New Multifamily Investment Options under Crowdfunding
The core concepts of crowdfunding have been around for decades–sponsors are always searching for investors to raise capital on projects. But the improvements made in technology and social media have eased the process and widened the pool, providing more opportunities for sponsors and investors alike.
“Traditionally a deal sponsor might be someone who’s well known in their community and is the proverbial developer who belongs to the country club,” says Steve Lefkovits, president of Emeryville, Ca.-based Joshua Tree Conference Group. “[They] source investors from members of the country club.”
Of course, you’d have to already have the social standing and connections to join the club and get access to those investors, he adds.
By bringing crowdfunding into the multifamily space, fundraising sites that mirror the popular but consumer-driven Indiegogo or Kickstarter are providing financial opportunities to reach investors that sponsors might not have been privy to. And it opens up another asset class to smaller investors, thanks to the lower minimum required to invest.
“Those [multifamily] assets have been privy to large institutions and private investors for the past eight years,” says Rodrigo Nino, founder and CEO of New York-based Prodigy Network. “That levels out the playing field in every possible way, because the smaller investor is in a very low-yield environment right now. They only have access to three asset classes [stocks, bonds, and cash].”
The streamlined process of crowdfunding allows accredited investors to inject funds into their preferred projects, while allowing sponsors to make one comprehensive sales pitch in one sitting.
But for a while, crowdfunding wasn’t possible from a regulatory standpoint, and those concerns still remain one of the biggest challenges for these sites.
“The challenge is making sure everything is done with investor protection in mind and also to that effect, making sure we’re compliant with SEC regulations,” Nino says.
At Beverly Hills, Calif.-based Realty Mogul, the staff has to qualify investors themselves, triple-checking accreditation statuses, and actively restricting the number of investors under SEC rules.
The now one-year old company attributes the site’s viability to its risk-mitigation factors. For instance, only cash-flowing properties are allowed to participate in the fundraising. If for any reason Realty Mogul went under, for instance, there’s already cash flow on the property so that another company with the same fee structure can facilitate transactions on the project, creating a safety net. If the investment goes under before the full life cycle of the property completes, another company can still manage the entity, and keep track of the moving parts of the investors.
“No matter where the market goes–up, down or sideways–you can rest assured that if you need to make a decision to hold onto that property for a little while longer, you can,” says Justin Hughes, CTO and co-founder of Realty Mogul. “Then you can choose to exit at a more opportune time when market conditions are favorable.”
The challenges are also a matter of scale. With such low minimum buy-ins set at $5,000, there are a greater number of investors, creating a larger overhead when it comes to accounting. Realty Mogul developed technology to make the process more efficient without creating unnecessary burden on the project's cash flow.
If an investor wants to exit their shares, they have to tackle the SEC requirement for the minimum hold period; securities cannot be transferred in less than a year. They would then need to find a buyer for their share, and Realty Mogul is able to help process that transfer of ownership.
Big Data Opportunities
Marketplace sites like Prodigy Network and Realty Mogul are now privy to the most sought-after information that gives insight on the actual performance of such investments. Every deal that transpires over the web adds to a growing database of transactions.
There’s very little accurate and current information on investment performance today, creating a huge information gap.
“We’ll have greater insight over time of how private equity investments in multifamily actually perform and who’s providing those returns,” Lefkovits says. “That greater transparency will be a great benefit to investors, and a great benefit to sponsors who are offering deals, who can make promises they can keep.”
And the possibilities to use such big data are endless.
So far, Prodigy Network has raised about $200 million from their site, with their most recent project in New York City alone reaching about $20 million, with a cut-off date in July. They have projects in New York, Philadelphia, and Colombia, where they started as a retail equity syndication firm.
About $14.6 million has been invested with Realty Mogul, funding 58 properties totaling more than $104 million. Investors on the site have been returned close to $1.6 million, showing signs that crowdfunding may be a viable trend that’s here to stay.
