The commercial real estate industry today bears little resemblance to the industry even just ten years ago. It continues to be one of the strongest and most attractive markets for investing, but new legislation and innovative technology are continually impacting most aspects of the industry, including the capital raise process. As KPMG says, “Numerous forces are causing investors to look to new frontiers and owners to change how they operate and deploy capital…including the new environment brought about by [legislative] reform.”
Read ahead to take a quick look at how crowdfunding is impacting the commercial real estate industry. For a deeper dive, go ahead and download the free eBook now: Raising Equity in the 21st Century: A Guide to Commercial Real Estate Crowdfunding.
The Traditional Equity Raise
For many years, commercial real estate owners had few options to raise capital for their projects. They could put in the money themselves (i.e. via personal wealth), secure a loan from a financial institution, or acquire funding from family and friends. Not only was this an inefficient way to raise capital, but owners could only pull from a very limited pool of potential investors. This situation also meant that because there were fewer investors involved, each had to contribute a larger amount of capital, so many people were excluded from even having the opportunity to participate.
The 21st Century Equity Raise
Until recently, CRE owners were not allowed to solicit investments from the general public. However, the 2012 JOBS Act relaxes many of those prior-existing securities regulations, serving to expand rather than limit or restrict marketplace activities. As a result, the JOBS Act effectively created a new source of funding, opened up a new pool of investors, and enabled individuals to invest in assets that they wouldn’t otherwise have access to. Title III in particular, commonly referred to as the CROWDFUND Act or the Capital Raising Online While Deferring Fraud and Unethical Non-Disclosure Act, played a major role in these changes.
In short, crowdfunding refers to the pooling of resources to fund a project. But despite its status as a 21st century buzzword, the idea of crowdfunding is surprisingly not a new one, having been around in some form since the 1700s. Alexander Pope crowdfunded the translation of the ancient works of Greek poet Homer, Mozart crowdfunded a piano concerto, and Joseph Pulitzer crowdfunded the pedestal for the Statue of Liberty. In present-day, the internet has enabled these activities to take place on a much larger scale, helping to create a popular method of raising money. And while traditionally crowdfunding was used to support personal endeavors, that is no longer the case. Crowdfunding for commercial real estate is considered by some to be the next wave of the sharing economy, where we have transitioned from sharing “stuff” (à la cars with Uber and Lyft and living spaces with Airbnb and HomeAway) to sharing value. Thus, crowdfunding has evolved past its donation-based fundraising origins, and the model has matured to become an effective and meaningful way to raise capital in the world of commercial real estate.
CRE crowdfunding lowered traditional barriers to investing, leveled the playing field, and essentially democratized access to capital. Now, with as little as $5,000, individuals can invest in apartment buildings, hotels, shopping centers, office buildings, and other commercial properties. And the smaller minimum investment means that investors can diversify across types of property, geographies, and even property owners. The outcome is that raising capital has become easier, cheaper, and faster.
It’s important for both CRE owners and investors to understand the trends and evolving challenges within the industry so that they can take advantage of new and emerging opportunities. To learn more about raising equity in the 21st century, download this free eBook: A Guide to Commercial Real Estate Crowdfunding.