Just closed first deal as Sponsor using Crowd Sourced CRE Equity

I’m in the development, investment and management business in greater Boston area. We just closed our first acquisition using one of the national crowdfunding platforms as majority LP equity. Total deal capitalization was approx $15.5M and they raised $4.4M as 90% LP. All prior deals have been more conventionally financed via institutional partnerships or HNW, friends &amp; family. This was an educational process for sure but at least initially a successful one. We will likely do more. Curious on others experience in this still small but quickly growing niche of CRE investment?
[{"id": "gu7odom", "text": "What type of placement fee did the crowdfunding platform charge and did they negotiate more favorable pref, splits, acquisition fees than you typically get from your HNW partners?\n\nWe may look to crowdfunding on a deal that is too small for our typical partners so curious how it may ultimately compare from a GP perspective.", "replies": [{"id": "gu7p2l8", "text": "Great questions. Following as we're in a similar situation as well and just starting to dig into this method as well.", "replies": [], "depth": 2}, {"id": "gu7uft2", "text": "Additionally curious here. We use a more traditional fund structure but distribute through RIA\u2019s. We avoid the crowdfunding market holistically because the RIA\u2019s say they\u2019ll stop working w us, unfortunately.", "replies": [{"id": "gu95h3e", "text": "Ria?", "replies": [{"id": "gu9aizk", "text": "Registered Investment Advisor", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "gu8p7sc", "text": "Good questions. $15k platform posting fee (Sponsor paid as part of equity contribution) plus $1400/investor in onboarding fees. Final subscriptions came to 127 investors. Also legal and marketing fees totaling $25k. All project costs we included in final underwriting. They act as Admin Member going forward and are paid 1% annual asset management fee plus 10% of the sponsor promote. We obtained favorable promotes on our terms plus were able to negotiate a split on the AM fee (was 2% we agreed to split 1% each). We also handle prop Managment, construction management and leasing and are paid market fees. Also negotiated favorable acquisition fees as we brought deal off market. \n\nSponsor had min equity requirement net of fees which came to around 10% total. Could have put in more if we chose. Obtained conventional bank debt at 65% on solid terms. Debt was a grind raising over mid to late 2020! Markets were terrible but got it done. \n\nSurprisingly a lot of appetite for the deal. Interesting value add mixed use commercial different from typical Multifamily offerings on the platform. Pledged interests were over $6m and achieved final funded commitments of the $4.4 we needed.", "replies": [{"id": "gu9t8g9", "text": "Do you mind sharing what platform service or is that confidential?", "replies": [], "depth": 3}, {"id": "guaosb4", "text": "Really appreciate the detail. Sounds fairly reasonable overall. Did you guys push back at all on giving up a piece of the promote or is that pretty much a non-starter?\n\nGreat job getting the debt secured in this market the last 12 months, I\u2019m sure that couldn\u2019t have been easy. Anything that isn\u2019t multifamily has seen a lot of scrutiny, especially if there\u2019s a lease-up component which it sounds like this project has.", "replies": [{"id": "gub7t0f", "text": "Yes exactly. This was a real value add play. Strong in place cash flows helped but a big capital improvement plan plus lease up. Wasn\u2019t easy! Didn\u2019t really push back on promote share it was their standard deal structure. Felt it was fair given the rest of the deal structure.", "replies": [{"id": "gub859h", "text": "Thanks again for the detail. Good luck, hope you guys crush your underwriting!", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gu7v0es", "text": "Congrats! We are teeing up a $55mm core+ stabilized asset to bring to a crowdfunding platform. \n\nWhat kind of promote structure were you able to achieve? Also, and snags with fundraising, or did there appear to be a lot of appetite?", "replies": [{"id": "gu8pmfy", "text": "See my replies above. We weren\u2019t sure what to expect but process was relatively smooth (once we better understood how it all worked! Ha.) and appetite was strong with full raise achieved.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gu7xk06", "text": "Any insight into overall structure of the deal?  Anything notable about equity waterfall or splits? What type of debt financing?", "replies": [{"id": "gu8pgim", "text": "Typical 90/10 with waterfall promote. 10% pref then 75/25 up to 16% and 55/45 above 16%. It\u2019s a real value add deal we\u2019ll be investing $3m+ in base building improvements plus another $3m in TI and leasing efforts. But solid historic cash flow going in.