In 2012, the JOBS (Jumpstart Our Business Start Ups) act was passed by Congress, thereby opening the door to general solicitation for private securities offerings in commercial real estate. At the time, many of us who raise capital for our own commercial real estate investments felt somewhat euphoric at the possibilities. The ability to market private securities offerings was going to open a flood gate of capital into privately held real estate assets. Fast forward to 2018, and the results have not quite been what we had hoped or expected.
Over the past 6 years, we have raised capital for our investments from friends, family, trusts and family offices. The process is inefficient. However, we have been able to raise approximately $20 million dollars of equity with this approach. We were relatively happy with this amount and expected the JOBS Act to enhance our efforts. However, as we became aware of the lack of regulatory direction, the high expense, and lack of affirmative capital commitment from crowd funding sources, we became less enthralled with the concept.
What has been so disappointing about the JOBS Act? From a sponsor’s perspective, it has been the lack of real reliable equity delivery from crowd funding capital raising platforms. In fact, we have watched many startups with a focus on capital generation through on-line sourcing or “crowd funding”, fail. Others are foundering or failing. Fees, transparency, and lack of internal resources to support due diligence have been issues as well.
One issue that we believe has impeded the amount of capital raised through online marketing is the lack of an advisory element for investors. Historically, brokers and/or financial advisors have worked with investors in evaluating real estate investments. Since crowd funding does not typically involve an advisor, it is difficult for investors to evaluate sponsors and their proposed real estate investments. Track record is of course very important to evaluating the sponsor. However, other things like fee structures, investment strategy and risk profile of the investor, are critical to the efficacy of raising money on line. Without an advisor, the leap of faith that investors take is even greater. This has made adoption of these platforms even more difficult. Raising capital for real estate investments is simply not an on-line game…yet.
Momentum is picking up. Over the past few years Congress has refined the JOBS Act fully approving all its provisions in May of 2016. With a clear idea of the regulatory environment surrounding Crowd Funding, capital flows should start to see some traction. According to Kickstarterforum.org, global commercial real estate equity crowd funding is expected to total $8.2B in 2018. This is up from $400M in 2013, and $3.5B in 2016. Given that the global real estate equity markets in 2016 were $217 trillion ($8.2 trillion in the US), there is still a lot of room for growth. The future should be brighter as millennials start to earn higher wages and begin looking to technology to make investments into commercial real estate.
Despite continued growth, the elephant in the room for Crowd Funding commercial real estate is still liquidity. Investors will typically lock their capital up into these investments for anywhere from 3 to 10 years.
This is a fundamental challenge for capital flows into commercial real estate. Investors like to know that they have access to their capital if they need it. Sponsors, on the other hand, don’t want to spend what it takes to create a truly liquid investment platform (aka traded Real Estate Investment Trust) because of the high cost. Enter the next new thing, Crypto Currency.
How can Crypto Currency impact investments into real estate? Efficiency and cost effectiveness. The potential efficiency of tokenizing real estate is hard to describe in just one post. Utilizing tokens capitalize commercial real is dependent upon having the appropriate protocols in place to ensure that compliance with securities laws are met. Currently, there are a few technology companies who may have figured out how to do this out globally. If they are successful, raising capital into private investments through secure tokens is just around the corner and will open capital flow for sponsors with limited up front expense.
Another aspect of Crypto Currency’s potential influence upon capital flows into real estate is liquidity. Ostensibly, you can own a coin that is a $100,000 interest in the Empire State Building. If you want to sell it, and Mary from Florida wants to buy it, so long as the protocols are met (done with a simple Crypto transaction known as a smart contract), you can sell it for whatever price she is willing to pay. The result is a highly efficient trade mechanism for single or multiple real estate assets. This is something that has never been done before in the private real estate investment space and we find it compelling.
Are you a believer in Crypto Currencies? If not, then you might not be thinking generations ahead. One of my good friends who is a communications professor at Pepperdine recently shared a story with me that I think is germane: Her students filled out a survey relative to how important technology was to them in their lives. Almost every student in the class agreed that they just wanted to find a way to go through the day with as little personal interaction as possible. They wanted to order their food, text or Snapchat their friends, figure out their homework, do their banking, etc., without having to directly address humans in any of these tasks. Without commenting on this socially (and I could go on), the message is clear. The next generation of investors in commercial real estate are going to need more than we are currently offering them. They are going to need more access to better investments, greater transparency from sponsors, increased access to easily understood due diligence, and liquidity.
In over 31 years, I haven’t seen a solution for creating this kind of fluid capital flow. However, if you believe that technology can serve every corner of the economy, then commercial real estate can and should be served as well. More importantly, whether it is Crypto or Crowd Funding that ultimately take hold, the next generation of investors (our kids and grand-kids), will be looking to technology to make these investments simple and efficient. This could, and we expect it will, create the kinds of capital inflows we were excited about back in 2010.