“Fifteen years ago we said no one would date online, that was obviously wrong,” Lefkovits says. “Clearly crowdfunding of investments is going to be a function that grows because it’s solving a problem for a lot of people.” *
NEW CRE Loans Hit All-Time High
During the fourth quarter of 2013, commercial and multifamily mortgage originations were strong, boosting mortgage debt outstanding to a new all-time high.
In fact, the fourth quarter marked the highest volume of commercial and multifamily mortgage originations since 2007, with all investor groups increasing their activity, according to the Mortgage Bankers Association’s just-released 2013 Data Book.
The level of commercial/multifamily mortgage debt outstanding reached $41.2 billion, or 1.7%, over the previous quarter.
Originations for commercial bank portfolios increased by 54% from last year’s fourth quarter. There was a 40% increase for life insurance companies, a 15% increase for CMBS and a 43% decrease in dollar volume of loans originated for the two big Government Sponsored Enterprises (Fannie Mae and Freddie Mac) loans.
Multifamily mortgage debt outstanding separate from CRE lending also rose to $895 billion, an increase of $11.5 billion, or 1.3%, from the third quarter and $36.6 billion, or 4.3%, from the fourth quarter of 2012.
Rising property incomes and values continue to boost the performance of commercial and multifamily mortgage loans, the MBA noted.
Commercial and multifamily mortgages performed relatively well during the downturn, and for most investor groups, delinquency rates are now back in the lower end of their historical range.
Loan Maturities Hit Nadir, but Expected to Increase Dramatically
Although 2014 will mark the fourth straight year of declining commercial/multifamily mortgage maturities, volumes are expected to spike - by 72% in 2015 and an additional 34% in 2016, as 10-year loans made in 2005, 2006 and 2007 begin to come due.
The loan maturities vary significantly by investor group. Just 3% ($12.7 billion) of the outstanding balance of multifamily and health care mortgages held or guaranteed by Fannie Mae, Freddie Mac, FHA and Ginnie Mae will mature in 2014.
Life insurance companies will see 5% ($18 billion) of their outstanding mortgage balances mature in 2014. Among loans held in CMBS, 7% ($41.8 billion) will come due in 2014. About 15% ($19.2 billion) of commercial mortgages held by credit companies and other investors will mature in 2014. **
Mortgage Rates Fall for the First Time in 3 Weeks
Mortgage rates erased the increases seen over the past two weeks, with the benchmark 30-year fixed mortgage rate retreating to 4.47 percent, according to Bankrate.com's weekly national survey. The average 30-year fixed mortgage has an average of 0.33 discount and origination points.
The average 15-year fixed mortgage rate fell to 3.52 percent, while the larger jumbo 30-year fixed mortgage rate dropped to 4.48 percent. Adjustable rate mortgages posted mixed results, with the 3-year ARM rising to 3.33 percent; the 5-year holding at 3.34 percent; and the 7-year and 10-year falling to 3.58 percent and 3.90 percent, respectively.
Any time there is stock market volatility and investors get nervous, that tends to be good news for mortgage rates. As investors gravitate to bonds of various types, including those backed by mortgages, it helps bring the rates that are quoted to mortgage borrowers lower. Mortgage rates are closely related to yields on long-term government bonds.
On May 1, 2013, the average 30-year fixed mortgage rate was 3.52 percent. At that time, a $200,000 loan would have carried a monthly payment of $900.32. Less than a year later, with the average rate at 4.47 percent, the monthly payment for the same size loan would be $1,009.81, a difference of $109 per month for anyone that waited.
30-year fixed: 4.47% -- down from 4.54% last week (avg. points: 0.33)
15-year fixed: 3.52% -- down from 3.58% last week (avg. points: 0.21)
5/1 ARM: 3.34% -- unchanged from last week (avg. points: 0.21)
Bankrate's national weekly mortgage survey is conducted each Wednesday from data provided by the top 10 banks and thrifts in the top 10 markets. For a full analysis of this week's move in mortgage rates, go to www.bankrate.com.
