Sean is a Founding Partner at Jackson Dearborn Partners with 15 years of selling, investing and developing real estate around the country.
Over the years, in our successful efforts to raise equity for various opportunity zone projects, my firm has tried multiple different methods in our deals: “friends and family” investors, qualified opportunity zone (QOZ) funds, talking to attorneys and wealth managers who have access to clients in an active capital gains event and identifying new potential investors through our existing network. Our biggest takeaway from this process was that it was inefficient and time-consuming, and my partners and I kept saying to one another that there had to be a more effective way to execute our fundraising efforts. Enter: CRE crowdfunding.
CRE crowdfunding is a relatively new space that started gaining some real traction a few years ago. There have been several platforms that have come and gone, and a handful of reputable ones have survived and built a sustainable business model. We began our vetting process by running detailed diligence on all of our options and evaluating their individual strengths and weaknesses. Ultimately, we determined that quality control was the most important factor in choosing the right platform for us and we went with a group that we believed was best-in-class. Because we focused on the platform with the highest quality standards, the most challenging part became getting our company and our project approved for its marketplace.
This process is thorough and could be an entire article by itself, so I will leave that for another time. It did take several months, however, and was akin to a very thorough vetting by a large lender or investor, so sponsors interested in going this route should be aware of that beforehand. Once we were approved as a sponsor, we began the process of getting our first deal — a student housing project at a local university — onboarded for the marketplace. Our deal was put through a strenuous stress test we received with multiple suggestions for how to improve our metrics. This scrutiny proved to be beneficial for use internally and continues to guide each new deal we consider for the marketplace.
For sponsors in search of a new approach for equity raises, consider exploring crowdfunding. Here’s how it can help:
1. Reaching the right investors: One of the most challenging parts of raising capital for OZ deals is that the investor has to be in an active capital gains event in order to take full advantage of the tax benefits offered by the program. It is nearly impossible for sponsors to accurately track this among their own network of investors, so crowdfunding allows for investors to approach you. This is a game-changer in more ways than one.
2. Setting your own minimums: As the sponsor, you can determine the minimum level of investment an individual can contribute to each deal. This provides significant flexibility based on the total number of investors you are looking to have in each new project. It also allows you to dramatically expand your reach by lowering the minimum beyond what is normally available in the marketplace to attract investors who may not otherwise have access on their own to these kinds of opportunities.
3. Backend management: Most reputable CRE crowdfunding companies offer backend fund administration software as an added service. This can help with distributions, issuing K-1 forms, asset management reporting and general administration of the OZ fund. Everything is automated, which eliminates a huge headache so sponsors can focus their time and energy on effectively running the deal while offloading the backend support.
4. Expanded investor reach: A significant portion of investors who are interested in OZ opportunities are not necessarily full-time real estate investors. They may have just sold a large portion of stock or their business and they have meaningful capital gains exposure as a result. They are out there actively shopping for OZ deals to invest in to protect these gains, but often do not have direct access to quality OZ deal flow. CRE Crowdfunding helps connect those dots by creating an active online marketplace that levels the playing field for all accredited investors who are interested in investing in real estate.
5. The world is flat: CRE crowdfunding has the potential to reach anyone with access to the internet, regardless of where they happen to be physically located. Before we took this route, we spent a ton of time meeting face to face with potential investors and pitching them our deals. Now, we present a one-time online webinar and wait for investors to come to us. It has completely opened our ability to fundraise from anywhere in the world and provided access to individuals who we would never be able to reach otherwise.
I have heard CRE crowdfunding referred to as “private equity for the people.” Having seen it work in action multiple times, I fully agree. I believe these platforms can democratize real estate investing in a way that has never been done before, and that is very exciting for the future in our space. Early on we saw its potential, and now after watching it work effectively multiple times on our own raises, I am confident that we are only a short time away from this methodology being widely embraced by the investor community.
Commercial real estate has traditionally lagged behind other industries when it comes to the adoption of disruptive technologies, but there is no question in my mind that crowdfunding is here to stay. Any serious sponsor should strongly consider this as they look for more innovative ways to raise capital in the current environment.
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