By Jonathan Wilson, After my last two columns about how crowdfunding might be used to raise cash for real estate projects, I was swamped with calls from crowdfunding platforms whose principals told me of their plans to start doing deals in Atlanta.
One of the more interesting points that came up in all of these calls is the question of where crowdfunded cash should fit into the capital stack of a real estate deal. There are several views among the several platforms coming to Atlanta, and how their philosophies compete against each other will be one of the stories that plays out in the space in the next few years.
Crowdfunding in commercial real estate is coming to Atlanta, and savvy project developers and deal facilitators will need to figure out how crowdfunding is going to fit (or not) into their deals.
The Traditional Equity Model
In the traditional model (i.e., where there is a developer or project sponsor who conceives of the idea and then recruits both equity and debt participants) the developer’s equity is like the common stock of a corporation. The developer might get some project fees or management fees from the top, but the developer’s equity deal stands behind the senior debt and the preferred equity.
Equity investors who are recruited into the deal generally get a preferred return. They will receive the first equity out of the deal and their return will generally achieve an IRR of 10 to 15 percent before common equity comes out. Once the preferred equity gets its return of capital plus its preferred return, common equity will get all, or most, of the remainder.
Senior debt sits at the top of the capital stack. Whether the senior lender is a bank or an institutional investor (like an investment fund or a pension plan) the senior lender will have a first priority lien on the project and, in the event of insolvency or bankruptcy, the senior lender will have the first position to recover its loan, plus interest and expenses, before any of the equity gets a distribution.