The survey is complemented by Bankrate's weekly Rate Trend Index, in which a panel of mortgage experts predicts which way the rates are headed over the next seven days. The panelists are divided, with 38 percent expecting mortgage rates to remain more or less unchanged in the coming week, and an equal 38 percent predicting rates to fall further. The remaining 24 percent forecast an increase in mortgage rates in the next week.***
Senior Living Acquisition Prices Neared Record Highs in 2013
Senior living acquisition prices are nearly back to their pre-recession peaks across property types, with skilled nursing seeing the highest per unit prices paid in 2013—up 21% year over year—according to an annual tally published by Irving Levin Associates.
In its 19th year of publication, The 2014 Senior Care Acquisition Report notes that the average price paid for skilled nursing facilities rose to a record high $73,300 per bed in 2013, a 21% increase compared to the prior year’s average price.
Additionally, the average SNF price per bed paid in 2013 was 17.3% higher than its previous record, which was set in 2010 when the average price per bed was $62,500.
“While we were surprised by the significant jump in the average skilled nursing facility price per bed, we had been seeing all year a higher number of skilled nursing facilities on the market that catered to a much higher acuity mix, or were in markets that had the potential for higher acuity, and that is what the buyers want,” said the report’s editor, Stephen Monroe, in a statement.
While average price for SNFs showed considerable growth, average cap rates for these facilities stayed within historical norms at 13%.
The private pay sector—including independent living, assisted living and memory care communities—also reported substantial average price growth.
For this sector, the average price paid was $164,000 per unit last year, just below the record set in 2007 at $164,500 per unit.
“Demand was so great in this market that for many of the transactions, there were as many as a dozen bids made,” stated Monroe. “It was truly a seller’s market.”
When breaking down components of the private pay sector, there were discrepancies between average prices per unit growth when looking at communities containing mixes of independent living and assisted living.
Communities that are mostly independent living set a record price of $191,950 per unit in 2013, which was 38% higher than the average price per unit in 2012.
In the assisted living market, however, the average price per unit declined 4.5% in 2013 to $150,600. The drag on price growth, Monroe suggests, could be attributed to smaller and older players within the market.
“Demand remained strong for assisted living and memory care communities, but in 2013 various small and older communities were in the market that nudged the average price down,” he stated. “There were plenty of sales above $200,000 per unit.”
The senior housing M&A market also indicated strong growth in 2013 compared to the previous year, as the number of publicly announced transactions increased by 20% to 225 individual senior housing and care mergers or acquisitions.
Looking ahead, the report suggests that future M&A activity will continue to grow.
“The market was liquid with the most buyers since the last market peak in 2007, accompanied by a major increase in transactions by the non-traded healthcare REITs,” stated Monroe.****
- Gill Group plans to provide RAD training at a regional seminar May 22nd in South Bend, IN.
- Gill Group plans to attend the National Housing and Rehabilitation Association’s (NH&RA’s) Developer’s Forum May 19th – 20th in Marina del Ray, CA
- Gill Group plans to provide RAD training at a regional seminar April 29th in Franklin, TN.
- Gill Group attended Bank of Advance’s Annual Retreat and Meeting March 20th – 22nd in Norfolk, AR.
- Cash Gill attended the Missouri Real Estate Appraisers Commission’s Quarterly Meeting as an Active Commission March 18th – 20th in Jefferson City, MO.
- Gill Group attended MACO’s Annual Retreat and Meeting March 13th – 16th in Biloxi, MS.
- Gill Group attended the National Housing and Rehabilitation Association’s (NH&RA’s) Annual Meeting February 19th – 22nd in Palm Beach, FL
- Gill Group attended the Council for Affordable Rural Housing’s (CARH’s) Mid-Year Meeting January 26th – 28th in Las Vegas, NV.
