Real estate crowdfunding, better referred to as online capital formation, is a new kind of fundraising that excels at raising capital and securing new investors for real estate developers and operators (In commercial real estate, the sponsor is an individual or company in charge of finding, acquiring and managing the real estate property on behalf of the partnership. The sponsor is usually expected to invest anywhere from 5-20% of the total required equity capital. They are then responsible for raising the remaining funds and acquiring and managing the investment property’s day-to-day... More). Investor Relationship Management (IRM) is the discipline of effectively and efficiently communicating with investors throughout their lifecycle and involves the use of software that enables sponsors to streamline the management of large numbers of investors. Combining online capital formation with strong IRM practices and solutions creates a competitive advantage for real estate sponsors; a combined software and services platform that they can use to rapidly grow their investor networks while also modernizing their fundraising and investor management processes.
In this article we provide an overview of online capital formation and IRM solutions, highlight the synergistic benefits delivered from these combined efforts, and provide several examples of how real estate sponsors are using the platform to significantly scale their investor networks while streamlining fundraising processes.
The Beginning of Online Capital
Online capital formation got its start on September 23, 2013 with the passing of Title II of the Jumpstart Our Businesses (JOBS) Act which created the Regulation D 506(c) offering capability. For the first time in nearly 80 years, U.S. businesses could publicly solicit investments from accredited investors. Since the passing of Title II, numerous online marketplaces have appeared, each designed to facilitate the efficient promotion and transaction of real estate investment offerings. A handful of these have cornered significant portions of the rapidly-growing market, Realty Mogul and RealtyShares for single-family residential offerings, and CrowdStreet for commercial real estate offerings.
Sponsors are the primary benefactors of this large and accelerating trend towards online fundraising. Real estate online capital formation raised an estimated $2.5 billion in 2015 and is projected to exceed $3.5 billion in 2016. This growth is the direct result of the value these marketplaces deliver to sponsors; specifically efficient capital formation, exposure to accredited investors outside their geographic boundaries and current networks, and less onerous institutional provisions. Direct-to-investor marketplaces, such CrowdStreet, enable sponsors to gain access to new investors for current and future investment offerings, unlike SPV-based marketplaces like Realty Mogul and RealtyShares, where investor identities are obscured behind a special-purpose vehicle such as an LLC.
An example of a sponsor realizing this value is Intellistay Hospitality and their Intellistay Lima offering on the CrowdStreet Marketplace. IntelliStay Lima is an existing Properties are considered value-add when they have management or operational problems, require some physical improvements and/or suffer from capital constraints. By making physical improvements to the asset that will allow it to command higher rents – remodeling the kitchens in multi-family, installing more energy efficient heating systems in a medical office, etc. – improve the quality of tenants and increase... More hotel investment opportunity in Lima, OH. The Lima opportunity was listed on the CrowdStreet Marketplace as a public Regulation D 506(c) offering and generated an impressive $3.52 million from 109 investors. Since CrowdStreet is a direct-to-investor marketplace, Intellistay also effectively acquired 109 new accredited investors for their business.
While any sponsor would love 100+ new high net worth investors, most would struggle with the additional overhead created by investment offer transactions and ongoing management of these new investors. This is where Investor Relationship Management (IRM) software comes in.
How IRM Software Works
Typical IRM software automates and streamlines many of the processes associated with investor relations and online capital formation. Common features include secure investor portals, investment performance reporting, and investor self-serve documents. CrowdStreet’s IRM solution offers these foundational capabilities, plus highly-requested additional CRE-focused features including investor distribution management, downloadable K-1s, and support for multiple kinds of An investing entity is the vehicle that makes an investment in a commercial real estate offering. On the CrowdStreet Marketplace, offers must be made by an investing entity, in which you may be a member. You may be the only solitary member or a co-member with other investors. Common entities are an LLC, Self Directed IRA, Trust... More.
It is clear that IRM solutions complement direct marketplace investor acquisition and help reduce overhead. However, one area where most solutions fall short is that they are strictly post-funding management tools, leaving sponsors responsible for the tedious task of importing/exporting investors between funding sources and IRM software.
CrowdStreet’s offering is unique in that it’s the only fully integrated online funding and IRM solution on the market. With CrowdStreet, sponsors can post a new investment offering, review/rank and correspond with investor leads, digitally transact investment offers, and manage investors post-funding – all through a single, easy-to-use interface. No other solution gives sponsors the same ability to secure funding, acquire new investors, and efficiently manage investors before, during, and after funding.
Our unique offering makes it easy to see why over 60 customers and over $1.7 billion in commercial real estate assets have chosen CrowdStreet as their secret weapon for online capital formation. To learn more about how CrowdStreet can help fund and grow your commercial real estate business, please contact [email protected].