2020 was the year of developers learning on-the-fly how to be more creative with raising equity for projects. Many needed to think outside the box if they wanted to get Opportunity Zone projects funded in the midst of a global pandemic. The growing trend of commercial real estate (CRE) crowdfunding can be optimal during this challenging time as many continue to expand on their development portfolio.
The most compelling aspect of CRE crowdfunding platforms, particularly as it relates to finding highly motivated OZ investors who are in an active capital gains event, is their ability to reach a massive universe of untapped qualified capital. These investors are actively looking for projects that meet their return criteria and often have a year-end deadline to meet for OZ deals in order to fully recognize the benefits of the program. This dynamic is the very definition of a “captive audience” who are proactively searching for what groups have to offer in the form of LP equity in a growth market.
THE BENEFITS OF CROWDFUNDING FOR OZ
The expanse of the reach these platforms offer goes well beyond anything many can ever do on their own. The “friends and family” option works well for smaller projects, but as companies continue to expand the size and scope of their pipeline, many need a more sustainable and repeatable model to follow in order to effectively raise the amount of equity needed to fund new development projects.
It was clear early on that the OZ investor is rather unique in multiple ways. For starters, the alternative to investing in a new project is paying a significant amount of your earnings in capital gains taxes, which nobody wants to do. They also have limited access to attractive OZ projects as many of them are handled privately through fund structures that are not necessarily available to the public if you do not know where to go. The demand is there for quality deal flow, but the supply of deals that an investor would actually want to invest in is limited by several factors. The result of these variables equals a highly motivated investor-base who is willing to move quickly once they can identify an opportunity that fits their criteria.
WHO TO TARGET TO RAISE OZ FUNDS
A factor many might not fully consider is the specific profile of the average investor. When raising equity on your own, many are targeting the most obvious groups with an interest – other Qualified Opportunity Funds, attorneys and high-net worth wealth managers who have a client base that are in an active capital gains event and established individual investors or real estate owners. One issue with these groups, however, might be to getting to them at the right time for their gains event when you are actively raising funds. What CRE crowdfunding can do is open up the investor universe to new groups -- the passive investor who may not have an established track-record of investing in commercial real estate. Many have no way to access this group directly without the use of the active marketplace of accredited investors that the reputable CRE crowdfunding platforms have created. This active marketplace didn’t exist just a few years ago and it has turned out to be the ideal marriage for individuals looking to place capital gains into OZ investments.
STRONG DEMAND FOR OZ DEVELOPMENTS
To show how powerful this crowdfunding tool can be, lets share an experience when we needed to raise a total of $8.5 million to close out the equity for a deal after we had raised a fair amount on our own. We knew there would be high demand for this opportunity given the product type, the market, and the year-end timing of bringing it out in November. What we did not anticipate, however, is just how strong the demand turned out to be. We ended up being oversubscribed and raising a total of $10.3 million in less than three minutes on the crowdfunding platform. We were told it broke a record for the fastest fundraise ever on that website and the variety of investors along with the amounts they invested was overwhelming. We were blown away by the efficiency and effectiveness of the process, especially when compared to doing it on our own as we had been doing previously.
THE FUTURE OF OZ CAPITAL RAISING
CRE crowdfunding can be a permanent solution that solves your future OZ fundraising needs. It is a proven process and the results continue to be impressive. Investors can also find you, not the other way around as it has been traditionally done, and that changes everything when it comes to how long you need to plan before breaking ground on a new development project. As an added benefit, the crowdfunding platform also facilitates the back-end reporting and distributions to every investor in each deal. This alleviates the asset-management headache and allows you to focus on the execution of the deal.
It has been said many times that CRE crowdfunding can be considered as “private equity for the people.” These platforms can democratize real estate investing in a way that has never been done before, and that is very exciting for the future of development projects.
Commercial real estate has traditionally fallen well behind other more innovative industries when it comes to the adoption of new and disruptive technologies, but there is no question that crowdfunding is here to stay in 2021 and beyond. Any serious sponsor should strongly consider this approach as they look for more creative ways to raise capital for their new projects in the current environment.
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