Commercial real estate tries a Kickstarter model with early success
You don’t need to be an Astor, a Rockefeller or a Trump to own a piece of New York City real estate.
Everyday New Yorkers are grabbing stakes in massive Manhattan skyscrapers, thanks to a wave of new crowd-funding initiatives that match small-time investors with big real estate projects.
Call it Kickstarter for commercial real estate. Developers are raising hundreds of millions of dollars to build and convert Manhattan towers into income-producing commercial offices and hotels that they hope will bring their investors much more dramatic returns than if they bought a standard condo.
The offerings, which are already a hit with foreign investors, are increasingly being marketed to accredited New Yorkers who want to own a piece of their city.
“We’re witnessing the creation of a new industry,” said entrepreneur Rodrigo Nino, CEO of New York-based Prodigy Network, which raises money from individual investors. “This is going to have an enormous impact on private wealth, One day. I envision everyone putting 5% to 15% of their money into commercial real estate.”
Prodigy is currently courting U.S.-based investors for a new project at 17 John St., one block from the World Trade Center. The company already raised more than $25 million from nearly 100 investors in the U.S. and abroad for the $85.3 million purchase of the building in August and is converting it into an extended stay hotel. Now, it’s looking to raise additional funds to add a 50,000-square-foot glass addition.
Here’s how it works: Investors who have either $1 million in cash or make more than $200,000 a year can invest. The larger the investment, obviously, the bigger the share in the building he or she can afford.
The investors’ money is bundled together with investments from thousands of other people to form a limited company. In return for their investment, investors get a share of the operating income the building produces and, ideally, an increase in the value of their equity over time.
Prodigy has skin in the game, too. It typically puts down several million dollars of its own equity to secure the purchase before raising capital from others.
Crowd funding is nothing new. People have long been raising money for honeymoons, new businesses, recording studio time and even the ingredients for potato salad on online platforms such as Kickstarter and Gofundme. Prodigy even crowd-sourced the design for the John St. tower by soliciting responses over social media from architecture firms, universities and designers. The winner got paid.
Such investment schemes only became possible under the so-called “Jumpstart Our Business Startup Act” in 2012, which made it easier for a wide variety of entrepreneurs to seek investors on the open market.
For developers, the new legislation means access to a new source of money. For investors, it means access to the kinds of assets that were previously controlled only by major corporations and which proved to be the most solid during the last bust, historically yielding returns of up to as much as 15% a year.
For now, nonaccredited investors with lower net worths can invest in select projects only if a developer goes through an intense regulatory filing process. But the Securities and Exchange Commission is expected to revise those restrictions within the next few years.
Inevitably, crowd-funding systems have risks, and inexperienced investors should fully examine any project before investing. But Nino said those risks can be mitigated by hiring a third-party fiduciary to oversee the process and make sure people like him don’t run off with the cash.
Real estate experts said they’ve seen a large uptick in the number of developers using crowd funding to finance at least a portion of the equity for big purchases in recent months. Nino is understandably optimistic about the prospective rise of crowd funding as a mainstay for real estate financing.
“It went from impossible a year ago, to improbable six months ago, to inevitable now,” he said. “We’ve already funded deals north of $475 million across three prime assets here in Manhattan.”
Prodigy has two other crowd-funded projects underway at 84 William St. in lower Manhattan and on 46th St. in Midtown. The investment threshold for the company’s projects has typically been $50,000 but Nino is trying to lower it to $10,000 for the next round of funding at 17 John St.
And it’s not the only game in town. Crowd-funding real estate platform Fundrise, based in Washington, D.C., has raised money for several New York area real estate projects, including $1.4 million for the purchase a multifamily portfolio on Harman St. in Bushwick and $1 million for the development of a luxury home on Dune Road in the Hamptons.
Fundrise has jumped through the regulatory hoops and allows local investors to get in on their projects for as little as $100 a pop.
Real estate heavy hitters such as Long Island City developer Justin Elghanayan of Rockrose and several top executives at Bruce Ratner’s Forest City Ratner Enterprises have already invested in Fundrise.
But it remains to be seen if crowd funding is really the next big thing and if New Yorkers will be quick to adopt it.
“There’s definitely a place for this in the market, but I don’t think it’s going to take over,” said Bob Knakal, a founder of commercial real estate brokerage Massey Knakal Realty Services. “It’s always going to be easier for developers to just go to two guys who can give them $50 million apiece.”