Crowdfunding - Pre-sales

[Brian Dwyer]

This is a question for you crowdfunding experts out there: Have you considered or heard about a real estate crowdfunding model that utilizes pre-sales?

For example: If I am "kickstarting" my business selling widgets, I may say "For X dollars you get a widget when once I have made them."

In a real estate deal, however, usually we are selling shares of the entity that ultimately will own the project once completed. But what if you are financing a condo project, and decide to pre-sell some of the units to the crowd (i.e. for $20,000 you have right of first refusal or option to buy a particular unit for $100,000 upon completion). You, the developer, have built in a certain amount of profit to this arrangement, and assuming you have controlled for costs, reduced the overall risk of the project. So, basically you are doing the same thing as the widgets business but at a much larger scale.

What I am asking is: What are the legal implications of this? Is this being done currently, or being considered?

[Jilliene H.]

@Brian Dwyer I think this is possible. There will likely be tax implications you have to disclose to the investors in the PPM or Operating agreement, but I see no reason why you could not do this legally (with smart lawyers representing you!).

We're doing something similar (but different), but with a transaction we are crowdfunding right now. We're crowdfunding the Hard Rock Hotel in Palm Springs and in addition to giving investors a share of the income from the hotel and appreciation when we eventually sell or refinance the hotel, we also have "perks", including 25% off room rates, free cabanas at the pool, free room upgrades, etc. These perks are somewhat like your "option" for investors to buy condos they help finance at a discounted rate.