To help fund construction for his extended stay boutique hotel project near the Jackson Memorial Hospital campus in Miami, Colombian developer Alfredo Acosta turned to crowdfunding, the practice of finding capital from a large number of people via the Internet.
Since listing the proposed 44-room Med Inn Suites and Residences in January on Earlyshares.com, a Miami-based website that raises capital for start-ups and real estate projects, Acosta’s project has raised $7.7 million.
“When we were identifying financing options, we saw we could get a wide array of investors on reasonable terms via Earlyshares,” Acosta said. “We decided crowdfunding was the way to go and the results have been positive.”
For a minimum contribution of $20,000, Acosta’s company Omega Grid Development offered investors a clear exit strategy to sell the hotel three years after it opens. “During those three years, they will benefit from an attractive stream of room rental income,” Acosta said.
According to Acosta, Miami lacks a boutique hotel that caters to out-of-town medical professionals, patients and their family members who fly in to the city for treatment at Jackson and neighboring hospitals. “There is a need for people who need to stay in bed for several days to recuperate from surgery or need to stay close to the medical facilities for follow-up treatment,” he said.
Acosta said the money raised from Earlyshares will complement another $5 million to $6 million that Omega Grid, which developed two condo loft buildings in Brickell in 2008, plans to raise from traditional lenders. He said his company owns the land and is just waiting for permit approval from the city of Miami to break ground. The site is located at 1343 and 1363 Northwest First Street.
Joanna Schwartz, Earlyshares’ chief executive, said the crowdfunding website began offering real estate deals eight months ago. Since then, the company has raised capital for 12 real estate projects around the country, including five in Florida that have reached their fundraising goal. “Real estate is now the primary focus of our business,” Schwartz said. “We provide project sponsors access to a universe of investors.”
She said Earlyshares performs due diligence on projects and developers to make investors comfortable that they are funding legitimate deals. All their projects have been vetted, Schwartz said.
Despite Acosta’s success with Earlyshares, some Miami developers remain skeptical about using crowdfunding websites to raise capital. Stephan Gietl, a principal of Mckafka Development Group developing the Crimson condo tower in Edgewater, said one problem with crowdfunding are the “success fees” project developers have to pay to the websites. “In some cases, success fees are 10 percent,” Gietl said. “That is a big amount to give up.”
Banks are also uncomfortable providing construction loans when a project is partially financed through crowdfunding, he said. “There could be hundreds of investors,” Gietl said. “Banks will want to know who they are and will want them to provide guarantees.”
If he had to, he would only offer crowdfunding investors 10 to 20 percent equity in a project, Gietl said. “In a worse case scenario, I can at least cash them out myself.”