Real Estate Crowdfunding 102: What Investors Should Know

Posted by Boots Dunlap on Apr 4, 2019 2:22:15 PM

In the previous post on real estate crowdfunding, we covered the regulatory structures of crowdfunding offerings and the impact that those offerings have on sponsors.  In this post, we’ll look at two distinctly different types of crowdfunding platforms that every investor should be aware of and how each affects the investor’s ability to find great deals.  The differentiators discussed below expose the business strategies, and more importantly the incentives, behind crowdfunding platforms that impact the investor.

There are two major types of crowdfunding platforms: crowdfunding marketplaces and captive crowdfunding sites

  • Crowdfunding marketplaces are websites built to be a truly independent and free marketplace for investors and sponsors.  The crowdfunding marketplaces are created to provide the investor community with deals from numerous sponsors, most often pre-approved for quality control. 
  • Captive crowdfunding sites are sites created by a real estate sponsor to satisfy a specific business need.  They do not necessarily find the investor the absolute best deal in the available market.
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Topics: Investors, Crowdfunding

Real Estate Crowdfunding 101: What Sponsors Need to Understand

Posted by Boots Dunlap on Mar 20, 2019 11:48:17 AM

Real estate crowdfunding has been quietly evolving on the sidelines during the latest commercial real estate bull market.  Critics dismissed this new form of capital raising as just another fad or buzzword du jour.  However, crowdfunding platform founders claim that it is destined to overtake traditional capitalization methods in the not too distant future.  Regardless, the major objections to crowdfunding are dissipating rapidly as advancements in supporting technology trends (to be discussed in a subsequent post) allow for greater investment transparency and growing user-adoption.  As this industry matures, real estate investors and sponsors will be able to connect more efficiently, creating greater competition for capital and deals.  This increased efficiency and competition will result in a broader demand for quality deals and cheap equity.  However, before market participants may hope to reap these benefits, they should first be aware of the basics of crowdfunding.

Over the course of a series of posts, I intend to cover some of the key differentiators of crowdfunding platforms that affect investors and sponsors.  These consist of two major areas: differentiation of platforms and differentiation of offerings.  While both platforms and offerings have significant effects on both investors and sponsors, investors should be more concerned with understanding the platform, and sponsors with understanding the offering.

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Topics: Private Credit, Sponsors, Crowdfunding

Counting the Costs When Purchasing a 25-Year or Older Building - Part 3

Posted by Charlie Dunlap on Mar 11, 2019 9:51:50 AM

In Part 1 and Part 2 of this series, we discussed the definitions as well as what factors decrease the useful and physical life of a commercial building.  In this article, we examine a specific property type of commercial real estate that has important deviations from a “typical” older commercial property: residential rental property.  We will explore why residential rental buildings (primarily apartments) have shorter economic useful life expectancies and what the main limiting factors in extending a property’s economic useful life is.

Economic Life of an Apartment is 27.5 Years

When considering the purchase of an older residential rental property (such as an apartment) it is important to understand that the useful economic life of an apartment building is significantly shorter than that of a commercial building.

As a reminder, the IRS allows 27.5 years over which you can depreciate residential rental buildings and 39 years for retail and other commercial structures.  This shorter depreciation schedule was established to encourage construction of new rental housing, however, it also reflects the fact that residential rental structures have a significantly shorter useful lifespan than commercial structures.  The tax code presumes that the useful life of a residential rental building is only 70% of the useful life expectancy of a commercial building.

What factors contribute to a shorter useful life for residential rental housing properties?

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Topics: Sponsors

Counting the Costs When Purchasing a 25-Year or Older Building - Part 2

Posted by Charlie Dunlap on Feb 22, 2019 12:38:01 PM

In Part 1 of this series, we discussed what the useful and physical life of a commercial building is, as well as the five stages of a building's life.  In this article, we will explore some of the factors that can decrease the physical and useful life of a commercial building. We will also touch on building obsolescence, which can be a major threat to older buildings.

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Topics: Sponsors

Counting the Costs When Purchasing a 25-Year or Older Building - Part 1

Posted by Charlie Dunlap on Feb 15, 2019 10:10:12 AM

*This is the first in a three-part series on considerations when purchasing older buildings.

Purchasing a building that is 25-years-old or older requires a significant historical investigation and analysis to determine the risks associated with the building.  These articles are intended to aid any investor attempting to answer the following questions:

  • How do you identify the risks that come with the ownership of an older building?
  • What factors can hurt the future net cash flow of an older building?
  • How much more economic life is left in the building
  • How many years are left that will produce reliable income from the ownership of the building?
  • How do you determine the current value of an asset with a shorter economic life?

A building’s “useful life” depends on its previous ownership, intended use, and prior maintenance regime.

