Texas SSA Magazine – April 14, 2016
This month’s magazine focuses on Game Changers and new options for thinking differently about owning and operating self-storage properties. Crowdfunding certainly has people thinking about new ways of raising money and investing in our Internet-connected world.
However, many still draw a blank stare when the word is mentioned. That’s not surprising; crowdfunding has only recently risen to public consciousness and much of its allure is media driven. Wikipedia defines crowdfunding as “the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations.”
From my perspective, that doesn’t sound too different from what has been done for millennia when groups of people (commonly friends and family) pool money for an investment or common cause. Crowdfunding’s key differentiator is its online fundraising approaches — primarily through social media and/or websites — establish a broader base of investors who never know one another. Crowdfunding is now being used to raise money for such disparate efforts as disaster relief, political campaigns, start-up company funding, scientific research and just about everything in between. And yes, that includes self-storage property investing.
So is crowdfunding just a trendy buzzword or truly a storage industry game changer?
Starting Small…And Always Online
With real estate, the most common crowdfunding approaches apply an equity-based model in which individuals contribute funds to a piece of real estate in exchange for an equity stake in a limited liability corporation (LLC) entity.
Occasionally, instead of equity being infused or raised, debt could be raised with a predetermined interest rate structure and maturity date, however I am unaware of this structure being used thus far for providing debt financing to self-storage owners.
Crowdfunding allows individuals to make relatively small investments, sometimes as little as $5,000 to $10,000, into sizable commercial properties. Once they are signed up and approved by the crowdfunding company, potential investors can click away on their computer, tablet or smartphone and receive access to property presentations and financial projections on which to base their investment decisions.
Registered website portals provide the information for crowdfunding property investment opportunities, as well as the legal forms and mechanisms to put money into one or more investments. Potential investors can browse properties online, securely sign legal documents, transfer funds and access web-based investor dashboards to monitor property investment performance.
Last December, StoreSmart, which operates 20 facilities in six states, used a crowdfunding platform to raise $1 million to convert a storage property in Fayetteville, N.C. The company that arranged StoreSmart’s crowdfunding, Realty Mogul, offers online investment opportunities for various property types nationwide.
Although crowdfunding platforms make no guaranteed investment returns, they will review a deal’s merits online before including a capital raise for a property. They also perform extensive due diligence on the property sponsor, the proposed investment structure, market demographics, and the property’s quality and past operating performance (if applicable).
If you’re considering pursuing a crowdfunding platform to provide equity or, possibly, debt to a real estate investment, remember one of my favorite Latin phrases: Caveat Emptor, or “let the buyer beware.” Complete your homework and due diligence on the crowdfunding platform and their track record to deliver as promised.
The Storage Attraction
Whether via crowdfunding or more traditional methods, self storage’s historic performance track record provides compelling reasons for capital sources to provide debt or equity to owners. Our industry features a:
- Recession-resistant nature
- Diversity of renter base
- Broad distribution of revenue from a large renter base
- Minimal sensitivity to economic shifts and the ability to raise/lower rents monthly
Crowdfunding real estate transactions create a single purpose LLC that investors ultimately own shares in. The investors’ liability is capped at their initial investment level and their rights as investors are spelled out in the legal documents.
A crowdfunding deal’s mechanics typically work like this:
The transaction’s investment package is posted on the crowdfunding website portal.
There is a timetable (generally 30-60 days) to raise the project’s needed funds. If the funds are successfully raised, the project proceeds to closing. Oftentimes, the real estate company will still need to secure debt on the property.
Timing is crucial, particularly with acquisitions, because of predetermined timeframes to execute a sales contract.
After closing on a crowdfunded transaction, investors receive quarterly and annual progress reports. Any cash distributions are distributed in accordance with the LLC and operating agreement.
Among the best utilizations of crowdfunding for an existing storage operator would be the ability to access lower cost capital and increase deal flow when traditional equity sources have reached their funding limits, are limited geographically, or have alternative risk tolerance.
Storage owners who seem best suited to potentially use crowdfunding are:
- Experienced operators with documented track records of developing, owning and operating several properties, and have the ability and willingness to provide required periodic reporting to investors.
- Those who need an equity raise large enough to warrant completing the due diligence and other efforts required to feature their property on a crowdfunding portal, yet are small enough that the amount can be raised in a reasonable time period.
- Ones who can offer a transaction with some value-added component that warrants the return criteria compelling to small investors.
- Operators with sufficient patience to see if the project can be funded by a pool of smaller investors.
And the Verdict Is…
While crowdfunding may be a new and non-traditional method of raising equity for property growth, it is more likely just another source of capital. I’ve seen a lot of creative funding approaches in my 20-plus years of self-storage property financing, however crowdfunding doesn’t appear to rise to the level of “game changer” by any stretch. It simply uses the Internet to accomplish the same tasks and goals of traditional fund pooling approaches.
The real game changer is that Texas is leading the country in economic growth and recovery. Texas storage owners have many other equity and debt financing options that do not require the structure needed and demanded by crowdfunding platforms.
For example, local and regional banks are offering attractive interest rates and are funding both permanent and construction loans. SBA lenders are offering higher leverage alternatives, and CMBS lenders are back and strong again with offers of non-recourse, long-term, higher leverage fixed rate financing.
Before you jump on the real estate investment scene’s seemingly hottest trend, complete your due diligence and evaluate all your options, then choose the best one suited to your investment criteria.
With more than 20 years experience as a national self-storage mortgage broker, Neal Gussis is a Principal at CCM Commercial Mortgage, where he specializes in securing debt and equity for self-storage owners nationwide. He can be reached at 224-938-9419 or ngussis@CCMCommercialMortgage.com.