Will Pre-funded Deals Strategy cause a shift in Real Estate Crowdfunding?
Real estate crowdfunding platforms are increasingly shifting towards pre-funded deals to increase their market share and deal flow. Pre-funded deals occur when a crowdfunding platform gives a real estate developer who needs capital right way a loan guarantee without having to first take the risk of raising the entire loan amount from online investors. According to the 2015 TRN Real Estate Crowdfunding Report, crowdfunding platforms are opting for this strategy to meet the needs of developers who need to raise capital quickly in order to close lucrative deals in a short amount of time. In such situations, pre-funded deals come in handy because raising funds online can take longer – usually a few weeks or even months. While pre-funded deals enable real estate developers fast funding, it also benefits investors who get returns faster because deals with developers are closed prior to the commencement of the fundraising process online.
The challenge with the innovative idea of funding projects upfront is that a crowdfunding platform needs to have substantial funds to back the projects. This cash flow requirement has seen crowdfunding platforms run funding rounds and accept financial backing from institutional investors and VCs so they can maintain a solid credit line that they need to drive, as well as sustain, loan facilities before turning around to offer online investors a stake in the pre-funded deals. Patch of Land became the first platform to offer developers an online investors pre-funded deals. The firm ran a series A funding campaign that saw it raise $23.6 million. A significant amount of these funds went towards securing a solid line of credit to sustain its loan facility. Fundrise is another crowdfunding platform that adopted the pre-funded loan facility strategy at an early stage. Like Patch of Land, Fundrise ran a funding round that raised $3.6 million to drive, as well as sustain, its pre-funding loan facility announced on its portal.
Real estate crowdfunding platforms that are also using pre-funded deals strategy include:
- Acquire Real Estate
- Prodigy Network
The pre-funded deals trend has already started altering the competitive landscape in the crowdfunding industry. Crowdfunding platforms that have adopted this strategy are benefiting from increased deal flows as well as rising revenues. Patch of Land, an early adopter of pre-funded deals, acknowledges the strategy has offered it an important competitive edge in the crowdfunding industry. Patch of Land recorded an increase in deal flow and transaction volumes since it adopted this strategy.
According to Fundrise co-founder Daniel Miller, the pre-funded model is a business model that’s more like investment banking as opposed to a pure technology platform where people post their deals and wait to see what comes in. According to Miller, pre-funded deals have been an important shift in the growth of Fundrise, a platform that has raised more than $31 million from financial, technology, and real estate institutions including Silverstein Properties and Renren in 2014. In our recently released report on real estate crowdfunding platforms, Fundrise reported a rise in its monthly transactions since it began offering pre-funded deals in September 2014. The platform raised an estimated $20 million for deals in New York alone, a factor that has contributed immensely to its rising market leadership and dominance in the industry.
Pre-funded deals are also addressing the problem of delays in deal closings, uncertainty and failed targets among deal sponsors. Realty Mogul‘s Chief Executive Jilliene Helman acknowledges that financing for crowdfunding platforms allows them to fund deals as soon as they are closed. Availing funds without delays offers sponsors the certainty they need. Realty Mogul has so far raised more than $52 million to finance more than 180 properties since its launch in 2013.
Whether crowdfunding platforms can sustain pre-funding deals as a strategy or not is yet to be seen. There is no doubt however that crowdfunding platforms will be requiring financing from VCs and institutional investors to sustain their loan facilities in the near future. This is an aspect that investors who have already put substantial amounts in past funding rounds might not find appealing. Even so, crowdfunding platforms that have successfully leveraged on this strategy have increased their competitive advantage and gained and substantial market share over platforms that have not offered pre-funded deals due to financial challenges. Pre-funding deals guarantees the crowdfunding platforms increased transaction volumes and a steady deal flow that translates to more profits and bigger market share. Going forward, crowdfunding firms will need to keep evolving their strategies to remain competitive in the dynamic crowdfunding industry.
David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a 300 family office network: LDJ Real Estate Group and Drake Hospitality Group; and The Soho Loft Media Group with divisions Victoria Global Communications, Times Impact Publications, and The Soho Loft Conferences. Reach him directly at David@LDJcapital.com.