principal and interest, and/or a share of the profits, typically within just nine to 18 months.”

Dally says that because the investments are collateralized by the underlying real estate asset, they offer an unusually low level of risk relative to the potential return.

“Our investors can choose from hundreds of different projects and get started with as little as $100, with a minimum investment per project of ten dollars. The historical rate of return on the 3,000 investments we have repaid is around 10 percent.

There are no fees for investors and the low barrier to entry means most people participate in hundreds of projects at a time, Dally says.

“Our offerings are regulated by the SEC, so we provide a level of transparency and consistency rare for private market investments,” Dally said. “We have also been doing this for ten years and the results speak for themselves.”

In the coming weeks, a next-generation mobile version of Groundfloor will be introduced, enabling further automation and instant diversification.

“Investors using the new app will only need to transfer funds to Groundfloor’s platform and the dollars will be automatically allocated to all available loans, typically 80 to 100 at a time,” says Dally.

While the webinar focused on two platforms as examples of trends and opportunities for sponsors and investors, there are a number of other crowdfunding sites, including CrowdStreet, which provide opportunities for investors accredited, and Fundrise, which focuses on eREITs (equity real estate investment trusts). ) and other real estate funds.

“Both take a different approach to Groundfloor, which is the first and largest platform qualified by regulators to offer direct real estate investing to all investors at scale,” Dally said.

There are also a number of regulatory crowdfunding platforms similar to SmallChange.co, such as Republic, Wefunder and StartEngine.

Although these sites open up opportunities to bring ambitious projects to fruition, provide an entry point for small investors and allow people to diversify their portfolios, Bhasin, senior vice president of Basis Investment Group, warns that this carries risks.

A case in point, Bhasin says, is PeerStreet, which filed for Chapter 11 bankruptcy this year.

Founded in 2013, the platform serves both sides of the market, providing qualified investors access to real estate-related debt investments and connecting lenders and borrowers to sources of capital.

“Higher interest rates, reduced demand for mortgages and reduced appetite among institutional buyers for below-market rate loans played a key role in the decline of the business,” says Bhasin.

Other problems, Dally explains, unlike Groundfloor: “PeerStreet limited its securities offerings to accredited investors to avoid regulatory scrutiny and served as a reseller rather than originator of the credit underlying its investments.” »

Bhasin, says PeerStreet should serve as a warning, reminding everyone that despite its many benefits, crowdfunding comes with risks.

“I advise everyone to do their due diligence before investing,” Bhasin said.

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