“A Launch Pad for Real Estate Entrepreneurs”
While crowdfunding has taken off on sites like Kickstarter, crowdfunding has yet to change the complexion of commercial real estate investment, mostly because the real estate investment landscape remains bound to the elaborate tapestry of state securities regulations known as “Blue Sky Laws” and federal protections for unaccredited investors.
However, Groundbreaker.co, has taken a different approach to real estate crowdfunding by additionally sourcing project ideas from entrepreneurs. “We realized that the infrastructure that helps tech entrepreneurs launch their companies simply does not exist in real estate, so we built a launch pad for real estate entrepreneurs that otherwise couldn’t reach the institutional lenders,” says founder Joey Jelinek. Jelinek’s Groundbreaker.co provides the framework for real estate entrepreneurs to focus solely on their vision by assisting clients with the accounting, legal, marketing, and fundraising. Groundbreaker.co seeks to become the premier real estate incubator.
The Lending Gap
Entrepreneurs like Jelinek stand to take advantage of rising property prices across the country because they stand to fill a lending gap between institutional lenders and smaller local banks. This gap exists in the principal debt equity market between $1 and $5 Million for real property. Other firms like Cerberus Capital Management and Blackstone have developed arms targeting this market segment by seeking to provide debt and liquidity to the balance sheets of successful real estate entrepreneurs, which will allow them to expand their holdings. Groundbreaker.co goes a step farther by providing resources beyond capital to the entrepreneur.
Sourcing Local Support
Crowdfunding additionally offers an opportunity to source local support, and potentially mitigate the risk of local opposition to development. “It strikes me that if you’re offering local investors a seat at the table on a lucrative development, that local support will also pay dividends in the event that there is opposition to the project,” says Jelinek. Jelinek also speculates that such local support may augment the property’s long term yields: “Consider a retail development, soliciting local investment may incentivize some investors to shop there the same way that some investors support the companies they invest in on the stock market.” While the truth behind this theory is relatively unknown, evidence in support of this theory may spur private equity groups to enlist or purchase existing real estate crowdfunding operations in efforts to improve their yields and lower local barriers.
Risk of Exploitation
There is the notion that only riskier deals will be subject to crowdfunding, as only the best projects will fail to gain institutional financing. It is a reality that many real estate deals fail and investors take losses. After all, finance is about pricing risk, and real estate is no different. Crowdfunding in real estate has dealt with this criticism in a variety of manners. For example, most real estate crowdfunding sites vet the deals before making the investment offering, and some, like GroundBreaker.co, only earn their management fee if investors make money. Establishing concurrent incentives between “crowd-fund managers” and investors is certainly an important bulwark protecting investors, but disclosure is equally important. Crowdfunding sites increasingly publish a wealth of information on the investment opportunities, from full text partnership agreements, to site plans, and financials.
Here to Stay
Real estate crowdfunding stands to grow as the vanguard of the tech savvy generation Y seeks to disrupt tradition with innovation. “There is an opportunity to democratize real estate ownership through technology, and our generation is particularly well suited to disrupt the industry,” says Jelinek. Clearly this development is evolving rapidly, and regardless of the criticism, real estate crowdfunding is here to stay.
By Jesse Wright