RE Crowdfunding Turns Institutional

Crowdfunding is becoming increasingly institutional, with large-scale funds and developers financing the growth of online platforms that can fund deals and offer them to smaller investors for as little as $100.

Real estate crowdfunding platforms are becoming increasingly institutional in their strategies and growth, helping shake up the way capital is raised for commercial real estate projects.

In late April, one of the earliest movers, Fundrise, opened what it says is the first crowdfunded real estate development in the U.S. to allow investments from individuals online: Maketto, a communal food and retail market financed by 175 individuals from Maryland, Virginia, and Washington, D.C.. The project highlights how crowdfunding solutions have opened a new source of capital for commercial property investment.

And it is this growth and acceptance of crowdfunding platforms that institutional investors are targeting. Capital from institutional investors allows Fundrise to finance transactions, then offer stakes in the deals to investors on its online platform, sometimes for as little as $100.

“We’ve gone towards 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,” says Dan Miller, co-founder and president of Washington, D.C.–based Fundrise. “It has been the biggest fundamental shift in our growth.”

Aided by $35M raised in its first round of funding from leading technology and real estate investors as well as others, Fundrise has deployed more than $40M into more than 55 projects in 15 markets across the country since 2011. The financing was led by NYSE-listed Renren—a large social–networking company based in China. Ackman-Ziff Real Estate Group, Guggenheim Partners, and Silverstein Properties also participated in the first round. Fundrise has also partnered with a $9B real estate credit fund that is helping finance deals, Miller says.

In addition, Fundrise acquired $5M in tax-exempt bonds related to the construction of the 80-story 3 World Trade Center building being developed by Silverstein, giving accredited investors a chance to buy into the iconic project for as little as $5,000. Fundrise projects an annual 5 percent gross return over a five-year holding period. “That’s a great example of the power of the crowdfunding model,” Miller adds. “We were able to get a piece of that deal, and now we can put it online and see what happens.”