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gu8grip", "text": "Congratulation and good luck with this project !  \n\n\nI am new guy here so please excuse me for my basic question(s). \n\nAt the moment I am exploring some investment opportunities in CRE and I'll super appreciate if you will have enough time to provider me with your answers.  \nAre those crowdfunding platforms structured the same way like indigogo etc. ? I mean do they operate in the same way ?   \nHow much money you need to bring on the table to open a successful campaign and what's the debt/equity ratio ?  \nHow big is your team ? I assume your are like 4-5 RE professionals with PE industry background, am I correct?  \nCan European investors participate on those investment platforms?  \nMaybe is this against subreddit's rules but can you share a link to this platform or DM me?  \n\n\nThanks!", "replies": [{"id": "gu8q28c", "text": "I haven\u2019t used other cf platforms but my sense is the cre platforms are a bit differently structured including ongoing asset and investor management. But the premise is the same - they are tech platforms not investor partners and the sponsor runs the deal utilizing their tech and investor base. But the cf admin is your single point of contact and handle all back of house investor matters - so we don\u2019t have to interface with any of the 127 investors who subscribed. \n\nWe had to bring min of 10% to the table net of fees (acquisition etc) which is this deal was came to $500k. Conventional bank debt 65% max LTV including acquisition loans plus lines for Capex and \u201cgood news money\u201d for TI and leasing.", "replies": [], "depth": 2}, {"id": "gu8q746", "text": "Oh also were a smaller group but growing. We have 7 full time professionals between the partners and core employees plus around another 10 facilities managment folks who work at the various properties.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gu8hevv", "text": "Never used any Crowd sponsor before just looking into it at the moment. Your experience thus far is helpful.", "replies": [], "depth": 1}, {"id": "gu8r7kh", "text": "Congrats!  I have been looking at crowdfunding for some of my deals.  I've had the same group of guys that have been lending to me for over 20 years so it is little to no hassle at this point, they're all in the 70's or older now and I want to expand to do larger projects so this may be the best way.", "replies": [], "depth": 1}, {"id": "gu91blu", "text": "I have thought about trying a CF platform and was wondering what the deal looks like.  This is super helpful.  I have heard that their vetting process is painful, what was your experience with that?  I imagine they are careful who they work with.  Are they looking at your UW and experience?  Any details?", "replies": [{"id": "gu9h58e", "text": "Yes vetting is extensive and very competitive. Sponsor experience and track record is huge. Didn\u2019t hurt we had a previous relationship with the CIO from his prior days at a large cre PE firm. Obviously they want to find deals that are good matches based on their registered investors history and interests but essentially it boils down to Sponsor record and proven ability to perform.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gu99o8e", "text": "What crow funding platform did you use? Im looking into the same situation on a deal. PM if you dont want to share\n\nTHANKS", "replies": [], "depth": 1}, {"id": "gu9be4m", "text": "As someone looking at investing in CRE via a crowdfunding platform, thank you for the feedback. I am an attorney by trade and work tax/corporate/M&amp;A in-house, so I'm on the periphery of CRE deals, but rarely in the thick of it, and my employer either uses conventional financing or cash. I was wondering what the structure looked like and how it looks from the developer's side, and this answers it. \n\nI am wondering, however, why you would agree to give up a 90% LP share for less than 30% of the cash. Maybe I'm just ignorant of the norms.", "replies": [{"id": "gu9hoke", "text": "90% of the total equity, not total capitalization. They raised 90% we invested 10% of the equity. The balance was financed with conventional bank debt. Acquisition loan at 55% LTV ultimately maxing out at 65% LTV after capex program and TI, leasing funds.", "replies": [{"id": "gu9o1cb", "text": "That makes more sense. Thanks for the explanation. My employers don't like to leverage themselves (old money and the RE end of the business is just ancillary to the operations), so I'm still trying to learn the different types of financing and the risks associated with each.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gu9g5fm", "text": "Just curious about crowd sourcing, how does this avoid securities regulation requirements? Or do you have to follow specific rules and disclosures related to that?", "replies": [{"id": "gu9i3hd", "text": "It doesn\u2019t avoid securities regulations at all. Our lawyers had to file all the requisite Form D and blue sky filings. It was actually fairly cumbersome given 100+ investors across the country. They had to file in over 20 states. Most allow electronic but not all. Fees added up too but cost of the deal.