Real Estate Crowdfunding: Post-Valuations Of $100M For Series A?

BY David Drake, 

Fundrise last week announced that they raised $31 million from Renren, a Chinese technology firm,Ackman-Ziff (Real Estate Group) and Silverstein Properties (owners of the World Trade Center Twin Towers). My discussions with the founder Ben Miller, concerning the successes of this platform, have revealed that Fundrise is currently on a hiring growth stage. At $31 million raised, assuming that they give up 40% of the company, this puts them at a $77.5 million pre-money valuation and a $108.5 million post money valuation – amazing statistics on valuations for the explosion of realty crowdfunding.

fundrise

The leader in the $31 million financing was Renren, a large Chinese social networking company; other participants included several firms and individuals in the real estate business including executives in Silverstein Properties, owner and developer of the World Trade Center, and Los Angeles developer Rising Realty Partners. The new capital allows Fundrise to undertake a national expansion while opening up the platform to major real estate developers.

We hope for this to be the classical billion dollar IPO in 2015/2016, yet I have been following the top 20 realty crowdfunding platforms that frequently speak at events we sponsor – see related report atTimes Realty News – because there are other players making inroads in this industry. There is an ever increasing pace of activity in this space and the VCs are clamoring to get their share of this market.

The Washington-based company, Fundrise, is an innovator in real estate crowdfunding and allows investors, for as little as $100 to as much as $10,000,000, to participate in deals involving hotels, apartment blocks, and other commercial developments. Until the emergence of crowdfunding, real estate projects, even the smaller ones, have been reserved for high net worth investors and private equity companies. The company was established by the Miller brothers, Benjamin and Daniel, in August 2012 shortly after crowdfunding was legitimized by the JOBS Act. Over the past few months, nearly 300 developers have signed up to use the site.

Investors and Real Estate Crowdfunding

Investor interest in crowdfunding has been growing and a number of real estate portals have raised financing such as Realty Mogul which took in $9 million from the venture capital firm Canaan Partners. In April, The Carlton Group, which supports traditional real estate investment banking activities, announced a new crowdfunding website which will offer deals valued at a total of $1 billion involving transactions all around the world. The concept is now well understood and the Miller brothers believe that they can now scale up quite significantly. Most of these new sites will cater to accredited investors (namely wealthy investors allowed by regulators to make risky investments) and The Carlton Group, for instance, is going to aim at individual investments in the range of $1 million and $20 million.

In contrast, Fundrise will permit any resident of a particular community to invest in developments located there even if they have small sums of money to invest, as little as $100, but they can also invest  as much as $10,000,000. Typically, the majority of commercial real estate development is financed by private equity investors and this, the Miller brothers say, can result in a disconnect between what the community actually needs and what is being built. Moreover, the involvement of a number of intermediaries reduces the profits of the investors.

How Fundrise Intends to Operate

Until the rules under the JOBS Act are finalized, Fundrise has to go through the expensive and protracted process of registering every deal (even the ones involving small investors) with the regulators. All investors in the deal will receive a share of the rental income as well as a share of the sale proceeds including appreciation as and when property is sold. Investors normally receive average returns of between 12% and 14% net of all fees and costs. Fundrise has so far financed over 30 deals totaling $15 million from 1000 investors on the website but only three of these deals have allowed small investors to invest. More deals involving small investors are in the pipeline but the company insists that institutional capital will be an integral part of the investor mix.

The company is creating new investment opportunities for retail investors (who have hitherto been unable to access this market), institutional investors, as well as other real estate companies. Many people are interested in local real estate investment, and Fundrise has used technology and the crowdfunding platform to enable them to do precisely that.

How the Fundraising Happened

Renren, which has invested around $70 million in SoFi, a peer-to-peer site catering to the student loan market, gave the largest share of the $31 million funding for Fundrise after completing a survey of the real estate crowdfunding market. The other investors came on board after strengthening relationships with other like-minded investors such as Martin S. Burger, and Tal Kerret, CEO and Chief Investment Officer of Silverstein respectively. Burger and Kerret said that they had been impressed with the vision and execution of the Miller brothers and Kerret has now joined the Board of Directors.

Current State of Crowdfunding Regulations

On April 10, 2014, the Securities and Exchange Commission Investor Advisory Committee released six recommendations related to the crowdfunding regulations proposed by the SEC. The recommendations will make it necessary for the SEC to rewrite some regulations and make it more difficult, as a measure of investor protection, for small investors to participate in crowdfunding. FA magazine has reported that the rules are not likely to be in place until late 2014 because more action is required from the SEC and the Financial Industry Regulatory Authority (FINRA). It has relied on the TheCorporateCounsel.net blog which states that FINRA still has to create a regulatory system for funding portals while the SEC is still developing the rules. As a result, the ability to carry out exempt crowdfunding remains restricted. The SEC regulations are expected to set the standards for allowing non-accredited investors to invest in crowdfunding offerings subject to a limit of $1 million over a rolling period of 12 months, as well as dollar limits on positions.

 

David Drake

Founder of LDJ Capital, a New York City private equity advisory firm, and The Soho Lofta global financial media company.

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