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Sunday, 13 April 2014 20:54

Crowdfunding platform opens community real estate investing to the masses

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Sam Cummings Sam Cummings

A new crowdfunding portal wants to encourage everyday people to invest in Michigan-based real estate projects that support startups and small businesses.

The barrier to entry: $100.

Within the next 30 to 60 days, the Ann Arbor-based Michigan Municipal League and Washington, D.C.-based Fundrise LLC hope to launch a new website (Michigan.fundrise.com) that will allow Michigan residents to invest in in-state real estate projects.

Fundrise offers accredited and unaccredited investors a way to invest in community-based development across the country, but its efforts in Michigan were made easier by the signing of the Michigan Invests Locally Exemption (MILE) Act. The law, signed by Gov. Rick Snyder last December, liberalized the process of equity-based crowdfunding for Michigan residents.

Executives at the MML see the partnership with Fundrise as a way to offer brick and mortar investment opportunities across the state to complement its work with Localstake, another equity crowdfunding portal for small businesses.

Supporters of the partnership hope it will democratize real estate investing by putting it in reach for more people across the state. They also hope it will help small businesses get their projects off the ground.

[EVENTS:  Local conferences explore how small businesses can use crowdfunding.]

[RELATED:  New crowdfunding partnerships aim to drive community development in MI.]

[RELATED:  Intrastate stock exchange could offer liquidity for crowdfunded investments.]

The concept has piqued the interest of area developers such as Sam Cummings, partner at Grand Rapids-based CWD Real Estate Investment.

“I think it’s super interesting and could really reduce the barriers to entry and ownership,” Cummings told MiBiz.

While the crowdfunding mechanism might not offer the amount of capital needed for larger, transformational projects, Cummings said it could help foster community pride and make it easier to accomplish smaller neighborhood revitalization projects that make sense, but might struggle to gain traction with traditional lenders.

Even the Michigan Bankers Association is supportive of the concept and wants to see how crowdfunding will work for commercial real estate.

“We think it will be a great source of supplementary funding for business startups and operations,” said David Worthams, the association’s policy director.


How it works

The process starts when entrepreneurs submit their projects to the portal, where they’re vetted by the MML and Fundrise. Projects that make the cut are hosted on the website for a flat fee. Fundrise also charges an ongoing service fee for investor management and documentation. The company then underwrites the deal and charges a percentage of the money raised, typically 2 percent to 3 percent.

Would-be investors need to sign up on the website for free to be able to search for projects. If they find one they’re interested in supporting, they can pledge a minimum of $100. The investment gets the individual a share of the limited liability company that owns the property and in return receives an annual dividend from the rent revenue paid by tenants, plus appreciation. Fundrise maintains that investors can expect to see returns of around 8 percent.

Most of the deals currently available on the Fundrise site are for between $300,000 and $1.5 million. Historically, the company has targeted infill redevelopment projects in emerging neighborhoods in 15 cities across the U.S., including Washington, D.C., New York City, Portland and Philadelphia.

MML officials believe the portal will attract similar types of projects in Michigan. By this summer, the MML plans to launch its own portal, CrowdfundingMI, to offer training on crowdfunding for entrepreneurs and investors, said Summer Minnick, director of policy initiatives and federal affairs for the MML.

The portal will also aggregate investment opportunities available on Fundrise and Localstake, another equity crowdfunding platform the MML is promoting across the state.
CrowdfundingMI will serve as a one-stop shop for anyone in Michigan to investigate deals available locally, Minnick said.


Why crowdfunding?

While developers working with national chains have the knowledge and resources to make projects work, an entrepreneur behind a small business startup such as a restaurant, brewery or boutique store might lack the familiarity needed to navigate through the real estate development process, Minnick said.

“Fundrise makes real estate investing easier and accessible for almost everyone,” she said. “It’s a natural extension and great complement to placemaking in our view. It gives a lot of control back to the community to help create places they want to be a part of.

