Crowdfunding firms are stepping into the REIT space to make a bigger play for commercial real estate investor capital.
Fundrise was the first firm to launch a crowdfunded REIT last December and the company has jumped out to an early lead in grabbing market share—and naming rights on the eREIT brand. In less than 12 months. the firm has raised $90 million across its two REITs, Income eREIT and Growth eREIT. And that fundraising success is attracting a lot of attention in both mainstream investment and commercial real estate sectors.
Five years ago, people had no idea what crowdfunding was, says Fundrise COO Brandon Jenkins.
“Today, everyone knows what it means, but most people in the broader commercial real estate industry haven’t really viewed it as on par [with] other traditional financing sources,” says Jenkins. “I believe this is the inflection point where you are going to see that change.”
There is a strong pipeline of demand coming from deal sponsors who are looking to use crowdfunding to access debt and equity capital, in addition to interest from investors who want access to institutional quality real estate investments. Fundrise claims to have a 60,000-person wait list of people who have registered online and indicated an interest in investing. In addition, about three fourths of 10,500 active investors on the platform are asking for opportunities to reinvest. “We see the demand now, which is why I say it is that inflection point moment,” says Jenkins.
Fundrise isn’t the only crowdfunding firm that is trying to capitalize on that growing investor appetite. RealtyMogul launched its first crowdfunded REIT, MogulREIT I in August, and the expectation is that more crowdfunding firms will follow suit.
The big focus for crowdfunding firms initially has been offering single asset syndications to accredited investors. Thanks to new legislation that has gone into effect in the past year as part of Regulation A+ and Title III of the JOBS Act, crowdfunding firms are now able to market real estate investment opportunities direct to non-accredited investors. Reg A+ REITs have emerged as a preferred method of marketing to large groups of non-accredited investors due to the tax advantages and efficiencies that the structure offers.
The crowdfunded REITs are structured as Reg A+ offerings, which allows them to raise up to $50 million over a 12-month period from both accredited and non-accredited investors. “There is a huge, huge demand from non-accredited investors to get exposure in commercial real estate, and I think (crowdfunded REITs) are a good vehicle to give them that exposure,” says Jilliene Helman, CEO and co-founder of RealtyMogul.
RealtyMogul currently has about 85,000 registered investors on its platform. Many of them are non-accredited investors who, historically, could not buy into crowdfunded syndications. MogulREIT I is a way to tap into that pool of capital, and it also allows RealtyMogul access to discretionary capital for real estate investing. Target acquisitions for MogulREIT I will be income-producing property with a general goal of building a diversified portfolio across different property types and markets.
Effectively, crowdfunded REITs are similar to non-traded REITs. Crowdfunded REITs don’t have the same volatility or daily liquidity as publicly-traded REITs. Fundrise calculates NAV on a quarterly basis, while MogulREIT I will start calculating NAV in mid-2017 and then quarterly thereafter to establish and maintain share prices for investors.
Crowdfunded REITs are promoting a lower fee structure as a key selling point over non-traded REITs. Crowdfunding firms are selling REIT shares online directly to investors, cutting out the broker-dealer middle man and allowing crowdfunded REITs to offer much lower fees. For example, MogulREIT I has no sales commission and offering expenses are capped at 3 percent. In comparison, non-traded REITs have been widely criticized for heavy front-end fees that historically have reached as much as 10 to 12 percent.
Fundrise has a similar low fee structure, with a 1 percent annual management fee. Direct expenses incurred by its eREITs, such as any accounting or reporting costs, are passed on to investors. The company’s initial Income eREIT focuses on debt or debt-like investments with fixed returns and fixed maturity terms. The company’s Growth eREIT, introduced in April, invests primarily in equity investments.
Investor capital pouring into both funds has exceeded expectations. “For us, that is evidence that people are very eager for alternatives to the very limited investment options that they have today,” says Jenkins. It also is a reflection that people are very comfortable investing in real estate on an online platform, he adds.