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Topics: Sponsors

5 Ways To Invest in Commercial Real Estate

Posted by Marc Grayson on Jan 24, 2019 9:11:08 AM

Back when we were young, fresh-faced students coming out of school and entering the real world we likely had a basic understanding of investing that was limited to publicly traded stocks.  Then, as we matured, we all came to realize that investing in publicly traded stocks was only one of the many ways that we could invest our money in the hopes it would grow.  Such options are now more diverse and more available than ever and are no longer the exclusive domain of large investors and financial institutions. 

One such investment is commercial real estate.  This investment class typically takes significant amounts of capital and historically has been a relatively illiquid investment.  Over the years, however, those features have significantly changed, and now there are more ways to invest in commercial real estate than ever before. 

But before we discuss the ways you can invest in commercial real estate, it must be emphasized that all investments in commercial real estate are not equal.  It stands, as with all efficient markets, the greater the risk, the greater the reward (or loss).  Commercial real estate is no different.  And those risk profiles have designations that are common among most investment classes: debt and equity.

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Topics: Investment, Investors

What is the Average Rate for a Commercial Bridge Loan?

Posted by Ted Van Brunt on Nov 30, 2018 8:55:58 AM

Have you ever wondered what average commercial real estate (“CRE”) bridge loan interest rates are or why the rates are what they are?  I’ll give you the spoiler: the average interest rate is 6.5%.  Just kidding.  Actually, the answer is: it depends.  Boring, right?  But it does depend.  It depends on things like risk profile, lender appetite, and interest rate trends.  We’ll dig a bit deeper and see if we can provide some helpful information on why lenders do what they do and what to expect in a rate.

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Topics: Bridge Loans

Tips For Getting The Best Commercial Bridge Loan Financing

Posted by Marcus Goodwin on Nov 1, 2018 10:31:44 AM

Securing a commercial bridge loan can be a lot of work and any missteps can prove costly.  Below are some tips, that if followed, will increase the probability of obtaining attractive bridge financing.

Have a Defined Plan

It is imperative to have a defined plan with an accompanying budget including a spreadsheet of monthly income and expenses for the first 24 months of the loan period.  A lender’s ability to both understand and quantify the strategy quickly always works to the sponsor’s advantage.  In particular, ensure that you are thorough in describing why this is a value-add opportunity.

For example, if poor management is to blame, talk through why they are a poor manager (limited experience, minimal properties under management, etc.).  Additionally, any insight as to why the current ownership didn’t recognize or address this shortcoming is also helpful.  A well-defined strategy, along with supporting details that paint a clear picture, will give significant credibility to the deal up front.  

Understand the Timing Required

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Topics: Bridge Loans, Closing, Brokers

8 Reasons for CRE Receivers to be Appointed...Even if No Monetary Default Has Occurred

Posted by Charlie Dunlap on Oct 3, 2018 9:25:13 AM

Events such as a downturn in the economy, a dispute among partners, or cash flow problems caused by new market competition, can affect the viability of an income property loan.  These real estate loans may need a “workout” by the lender so that the borrower doesn’t lose its property.  During the loan workout phase, it is critical that the borrower keep in full, open communication with the lender about their cash flow situation and plans to avoid a monetary default.  When a lender is dealing with a responsible, honest borrower, the lender is more likely to work with the borrower to help them get through a rough period. 

With that being said, even if no actual monetary default has occurred, there are a number of events that could precipitate the need for the appointment of an independent receiver.  Some examples of these events are:

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Topics: Receivership, Litigation

What Is a Commercial Bridge Loan and How Does It Work?

Posted by Marc Grayson on Sep 11, 2018 9:53:15 AM

Bridge loans.  You’ve heard about them, you kind of understand what they are, but you’re not clear on the details or if one is right for you? This article will hopefully clear up some of the ambiguity surrounding Commercial Real Estate (“CRE”) bridge loans and answer any unanswered questions. 

What is a commercial real estate bridge loan?

A commercial real estate bridge loan typically has a 1-5 year term and is intended to transition an underperforming property into one that has reached full potential.  This is achieved through a multiple-advance loan structure that commits money up front to cover the cost of the purchase or refinance, and then future monies for leasing costs and capital expenditures needed to maximize the income generated by the property.  That unique structure is what makes a bridge loan.

Would a bridge loan be right for your deal? 

You find yourself involved, or at least interested, in purchasing or refinancing commercial property. You’ve made the decision to finance a portion of the investment with debt, and you require a loan, but you don’t need the loan for a long period of time.  A bridge loan could be the solution.

Bridge loans have a special place in the commercial real estate finance ecosystem.  They exist, as the name suggests, to bridge your investment over a transitional period.  There are many reasons commercial real estate borrowers or sponsors look to a bridge loan for their financing needs.  Some of them are: 

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Topics: Bridge Loans