Previous Page  28 / 72 Next Page
Show Menu
Previous Page 28 / 72 Next Page
Page Background

CRE Finance World Summer 2015



Crowdfunding: The Future of

Commercial Real Estate

Lending or Just a Voice

Lost in the Crowd?

Geoffrey Maibohm

Counsel, Finance Group

Alston & Bird

Stephen Denmark


Alston & Bird

Robert Sullivan

Partner, Co-Chair

Finance Group

Alston & Bird

he future of traditional lending has challenges ahead.

As technology advances and capital becomes more

readily available, traditional lenders are likely to see

increased pressures to lend and increased pressures on

profit margins from lending. Crowdfunding, assuming it

can withstand increased regulatory scrutiny, looks well suited to

fill a niche that traditional lending may not be able to fill. However,

traditional lending will likely not see any challenges posed by

crowdfunding for larger and/or more complex transactions. The

next several years will provide challenges and opportunities, and

entities that can overcome challenges and execute on opportunities

presented by technology and the widening availability of capital

will be well positioned to flourish. Less nimble entities are likely

to get trampled by the crowd.

Crowdfunding: What Is It and What Are Its Applications in

CRE Finance?

Crowdfunding has been described as, “[t]he practice of raising

funds from two or more people over the internet towards a common

service, project, product, investment, cause, and experience.”


In crowdfunding, various small investors serve as the source of

capital for the project. Applications of crowdfunding have been used

for a wide range of capital intensive projects over the last several

years, which include the production of major motion pictures and

video games.


In crowdfunding, a party seeking financing for

a project goes onto the internet to a website that arranges the

financing. The project is published on the website, and registered

users are given an opportunity to invest in the project in some

small increment. At the most basic level, crowdfunding is syndicated

investing/lending on a micro level. It is a global phenomenon

changing investing and lending.


Knowing what crowdfunding is

at its most basic level allows a look at its application and rise in

the world of CRE lending.

The principles of crowdfunding applied to CRE lending suggest

that potential CRE borrowers would go to a website dedicated to

crowdfunding to seek capital from the investors on that website that

have “signed up” or agreed to participate in the proposed project

through investing. There are already a number of crowdfunding

websites devoted to CRE investments featuring different risk

profiles for both assets and investors alike.


The role of the “crowd”

in crowdfunding for CRE is varied. Some crowdfunding websites,

acting as the arrangers, utilize crowdfunding structures where the

crowd acts as direct lender to the CRE borrower. Some arrangers

utilize a structure where the related CRE loan is prefunded, and

interests in the loan are sold to investors. Other crowdfunding

platforms utilize structures where the arrangers create a lending

vehicle with funds collateralized by the investors’ investments. The

vehicle then lends such funds to the related borrower(s), and the

investors are given ownership interests in the lending vehicle itself.

When structured in these ways, crowdfunding looks very much

like a microcosm of traditional lending. Yet, other crowdfunding

arrangements work where the arranger funds upfront and creates

a project note and the related crowd invests in that note. At its

core, crowdfunding is a blend of traditional lending strategies that

are being made available to the general small investor. In a market

that has been dominated by traditional large lending institutions

and large institutional real estate investors, this could signal a

major shift in CRE lending away from its traditional lending present

form. Nonetheless, the mechanics of crowdfunding and its ability

to service the needs of CRE borrowers must be considered. In this

regard, the rise of the crowd may just not be enough to replace

traditional lending.

Crowdfunding: Who is in the Crowd and Who Regulates It?

As mentioned earlier, investors/lenders in crowdfunding are not

traditional CRE lenders; they are the antithesis. They are individuals

interested in CRE finance. They may have no experience in CRE

investment, and generally are neither institutional investors nor

the wealthy individual investor that have otherwise dominated CRE

finance from its beginnings to present day. This raises questions and

concerns simultaneously. In particular, many wonder how regulatory

agencies will deal with the phenomenon that is crowdfunding.

Crowdfunding in the United States arises from the recently enacted

Jumpstart Our Business Startups Act (the Jobs Act).


According to

the legislative history of the Jobs Act, crowdfunding was designed to

improve liquidity and investment in small business.


Most notably, the

Jobs Act amended Section 4 of the Securities Act of 1933 (the 33

Act) to include provisions that permit crowdfunding in new Section

4(a)(6), yet limit the amount that may be invested by each investor

within any given 12-month period.


On October 23, 2013, the Securities and Exchange Commission

(SEC) proposed implementing rules related to the newly amended

Section 4(a)(6) of the 33 Act and crowdfunding (Crowdfunding

Proposed Rules).


While the Crowdfunding Proposed Rules have

not yet been adopted by the SEC, they contain several key points

for discussion that are beyond the scope of this article. Relevant

for purpose of this article, however, is discerning the legislative

intent. The text of Section 4(a)(6), as amended by the Jobs Act,

and the Crowdfunding Proposed Rules arguably demonstrate the

legislative intent of Congress and the SEC. Congress and the SEC

want to grant small business easier access to capital markets, but

at the same time, protect small and/or unsophisticated investors

from overreaching. The limitations that Congress and the SEC have

Crowded Trades: Crowdfunding Enters Commercial Real Estate