Industry Watch

Photo by Tate Carlson

Crowdfunding gets real (estate)

Crowdsourcing opens commercial real estate to new investors

By Kevyn Burger
Monday, June 20, 2016

Maybe you’ve kicked in a few bucks online to help a musician record an album, a chef fire up a food truck or a tech genius develop a gadget.

Now the concept of crowdfunding is extending to commercial real estate.

“This broadens who can make a direct investment in real estate,” says Marshall Saunders. The St. Paul real estate veteran co-founded, his online portal that pools funds from accredited Minnesota investors who share the costs of owning multi-family residential properties.

“In the past, there hasn’t been room for much new blood in real estate,” says Saunders. “This platform lets us knock on doors of people who’ve never invested and lets them get in on building wealth. It changes who can own property.”

The breakthrough that allows the new funding mechanism came with the passage of the federal 2012 JOBS (Jumpstart Our Business Startups) Act. It loosened securities restrictions to allow businesses to raise capital by soliciting investors. That means businesses can use digital tools including websites and YouTube to reach out to new money.

Only a well-heeled crowd can get in on this crowdfunding; regulations require accredited investors to have a net worth — excluding their home — of at least $1 million, with an income minimum of $200,000 for the past two years. (However, soon an individual will need an income of $200,000 for the past two years and a married couple will need a combined income of $300,000 for the last two years.)

Saunders’s portal went live last summer. Since then, he’s rounded up some 40 Minnesota clients who each make a relatively small investment to share ownership of income-producing properties in the metro area. Most of these new clients have had no previous direct investment in commercial property.

“Some investors go to our website, learn what we’re doing and are ready to go. Others want to talk on the phone, go to a public event or sit down with us one-to-one,” he says.

Saunders and his partners have set up private Facebook groups for investors of individual properties and stage get-togethers to foster a sense of community among them.

“We tell them the number one rule is, ‘invest in what you know.’ Drive by the property, get a gut feeling about the neighborhood,” he says. “Local ownership means more stable neighborhoods. The profits don’t fly out of the community to other places around the country.”

Saunders, 46, was previously co-owner of Eden Prairie-based RE/MAX Results; in 2014 he sold his half of the brokerage to his partner so that he could pursue new avenues in real estate, including the community-funding strategy.

Herb Tousley, who directs real estate studies at the University of St. Thomas, finds the approach presented by SaundersDailey to be intriguing.

“They’ve put the groups together. Typically this is hard to do on your own; you’d have to find and qualify co-investors. Taking on those details and executing is a lot of work,” he says.

Tousley came to academia after a long career in commercial real estate, and urges investors to bring questions before sinking cash into any investment opportunity.

“I’d ask about their track record, how their investments have turned out. I’d want to know about their fee structure and if they’re raising money for equity or paying cash for the properties,” he says. “With income-producing real estate, you can write off interest and depreciation. I’d ask who gets those tax benefits.”

Saunders knows what kind of properties he’s vetting for the investors he brings together.

“We leverage a hyperlocal idea of real estate to get the best possible deal. I want a solid performer that’s stabilized, with a good cash-on-cash return. Most times we purchase them from out-of-state owners,” says Saunders.

He’s crowdfunding several luxury 12-unit senior homes to be built in the suburbs.

Minnesotans without deep pockets also have access to a new mechanism for investment using the crowdsourcing approach.

In 2015, the legislature passed MNvest, which allows Minnesota citizens to use online crowdfunding platforms to invest up to $10,000 in Minnesota-based small businesses and startups. After a year devoted to developing guidelines, MNvest rules were finalized and went on the books earlier this summer, in late June. Under guidelines developed by the Minnesota Commerce Department, MNvest lets companies publicly offer securities investments to raise capital through the use of registered funding portals. Those offerings are not limited to accredited investors.

MNvest will ultimately make it simpler for companies to publicly offer securities investments via registered funding portals to raise capital. The implementation of MNvest has been delayed because guidelines for the program are still being developed by the Minnesota Commerce Department.

Saunders believes that while community funding is in its infancy, it holds the potential to expand rapidly and to become the default way that many investors will round out their portfolios.

“If you buy a share of stock, you don’t say you bought it online; that’s just assumed. It will be the same for raising money for other investments. We’ll stop calling it crowdfunding, it will go without saying that’s how you find capital.”