Banking & Finance  March 6, 2015

Fundrise brings little investors to big developments

The same online technique used to support the early production of video games and tech gadgets has made its way to the real estate market, and it could be headed for Northern Colorado and the Boulder Valley.

While dozens of companies nationwide have created crowdfunding platforms for small-scale real estate investing, one of those, Washington D.C.-based Fundrise LLC, wants to expand its service in Colorado. Fundrise operates a crowdfunding website that allows people to invest as little as $5,000 for a small equity stake in a real estate development project.

The website connects investors with developers who are open to the idea of receiving a portion of their project’s funding from individuals.

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Brandon Jenkins, Fundrise’s chief operating officer, said he hopes to find developers along the Front Range who would use Fundrise to help attract investors.

The company, founded in 2010 by brothers Ben and Dan Miller, has raised $40 million for about 45 projects involving about 50,000 investors. It targets urban infill projects valued at $5 million to $100 million. Fundrise signs up potential investors to its website, and then lets them look at projects the company has posted after striking a deal with developers who want to list their projects and raise capital through Fundrise.

Last month, Fundrise made its debut in the Denver real estate market after providing $1 million to help finance a mixed-use apartment complex with Littleton Capital Partners.

Jenkins said 69 individual investors from across the country are helping finance a 62-unit mixed-use development at 35th and Larimer streets in Denver’s River North district. Investments range from $5,000 to as much as $50,000 or $100,000.

The return on investment for each project varies, Jenkins said, adding that the average rate of return for its investors is 12 percent to 14 percent.

Jenkins believes Northern Colorado has “strong growth fundamentals” because of its projected population and job growth, and its attractive outdoor setting.

“We’ll be in the Denver area and working along the Front Range in March,” he said, hoping to find developers, including several in Boulder, who might want to tap the capital source. He declined to identify the Boulder developers with which Fundrise is hoping to work.

Ryan Schaefer, president of Chrisland Commercial Real Estate Inc. in Fort Collins, said it’s an intriguing idea.

“We’ve had younger developers contact us to ask what we think about it, but we haven’t actively explored it,” he said. “We have other sources of capital for projects.”

Schaefer said the increased activity in building in Northern Colorado, with developers building and selling projects at a rapid pace, is creating a need for more projects, not alternative funding sources.

Keith Burden, vice president of Niwot-based Burden Inc., agreed.

“Right now, it’s tougher to find deals to create projects than raise capital to build them,” he said. “We use a lot of friends-and-family funding. We aren’t raising a lot of capital outside that.”

As a developer, Burden said, he’d rather have fewer investors than more. With more investors, he said, more time and money would be spent on responding to their questions about the project as well as dealing with issues about investor accreditation and tax-reporting issues.

Vanessa Grout, president of CMC Real Estate in Miami, told Forbes magazine that landlords and developers are turning to crowdfunding because banks or other traditional financing sources have turned them down, a niche Jenkins wants to fill.

“We are raising amounts that are too small for developers to obtain from conventional lenders, and too large for family and friends,” Jenkins said.

Most real estate crowdfunding platforms charge developers a flat origination fee of 1 percent to 2 percent of the total project cost, and an asset-management fee to list their projects. Crowdfunders must be accredited investors, Jenkins said, meaning they must have assets of $1 million and annual income of $200,000.

Omri Barzilay, founder and CEO of Propcy, a New York-based real estate firm, said the current form of raising money for real estate purchases was established with the Real Estate Investment Trust Act, a law that allows small investors to band together so they can invest in many large-scale, income-producing properties just like large companies, corporations and wealthy entrepreneurs had been doing for many decades.

Crowdfunding has offered another option, he said, but there have been some obstacles and roadblocks.

Barzilay said crowdfunding, because it is relatively new, has yet to establish the successful track record needed to be seen by most as a viable alternative form of real estate investment. “Given the overall track record of the real estate industry, this is to be expected, as many innovations take years to become standard practice,” he said. Barzilay added that there is no secondary market for crowdfunding investment, which means the project will have to come to completion before an investor can liquidate.

“This is a big advantage that REITs have over crowdfunding platforms,” he said. “However, new or existing platforms could seize the opportunity to create a secondary market.”

The same online technique used to support the early production of video games and tech gadgets has made its way to the real estate market, and it could be headed for Northern Colorado and the Boulder Valley.

While dozens of companies nationwide have created crowdfunding platforms for small-scale real estate investing, one of those, Washington D.C.-based Fundrise LLC, wants to expand its service in Colorado. Fundrise operates a crowdfunding website that allows people to invest as little as $5,000 for a small equity stake in a real estate development project.

The website connects investors with developers who…

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