In the high-flying world of commercial property investments, $1.5 million is a rounding error. So most investors probably didn’t pay much attention when, in late July, the owners of the Hard Rock Hotel Palm Springs said they had sold a 15 percent stake for that sum to a group of 85 people.
The deal was noteworthy, though not because of the amount of money changing hands. What was significant was the means by which the cash was raised: crowdfunding.
Yes, that’s right: the same online technique used to support the early production of video games and tech gadgets. The most popular crowdfunding site, Kickstarter, has helped fund the production of everything from bacon-shaped jewelry to Oculus Rift, the virtual-reality headset.
Oculus raised money on Kickstarter in September 2012 and was purchased this year by Facebook for $2 billion. The prize for the 9,522 Kickstarter investors who ponied up $2.4 million for Oculus in 2012? Well, it was not a 145-fold return on their investment. They had been promised only “posters, T-shirts and, for more generous backers, early prototypes” of the headset.
In fact, “equity crowdfunding” — the sale of corporate equity stakes through online platforms — wasn’t really possible until 2012. That year Congress passed the JOBS Act, which legalized equity crowdfunding, albeit only for accredited investors (those with a net worth of $1 million, excluding their primary residence, or an annual income of at least $200,000). Since then, there’s been quite a bit of arguing about how the rules should work. But equity crowdfunders have helped fund new ventures like Bitvore, a platform to analyze complex data streams, which raised capital through a platform called EquityNet, and Pono Music, a purveyor of high-resolution music downloads and listening devices founded by rocker Neil Young. (The latter raised capital through Crowdfunder, run by Los Angeles-based serial entrepreneur and FORBES contributor Chance Barnett.)
Now they’re turning to real estate.
The Property Play
At first, real estate doesn’t seem like an obvious play for crowdfunding. The problem is that it’s so very expensive. The collective market capitalization of publicly traded equity REITs — they own only a small fraction of all commercial property in the U.S. — is a whopping $670 billion. And though a few crowdfunding projects have raised more than $10 million, most attract just a few thousand dollars.
Yet this year the idea of using crowdfunding in real estate seems to have caught on. For now, it’s available only to millionaire accredited investors. But there are several firms vying to become the Kickstarter of real estate. One is Beverly Hills-based Realty Mogul, which oversaw the campaign that raised $1.5 million for that hotel in Palm Springs for owner Kittridge Hotels & Resorts. Another is Fundrise, a Washington, D.C.-based platform backed by a list of notable players like Silverstein Properties, developer of the new World Trade Center. The Wall Street Journal reported in June that, collectively, these and “dozens” of other real estate crowdfunding firms had raised $135 million in debt and equity for various owners and developers.