Earlier this year, online crowdfunding platform Fundrise pooled enough money to buy a $5m share in tax-exempt bonds backing Lower Manhattan’s 3 World Trade Center.
Though a tiny slice of the full offering (developer Larry Silverstein sold more than $1bn in bonds to finance the 80-story tower’s construction), the deal showed that you didn’t need to be a bigtime real estate investor to own a piece of a high-profile asset; all it took was $5,000.
But the success of Fundrise — and debt crowdfunding in general — relies not on iconic buildings, but rather on areas that have been largely “ignored” by mainstream lenders, said company co-founder and president Daniel Miller this week at the National Association of Real Estate Editors (NAREE) annual conference, held at the InterContinental Miami.
Despite its critics, and while admitting that “it’s still a very niche part of market,” Miller defended the long-term viability of his lending platform, suggesting that urban infill locations driven by middle market real estate investors are the niche that will allow crowdfunding to become a CRE mainstay.
Miami’s trendy Wynwood Art District, for example, is home to more than 70 galleries, museums and collections, but projects still struggle to attract the type of financing that’s flowing into Downtown Miami.
“There are still a lot of pockets being ignored, where it’s very difficult to get financing,” Miller said, noting that Fundrise’s lending platform was born from “frustration with traditional groups that would not do deals smaller than $30 or $40 million.”
Through smaller deals — typically up to $10m in addition to a bank loan — Fundrise occupies between 65-85% of the capital stack on loans made to middle market market borrowers doing about three to five deals per year.
The efficiencies of an online-based platform are allowing Fundrise to pass on 12% returns directly to investors (after taking a fixed 50bps fee), Miller said. The company president after all has previously stated that his goal is to bring investors “top flight returns like Blackstone, but with a superior investor experience.”
“It’s a more efficient way of connecting borrowers and investors… it creates trust and transparency,” he said at the NAREE conference.
The platform and others like it have raised both money and hope for the future viability of crowdfunding in commercial real estate. One block away from the World Trade Center site, at 17 John Street, another crowdfunding platform, Prodigy Network, raised a reported $25m from investors for the purchase of a site that will spawn a new extended-stay hotel.
More recently, just two months after crowdfunding platform Realty Mogul launched a commercial lending division, the online marketplace raised $250m of capital that will fund bridge and senior loans as large as $25m.
But hardened commercial real estate lenders argue that, while online crowdfunding may serve a small niche, its “impersonal” nature will never take the place of traditional relationships with borrowers and fellow lenders in larger markets.
One lender, speaking to Real Estate Capital by telephone, said his firm would not feel comfortable originating a whole loan and, for example, selling the mezzanine piece off to a group of investors tied to a website.
“Commercial real estate is a people business and it always will be,” he said.