Forty-eight hours is how long it took a Real Estate company to raise $485,000 from investors to secure a note on a space in New York City’s Trump Palace in April, using new Real Estate crowdfunding platform AssetAvenue.
"I've built my company the traditional way, but I think this is the future," said Alim Kassam, CEO of Los Angeles private mortgage fund Rama Capital, who sought the money for the Trump Palace project. "In the traditional way, you're limited to who you know. Crowdfunding is a way to reach the people you don't know; yet. I think the ability to scale is a lot greater."
Despite launching just last winter, AssetAvenue already has a core clientele of 500 people wishing to invest a minimum of $10,000 in Real Estate, and a group of 50 companies need investments. That’s just in the Los Angeles area, with much growth expected in the next several months.
“That number is going to grow into the thousands in the next 90 days,” said AssetAvenue CEO David Manshoory. “At the end of the day, we are allowing millions of people across the country who have never had a big-enough checkbook to participate in a Real Estate opportunity.”
Controversy surrounding Real Estate crowdfunding grows — with the chief arguments against it being that the system is not broken because Real Estate companies can find funding for their projects without the option, and that crowdfunding opens the market up to bad deals made by people without proper knowledge of the industry.
“It will be used by those who don’t know what they are doing and those who do to defraud others,” said John McNellis, co-founder of McNellis Partners, a developer in Palo Alto, Calif. “Established developers will never use crowdfunding.”
McNellis said that investors without the money to invest traditionally can still enter the industry through publicly traded real estate investment trusts, which have fewer risks.
But the number of crowdfunding alternatives for interested investors continues to grow.
“I would counter that and say that (the system) actually is broken and… it can be done better,” Manshoory said.
Crowdfunding (think Kickstarter) allows people with a project and no money to connect with people who have money and want to make some more through investment. In Real Estate, traditional investors have huge portfolios with millions to invest. That, traditionally, has ruled out those who want to invest but only have thousands rather than millions.
With the passage of the JOBS Act to legalize crowdfunding of investment projects in 2012, the SEC allowed platforms to solicit funds directly from investors. This lifted a ban dating to the 1930s, and resulted in the quick formation of a dozen Real Estate crowdfunding companies in the fall of 2013.
Real Estate, crowdunding
AssetAvenue, which deals only with commercial property investments, steps in to help Real Estate companies raise the down-payment, typically about 30 percent. For a $15-million-property, that’s $5 million that is needed quickly; within one and three months.
“Traditionally they are raising money from friends and family, or their local network of investors,” Manshoory said. “We’re just taking something that has been done offline for decades and bringing it online. It’s not that Real Estate companies can’t raise the money; it’s just that it’s the most challenging part of their business. They’re open to the idea of getting themselves in front of a new community of investors that otherwise would not be able to find them.”
Kassam thought it would take one week to raise the $485,000 he was seeking, and he intends to use the service again.
"The execution was great," he said.
Manshoory said his company makes sure that no bad investments are made by pre-screening all opportunities brought by Real Estate firms seeking money. He agreed that most investors are know knowledgeable enough about the industry to make concrete decisions, but that AssetAvenue screeners minimize the risk. Nine out of 10 deals brought forward are rejected before they get in front of the eyes of investors.
“We’ll filter out the good deals from the bad deals,” he said. “It’s a curated marketplace. Our goal, at the end of the day, is to make our investors money. When they win, we win.”
What AssetAvenue investors win is an annual 9 percent interest rate return, paid in monthly installments. The company, meanwhile, makes money by charging Real Estate companies a flat fee of about 1 to 2 percent of the funds they are trying to raise, and by charging investors an annual reporting and compliance fee to cover the legal paperwork required by the federal government.
Manshoory said that crowdfunding will bring access with transparency to Real Estate, and that it soon won’t been seen as an unusual or unique strategy to raise money, similarly to how Auction.com and LoopNet have allowed people to buy, sell and rent commercial property online.
“In 12 to 24 months, investing in Real Estate through crowdfunding platforms will be normal,” he said. “There are a lot of people who have wanted to participate in the industry but have been kept out for no good reason.”