In September 2003, Harry Macklowe’s bid to buy the GM Building hit a roadblock: his lender, Wachovia Bank, was getting cold feet over the $1.4 billion price tag, and needed more time. With days to close on the purchase, Macklowe’s capital broker Rob Horowitz called his friend Eric Schwartz, head of U.S. real estate lending at Deutsche Bank. “I called Eric. He was playing golf in Ireland,” Horowitz later recalled. “I said, ‘Eric, do you want to come into this financing? I need a billion-four.’ And he said, ‘sure, we’ll do it.” Ten days later, the deal was done and Macklowe had his prize.
The episode, recounted in Vicky Ward’s book The Liar’s Ball, is in many ways typical of the old-fashioned world of real estate finance. While Wall Street was transformed by technology long ago, funding large commercial real estate projects is largely done in much the same fashion it’s always been: over a few phone calls to old cronies and maybe a couple rounds of golf.
But now, technological innovation is slowly beginning to take root in the real estate capital markets brokerage business. One spark of change is crowdfunding, or funding projects through a large number of individual investors, usually through the internet. Pioneered over the past few years by a handful of startups, the practice is now seeping into established brokerages. Howard Michaels’ the Carlton Group and Nicholas Schorsch’s RCS Capital have both launched crowdfunding platforms, while others are looking to follow suit.
The latest such brokerage to tap into the crowd is Ira Zlotowitz’ Eastern Union Funding. The firm is building up a database of potentially thousands of high-net-worth individuals in order to connect them with real estate equity investment opportunities. The project is similar to most crowdfunding businesses, with one major distinction: Eastern Union merely introduces investors and developers through the platform and doesn’t participate in any transactions. Essentially, it serves as a friendly matchmaker.
“Our ultimate goal is to juice up our debt business, that’s our core business,” said Eastern Union’s Marc Belsky, who is co-heading the project with Charles Fishof. He hopes that this “complimentary service” will entice more developers to arrange loans through Eastern Union. Developers can only access the offline database if they get their debt through Eastern Union, Belsky said, and will still have to pay a one-time subscription fee of $6,000. Prospective investors will be vetted and asked to fill out a questionnaire, in order to better pair them with projects.
Perhaps the most interesting thing about the new Equity Division (its official title) is the way Eastern Union is building the database. The firm simultaneously launched an internship program, and every new intern is required to provide the names of at least 20 high-net-worth individuals. “If 100 interns come on and they get 20 people, that’s 2,000 people,” said Belsky, adding that 400 people have applied for an internship to-date. Beyond that, Belsky and Fischof are also tapping into their own networks. “We’re talking to anybody who has money to invest in real estate,” he said.
The Carlton Group, a capital markets brokerage that generally deals in a higher price segment than Eastern Union and primarily does equity deals, is also cautiously embracing crowdfunding. About a year ago, the firm launched Carlton Accredited Crowdfunding, which allows accredited investors to pump equity into real estate projects with a minimum individual investment of $1 million.
Like Eastern Union, Carlton isn’t doing crowdfunding in the strictest sense – at least so far. The $150 million it raised with the help of the platform came from just two people – hardly a crowd – and Michaels said he closed the deals by very traditional means: phone calls and site visits. But the firm is currently working on a re-launch of the site, and is looking to lower the individual minimum to $25,000, Michaels said.
“The reason we went into crowdfunding is widening the scope of people that can access our transactions,” Michaels said. “A lot of people have been burned by their advisors and are looking to make direct investments in real estate.”
Michaels and Belsky see crowdfunding as enhancing traditional business models, rather than replacing them. And both downplayed its revolutionary potential. While Belsky said he isn’t “reinventing the wheel”, Michaels argued that crowdfunding is similar to traditional methods of capital raising, albeit under a new regulatory environment. “What crowdfunding is essentially doing is the bringing back the syndications of the 1980s. But because of the JOBS Act you don’t have to be a broker dealer don’t have to register through the SEC,” Michaels said.
Slowly but surely, other established players are jumping on the bandwagon as well. Last July, Schorsch’s RCS Capital announced the launch of its own crowdfunding platform, We R Crowdfunding. However, the platform doesn’t appear to be operational – a note on the website says it is currently being “refreshed with updates.” A spokesperson for RCS did not respond to requests for comment.
Private real estate fund manager Thor Equities, one of New York City’s biggest retail players and now a major residential landlord, is also working on the launch of a crowdfunding platform, according to its CFO Michael Schurer. “Invest Thor, it’s going to be called,” he said last month.
In a way, the influx of established real estate firms into crowdfunding isn’t surprising. The history of technological innovation is full of startups launching new ideas that are eventually adopted by large corporations. A small Korean firm called Saehan, for example is credited with inventing the MP3 player, which was eventually adopted and made mainstream by tech giants like Apple and Sony. Saehan, unable to compete with larger rivals, shuttered its MP3 sales division in 2003.
Will crowdfunding startups like Fundrise or iFunding share Saehan’s fate of introducing a new technology only to be pushed aside by larger, better-connected incumbents? So far, crowdfunding entrepreneurs say they are operating in hitherto underserved markets – such as residential fix-and-flips or smaller commercial properties – and aren’t directly competing with established players. But as startups expand their scope, that could change.