For over 80 years, only accredited investors (those making over $200k per year or with more than $1 million of net worth excluding their primary residence) were allowed to invest in private real estate investment offerings. Non-accredited investors (everyone else) were free to invest in publicly traded REITs, however these investment vehicles often came loaded with significant fees that diluted net returns and also exhibited correlation to publicly traded equity markets. With the enactment of Title IV of JOBS Act and, specifically, via a Regulation A+ exemption – investors of all sizes are now able to directly access and benefit from private real estate investment offerings.
What does this mean for investors?
For decades, direct private real estate investments have been dominated by the financial elite. High net worth individuals, family offices and institutions (including endowments such as Harvard’s and Yale’s) have used direct real estate investments as a means to supercharge portfolio returns and regularly trounce more pedestrian portfolios (e.g. 60% equity / 40% debt). The most frequently cited reason for gating access to the best private real estate deals across the country has been the asset class’s capital intensive nature. Raising the required amount of equity within the required timeframe to take down private deals with smaller investors was simply too cumbersome. And historically speaking, this was a fair statement. However, with the advent of:
- Legislation, such as Regulation A+ that enables up to $50 million of capital to form per deal
- Technology that enables aggregation of large numbers of investors
- Online platforms (such as the CrowdStreet Marketplace) that can widely disseminate these offerings
…the old guard has a new and formidable challenger that is gaining momentum. Non-accredited investors are now beginning to gain access to the same types of institutional quality real estate deals historically reserved for high-net worth individuals,family offices and institutions.
What will those Reg A+ offerings look like?
Realistically, Reg A+ offerings are likely to be structured in a fund or REIT format rather than single property offerings. This is partially because those vehicles are proving to more efficient when working with a larger pool of investors but mostly due to the fact that the time required to gain SEC approval for a Reg A+ offering is too long fit within the confines of a single asset contract period. For example, CrowdStreet’s first two Reg A+ offerings are a diversified REIT sponsored by a Virginia-based group and focused on southeastern states and a multifamily fund sponsored by a Southern California-based investment group. Fund and REIT structures can accommodate capital raises that are large enough to reach the critical mass necessary to acquire institutional quality commercial real estate assets. Larger offerings also help to offset offering costs.
How does an online Reg A+ deal compare to other non-accredited real estate investing options?
Non-accredited investors already have access to real estate mutual funds, publicly traded REITs and public non-listed REITs. The main advantage that Reg A+ deals offer investors via an online channel is lower loads. Traditionally, loads on non-traded REITs have ranged from 12% to as high as even 20% of the investment amount. Put another way, if only $.80 on the dollar of an investor’s original investment is actually deployed into physical assets that means that it requires a 25% return from those assets to simply provide investors with a return of capital, let alone a return on capital.
The efficiencies that are being generated by making investments available directly to investors through online platforms are reducing loads. The industry is already seeing sales commission loads that were historically 7-10% immediately dropping to 3-6%. These immediate reductions are translating into total loads (after factoring in all offering costs) of 8-11%. All things being equal, a 9% total load online offering stands at a huge advantage to a 15% total load off-line offering. More dollars invested into physical assets means that both lower returns are needed to generate a positive return and that returns are amplified since the invested amount is larger at inception. It’s that simple.
What’s next for real estate crowdfunding?
Dedicated sponsors that are bringing Reg A+ deals to market will likely blaze a trail for others to follow. The collective hope on behalf of the crowdfunding industry is that building a track record of offerings will generate more investor attention to the real estate crowdfunding space. At the same time, as online direct-to-investor channels continue to scale, CrowdStreet anticipates further load reductions with total loads dropping as low as 4-6%. Once total loads reach the single-digit range, they will match those of private Reg. D offerings and, by doing so, realize the original vision of the online direct-to-investor real estate investing.
CrowdStreet will continue to offer Reg D offerings on the CrowdStreet Marketplace for accredited investors, as well as a selection of Reg A+ offerings that will be available to all investors. CrowdStreet’s goal in stepping into the Reg A+ arena for non-accredited investors is to fulfill part of the promise that we set out to achieve when we first launched the CrowdStreet Marketplace in 2014, namely to democratize commercial real estate investing and make it more accessible to all investors. Reg A+ is simply the next step in that evolution.
To learn more about online real estate investing, please visit the CrowdStreet Investor Center.