Real Estate Crowdfunding is Really Property Syndicates 2.0
Real estate crowdfunding is a new spin on an old concept, the property syndicate. It’s real estate syndication 2.0.
Crowdfunding comes in so many variations that it is tricky to give it a clear definition. But let’s try to clear up the confusion.
Simply put, real estate syndication is when numerous investors pool their funds to buy real estate. The modern city would not exist without property syndicates. Commercial real estate would be out of reach for all but a few investors without the limited liability corporations and other joint ventures that allow group investing in real estate.
The 20th Century gave us fundraising for commercial properties in the public equities markets through real estate investment trusts, or REITs. In 2012, the JOBS Act further changed how investors could come together to fund commercial real estate deals. It’s around then, or just before, that the word “crowdfunding” began to be used for real estate.
Crowdfunding originally got its commercial start in the late 1990s, in a completely unrelated field: music. In 1997, a British rock band raised money for a reunion tour through online donations. Soon, other musicians started to finance their projects through donations, and ArtistShare launched in 2003. Sites such as Indiegogo and Kickstarter followed, bringing online donations to the arts, social causes, inventors and small businesses with ventures based on new ideas.
When credit markets tightened after the 2008 meltdown, crowdfunding emerged as an alternative source of capital. Digital funding platforms proliferated, linking entrepreneurs with angel investors. Platforms such as MicroVentures for tech startups and CircleUp for consumer products found new sources of capital online.
Online connections shortened the previous eight- to 12-month process of finding investors and negotiating a deal, according to David Freedman and Matthew Nutting in “Equity Crowdfunding for Investors” (Wiley, 2015). But such connections also upped the ante in many cases, as some online investing platforms sought larger sums, which required them to approach only accredited investors with a high net worth.
While these efforts were no longer campaigns financed from “the crowd,” the crowdfunding name stuck.
In 2012, real estate companies were able to take a leap forward with the Jumpstart Our Business Startups (JOBS) Act. The JOBS Act allowed “quiet deals” in which prospective investors could certify their qualifications as high net-worth investors without submitting bank statements and tax returns. Depending on which of three Securities and Exchange Commission rules an online real estate syndication invoked, notes Development Magazine, the managers of such syndications could raise unlimited amounts of money from accredited investors; significantly reduce their reporting obligations; include specific numbers of non-accredited investors; and advertise anywhere.
In the Harvard Business Review, internet analyst Larry Downes called the JOBS Act “crowdfunding’s big-bang moment.” By allowing real estate syndicators to offer deals to accredited and non-accredited investors, the JOBS act inspired a broader and more creative array of deals and attracted a bona fide “crowd” of new investors—and a new name. Indeed, research company Massolution estimated that crowdfunding for real estate jumped to $2.5 billion last year, up 2.5 times the 2014 total.
The JOBS Act democratizes property syndicates by enabling crowdfunding. Real estate deals that were available only to institutional investors now are within reach of people saving for retirement, without the volatility of public real estate equities or the high front-end loads of non-traded REITs. And now, amendments to the JOBS act that took effect in April allow anyone to invest $2,000 a year, with higher amounts based on income or net worth.
At Origin, we provide private real estate funds for investment to accredited investors. Think of it as crowdfunding or as property syndication. Either way, it’s here to stay.