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gu9idt5", "text": "Congrats on the closing.  Why did you pursue crowd sourced equity in this circumstance?  Was it a deal-specific decision or, like you said, mainly for educational purposes?\n\nEdit - also, did you use traditional financing on the debt side?  What were the underwriter\u2019s thoughts on the crowd sourcing piece?", "replies": [{"id": "gubijrp", "text": "Both state of the finance markets in 2020/2021 and educational. Ran deal past our typical sources who passed due to market risks. Bit too big for an internal f&amp;f raise ourselves so we pivoted to the crowdfund which is essentially a large f&amp;f / HNW raise but with a single point institutional contact administering it all. As I said worked out well given our options.", "replies": [{"id": "gubvu26", "text": "Very interesting - thanks!\n\nHow did you source the deal?  Safe to assume it was off-market?  Hard to imagine you had the time to throw this all together during a competitive or visible bid process.", "replies": [{"id": "gud09iy", "text": "Yes off market. Long time multi generational family ownership. Built the relationship over several years. Lots of twists and turns - complex deal and a little global pandemic added to the fun!", "replies": [{"id": "gudfc0l", "text": "Well done!", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "gubim74", "text": "Yes traditional debt financing. I replied to similar comments above. Thanks.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gu9s71o", "text": "Used a large crowdfunding platform back in 2018 after we were introduced to it by a partner. \n\nPartner did most of the marketing to get it launched on the site but we provided the deck and all investment data. Filled our capital raise in under 24 hours. Think it was $3 - $4mm but can\u2019t remember specifics. We were shocked. I want to say we ended up with approx. 50 subscribers. \n\nThis was a solid deal but too small for our primary lenders. Returns met proforma projections. \n\nWith all of that said - doing our DD of the crowdfunding site - we saw some TERRIBLE deals with absolutely outrageous projected returns. These were deals or properties we knew about off market - and never could have realistically modeled the same returns. Think a lot of snake oil selling going on out there. \n\nIt seemed sketchy to us due to the quality of other deals on the site - but as I said - took a day to raise the cash we needed, and never looked back. I don\u2019t think they have used crowdfunding on any other deal since though.", "replies": [], "depth": 1}, {"id": "gu9vasf", "text": "Wow, congrats!\nI'd love if you can elaborate on the debt side of working with crowdfunding?\nI've done many loans as a borrower but not worked with crowdfunded equity.\n\nWas it harder to find a lender?\nHow did you find them eventually?\nHow does recourse work?\nWho does the lender underwrite?\nWhat else is different about debt on a crowdfunded project that might not be obvious?", "replies": [{"id": "guakrhz", "text": "It wasn\u2019t the crowdfunding equity that made finding debt any harder it was simply the state of the debt markets in general mid pandemic. First and foremost the lender underwrote the deal and us as Sponsor. They had to approve the platform agreements with the crowdsourcing group but ultimately treated it like any other majority LP equity. Sponsor had certain limited carve out guaranties but we never sign personally on any repayment guaranties. Not worth the risk we\u2019d rather pass on the deal. So far we\u2019ve always been successful in negotiating around repayment guaranties. \n\nWe widely sourced dozens of lenders with help of a capital markets advisor. From high leverage debt funds to conventional lenders. Surprisingly terms not too far apart as everyone is more conservative these days. Ultimately went with a solid regional relationship bank that had active loans in the same market so was comfortable with the risk and Sponsor track record.", "replies": [{"id": "guaomdd", "text": "Thanks!\nAny advice on getting around repayment guarantees when working with a new lender relationship, with a strong sponsor track record?", "replies": [{"id": "gub7gra", "text": "Well bit of a loaded question! So many variables come into play. Sponsor strength, track record, total LTV (lower = less likely), deal type, strength of rent roll and cash flow, etc. Lenders are so much more conservative in today\u2019s market. We had to be creative in our deal structuring.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gub1l4v", "text": "Nice information", "replies": [], "depth": 1}]