I've been reading with great interest the articles by Ben Leybovich, especially the dilemma regarding obtaining non-recourse financing for the debt portion of deals. I think doing the larger deals the - GP/Syndicator + Limited Partners is the old way of RE syndication. There are many of these offered through PPMs and before banking reform, some I've seen had non-recourse loans attached to them. There is a trend in equity funding using 506c accreditation standards and sites like angel.co are allowed advertise for accredited investors where these individual investors can become syndicators of their own. Many successful investors form them with a 5-15% carry and other investors "back" them so when they want to make an investment in a startup, they have the money lined up (some on the site have $3M in backed investors). I'm wondering if you can pool a 35% equity raise (profit share + syndicator carry) and 65% crowdfunded debt (coupon + something "convertible" to equity). It has worked very well in venture capital. This way you get all the funding and acquire the property without banks. You then go enhance the value and refinance, recover some capital and distribute to the investors. The tricky part would be if you wanted to hold the investment, then the revenue streams have to be allocated accordingly.
I don't think you'd have a problem with this provided you have a good project, track record, etc. The crowdfunding sites favor simple deals though. Anything with a convertible feature will add complexity and confuse people. A confused mind says no. If I were you I would focus more on keeping it simple for the investors in the 65% debt tranche.
Good points @Bryan Hancock , I like what you guys are doing down there in Austin. Have you thought about expanding to North Texas?
I agree with Bryan - crowdfunding sites are out of the question. Realtymogul wants 20% down from syndicator, and while it might be possible to talk them down a bit, not by much.
Also, long-term leverage has to come into the equation fairly early on in terms of IRR. Interesting - I am going to think on this...thank you Paul!
Thanks for the reply @Ben Leybovich . Maybe these crowdfunding sites are coming at it from the wrong direction, making them mirror other business equity fundraising scenarios and not meeting the needs of the real estate investor community. BP could form it's own crowdfunding site, there is nothing proprietary about any of the popular real estate crowdfunding sites. I'm a member of most of them and there aren't very many deals to invest in and most of them are debt where you're basically being a HML.
A little birdy told me through my double secret probation network that you may just get your wish at some point in the future ;-)
Originally posted by @Paul Lopez:
I'm wondering if you can pool a 35% equity raise (profit share + syndicator carry) and 65% crowdfunded debt (coupon + something "convertible" to equity). It has worked very well in venture capital. This way you get all the funding and acquire the property without banks. You then go enhance the value and refinance, recover some capital and distribute to the investors.
Interesting idea, Paul, but I think it's probably unnecessary. The challenging component to raise is the equity portion (what you are calling the 35% portion). The crowd funding sites and / or your own efforts to raise capital from accredited investors is great for this piece of the capital stack. The debt portion (the 65%) is readily available these days in the form of bridge debt with better terms than I would expect to get from a crowd funding portal, and with greater certainty of execution. Bridge debt is specifically designed to be used in the manner in which you described. This is especially true in the > $1MM space. Smaller deals are a little more challenging.
Your structure is probably used in venture capital because low priced secured debt financing is less readily available, which isn't the case with real estate.
@Brian Burke , you wrote "The debt portion (the 65%) is readily available these days in the form of bridge debt with better terms than I would expect to get from a crowd funding portal" and I agree with that. @Paul Lopez , I don't know why you wanted to over-complicate the "debt portion" part with untested crowd funding. I would consider crowd-funding for the 35% *equity* piece, but based on discussions so far, crowd-funding is not ready for this yet, but I think it will be eventually.
@Michael Blank @Brian Burke what are the rates you expect from bridge debt in this instance? There are portals who do bridge debt financing. And I am also genuinely curious to know what would make a crowdfunding portal go from "untested" to tested in your eyes? Which criteria are you looking at? And what things would you like to see from portals?
Thanks @Michael Blank I was thinking we could get a non-recourse on the debt side from crowdfunding. I believe people are having trouble finding non-recourse loans when there is more than 1 person or syndicated entity on the 35% equity side. I can overcomplicate things, no doubt!
@AdaPia DErrico non-recourse debt is very common in the >$1MM loan space. If you are trying to do small deals it's more elusive but the larger the loan, the easier it is to get non-recourse, especially at 65% leverage. Lenders in this space also understand the structure of partnerships and syndications very well.
@Brian Burke thanks! I ask from the position of "being" a portal, in fact a short term lending crowdfund portal at that. Since crowdfunding is such a new "thing" but truly isn't anything new in terms of what real estate underwriting and risk pricing is, then it helps me to know what an experienced real estate operator or investor like yourself is looking for in order to validate or feel comfortable working with a CF portal. And on the topic of bridge debt, we also will give competitive rates after we've done at least preliminary underwriting and we like to stay competitive - ambiguous as that may sound. Your comment about the phone as portal made me smile because so much of the world's business is now done via mobile!
Thanks @Brian Burke I definitely need to think a bit bigger as I've not had experience going in for a loan greater than $1M, so it's good to know non-recourse is more common at that level.
You're not going to get any traction in the crowdfunding space competing with bridge debt in the 6% or so range. If your lender options are closer to 10% it gets a lot more interesting and I bet you can crowdfund the debt at that rate. Procuring debt from the crowd avoids tying yourself to a lender and gives you direct access to the capital markets. I disagree that there is no value in this. The value is, however, moot if you can find debt 4% cheaper for your loan scenario doing things the old way.
You have to ask yourself how valuable developing relationships with these crowd debt investors is with debt pricing that is close. For instance, if the crowdfunded debt was something like 8% and your deal supported it and the conventional debt as 7% then for a small loan a compelling argument could be made that the long-term benefits of crowdfunding the debt are superior because you'd presumably develop many lender relationships for life.
Something to consider...
I can see the value to establishing relationships in the crowd funding space (I should probably do that myself), but to play devil's advocate there is just as much value in establishing relationships with lenders. Not long ago I was trying to borrow a few million from Citigroup. The guys there said "you were the first loan we ever did from this office. Your name is on the wall". Talk about a relationship! It had been two years and the executives knew exactly who I was. This new loan sailed through. A relationship with a lender as large as Citigroup? Priceless.
How about this: borrow from a lender and get equity from crowdfunder and establish relationships with both disciplines in one deal.
Not trying to self promote, we structure deals like these frequently. Typically we will do a first deed of trust HML for say 70-90% of purchase price. Then you pool funds together for the 10% down, carrying and construction cost. Profits are then split based on percentage you put in. It is a very helpful model in a market where the average "fixer" will cost you $600,000-$1,500,000. Finding the deals are the hardest part, finding money is easy in my opinion.
Does anyone here have experience with realtyshares.com for syndication deals? They charge 1-2% as far as I can tell. I am looking to buy an apartment complex in Fort Smith, Arkansas in the 1-2M range.
RealtyShares is a solid outfit to consider. Tell Nav I said hi if you speak with him.
@Bryan Hancock Have you worked a lot with them in the past? How does it work exactly? For example, when do investors get paid? I know they can do an offering based on equity or debt and debt seems to be the better of the two if I want to keep all the equity in the property but the specifics are a little vague.
It depends on how the deal is structured. I am sure there are a million different ways you can structure payments to investors.
I haven't worked with them directly, but I know the industry very well.
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