“We think it could be a game-changer in community development.”

When Fundrise launched in 2011, the company was started out of the frustration that came with having to bend over backwards to convince institutional lenders that a community project had merit, said Dan Miller, president of Fundrise. That frustration, along with what Fundrise executives saw as antiquated barriers to real estate investing, made equity crowdfunding seem like the next logical step and one that could be done all online, he said.

“The idea in the beginning for our company was really, ‘Why can’t anybody be an investor?’” Miller said. “We didn’t really understand how it was possible that real estate investing was limited to only high net-worth investors. That automatically cuts out 97 percent of the population.”


A new frontier

Miller and the team at Fundrise believe the “citizen investing” model is going to be a much bigger story across the nation as other states take notice of how early adopters like Michigan, Georgia and Kansas are embracing crowdfunding.

The crowdfunding mechanism, made possible by the new state law known as the Michigan Invests Locally Exemption, allows Michigan-based companies to promote a capital solicitation to Michigan-based investors and removes a cap on the number of investors they can have.

Unaccredited investors may invest up to $10,000 into a new or existing business, and accredited investors can make unlimited investments. Issuers can raise up to $2 million if they make their financial statements available to investors and state regulators. If they don’t release their financials, they can raise up to $1 million under crowdfunding.

The exciting part for Miller is that Michigan’s crowdfunding laws are highly liberal and remove barriers and delays — including U.S. Securities and Exchange rules — that can bog down similar projects in other states.

Additionally, the community-driven investment model bypasses the need to court institutional lenders who are often uninterested in small deals or unfamiliar with tenant concepts, he said.

“We thought there had to be a better set of investors out there with that understanding of what a neighborhood is,” Miller said. “It’s about access and using the efficiency of the Internet to streamline the (investment) process. We think this model will be really helpful in those deals that are often harder to finance.”

While financing those projects might be more difficult, Miller said the success of the Fundrise model is predicated on allowing people the opportunity to invest in local projects they think fit their communities.

“I think Michigan will be the first state operating where we’ll really see the benefit of the viral nature of what something like this can become,” he said.

Still, with any real estate development comes risk, and Fundrise continues to draw scrutiny from many in the financial services industry, according to a report last year in The Washington Post. Advisers’ concerns ranged from investors’ options for liquidity, the firm’s experience in commercial real estate, the fee structure of the deals and potential conflicts of interest, the report stated.


Proving grounds

While the concept of online community-based investment in real estate is only in its infancy, Miller likened its adoption curve to the rise of e-commerce in the mid-1990s.

“It’s way early, but I think 10, 15, 20 years from now, even large-scale (real estate) investment will be done online,” he said. “There’s a good deal of education into how it works initially, but what we’re doing is giving people the ability to make real returns and stick their toes in the water.”

The developers of several projects in the Detroit area are planning to use the Fundrise portal, Miller said, noting that he hopes the city will serve as a proving ground for how the real estate crowdfunding model works.

Worthams of the Michigan Bankers Association said the consensus among its membership is that crowdfunding could be a good mechanism for local commercial real estate investment.

The ability to crowdfund initial capital could help entrepreneurs and small businesses bridge the financing gap between available equity and a traditional bank loan, he said. The group thinks crowdfunding could help spur more lending activity in the long run.

“We don’t really see any drawbacks or it being competition with what we do,” Worthams said. “We think it will enhance the number of opportunities out there to do commercial loans.”

At CWD — one of the most active developers in the downtown Grand Rapids market and in the surrounding suburbs, the principals are looking into the possibilities of using crowdfunding for projects that rely on a broad base of community support, Cummings said.

“There could be certain scenarios under which we could say, ‘Let’s look at how we can broaden the base of equity and the number of people who have a stake in our downtown.’ From that perspective, we love (the idea),” he said. “(We) have to do our homework yet, but I’m investigating it.”

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