Crowdfunding has emerged as a viable source of financing – under certain conditions. At CRE.Converge 2017 in Chicago, Selequity CEO A.J. Chivetta will address the ins and outs of crowdfunding in commercial real estate. He co-founded Selequity, an online syndication platform for commercial real estate investments, after more than 30 years’ experience as a real estate and corporate lawyer with Armstrong Teasdale. During much of his legal career, he served as primary outside counsel for Cassidy Turley. NAIOP asked Chivetta for a preview of his insights into making the most of this financing vehicle.
NAIOP: How is crowdfunding changing the landscape of commercial real estate investing?
Chivetta: Crowdfunding is making it easier for all types of investors to participate in direct ownership of commercial real estate. The JOBS Act made it easier to invest in real estate in three ways. First, by allowing real estate companies to more broadly market their opportunities to accredited investors in private placements through general solicitation.
Second, by allowing for a new offering called RegA+ that allows a company to raise up to $50 million from non-accredited investors following a filing with the SEC and compliance with follow-on reporting requirements.
A third change allows for small offerings up to $1 million to non-accredited investors, subject to limitations on marketing and investment size. The new general solicitation and RegA+ offerings are receiving the most attention from the real estate industry.
NAIOP: What are the emerging trends this year in commercial real estate crowdfunding?
Chivetta: The real estate crowdfunding landscape is developing several different investment models on both the debt and equity sides of a real estate project. RegA+ is being used to create larger funds and eREITS targeted at non-accredited investors. General solicitation rules are being used by crowdfunding companies that act as investment intermediaries, aggregating investor dollars, and deploying those dollars to a specific investment with a real estate sponsor who may or may not be affiliated with the crowdfunding site. General solicitation is also being used directly by real estate sponsors who broaden their investor base by using software and websites, like Selequity, that provide the technology that makes it easy to conduct such offerings.
NAIOP: What are some key factors that investors need to consider when evaluating crowdfunded real estate projects?
Chivetta: As passive investors, most crowdfund investors are relying on the sponsoring real estate company to select and manage the real estate asset in which they are investing. As such, there is no more important factor than the expertise and strength of the sponsor. Investors should consider a sponsor’s prior experience with the type of real estate in which they are investing, whether the strategy for the current investment is similar to strategies used successfully by the sponsor on other projects and the sponsor’s experience in the location in which the project is located.
Other key considerations when evaluating a sponsor include the amount of investment made by the sponsor in the project, depth of the sponsor’s management team and the sponsors’ proven ability to deal with problems that may arise in a real estate investment. Of course, the valuation of the asset, projected financial returns, plan for leverage, and fees and promotes are important considerations in any investment.
Learn more about crowdfunding and the latest in commercial real estate innovation as part of a special set of tech-focused sessions this week at CRE.Converge 2017, October 10-12, in Chicago, where deals, connections and trends come together.