- Gill Group attended 22 conferences and meetings throughout the United States in 2013
GROWTH (2013 - Highlights):
- Gill Group expanded our cutting-edge market analysis software and added our own in-house developed needs assessment software for CNAs, PNAs, PCNAs, PCAs, RPCAs, and every other acronym for this type of service.
- Gill Group added 4 offices with appraisers, market analysts, engineers and architects.
- Within the offices are three architects, one MAI appraiser, two general certified appraisers, five market analysts and 10 additional support staff.
- Gill Group expanded the footprint of its subsidiary, National Title & Escrow, to cover the entire United States with a local presence.
- Gill Group attended 20 conferences and meetings throughout the United States in 2012
GROWTH (2012 - Highlights):
- Gill Group developed cutting-edge market analysis software that will allow us to do preliminary analysis that is subject-specific in any market in the United States within minutes.
- Gill Group added 11 offices with appraisers, market analysts, engineers and architects.
- The offices now employ an additional 34 people.
- Gill Group expanded coverage of its subsidiary, National Title & Escrow, to cover the entire United States.
- Gill Group expanded coverage of its subsidiary, Gill Insurance Group, to cover the entire United States.
Gill Group has published the following:
- New York Real Estate Journal - How can low-income housing facilities translate into high profits?
- New York Real Estate Journal - Up, up and away: Home mortgage interest rates and gasoline prices continue ascending.
- Tax Credit Advisor - Boston MSA Market Snapshot
- Tax Credit Advisor - Seattle MSA Market Snapshot
- Northeast Industrial Development Resource Guide - What Appraisers Know About Investing.
- Affordable Housing Finance – Urban and Rural Market Studies.
Cash Gill, MAI has had the opportunity to speak on the following topics:
- (Indianapolis, IN) National Council of Affordable Housing Market Analysts - Maximize Your Market: Understanding the Methodology Behind Market Studies.
- (Reno, NV) Nevada Council of Affordable and Rural Housing - Don't Get Caught in the Red. New Guidelines for Audits and Inspections.
- (Washington, DC) The Institute for Professional and Executive Development - Nonrecourse HUD Deals - So You Closed Your Nonrecourse HUD Deal. Now What? And Is It Really Nonrecourse?
- (Arlington, VA) Council for Affordable and Rural Housing - Property Valuation: The Correct Way to Value Properties.
- (New Orleans, LA) National Council of Affordable Housing Market Analysts - Affordable Housing Site Analysis
- (Las Vegas, NV) Nevada Council of Affordable and Rural Housing - Auditing and Accounting Guidelines for Section 42 Low Income Housing Tax Credits.
- (Washington, DC) Council for Affordable and Rural Housing - Rural Development Appraisals and Market Studies
- (Miami, FL) Council for Affordable and Rural Housing - The Equity Market - Impact on Rural Housing
- (Washington, DC) Council for Affordable and Rural Housing - How to Foster Affordable Green and Rural Housing Needs Assessments
- (Indianapolis, IN) Affordable Housing Association of Indiana - Market Analysis – Best Ways Use Market Studies to Ensure Application Points
- (Portland, ME) Enterprise Buyer/Seller Conference for RRH 515 Properties – Valuing the Product. What Is My Development Worth?
- (Washington, DC) National Housing and Rehabilitation Association – Financing and Underwriting Special Needs Housing.
- (Atlanta, GA) National Council of State Housing Agencies – Comprehensive Market Analysis.
- (Chicago, IL) AHF Live – Strategies for Rural Deals.
- (Dallas, TX) Crittenden Multifamily – Financing Special Use Properties.
- (Washington, DC) Council for Affordable Rural Housing – Rural Housing Preservation
- (Denver, CO) National Council of State Housing Agencies – Rural Housing Strategies
- (Denver, CO) National Council of State Housing Agencies – Y15: Preservation and Disposition Seminar
- (San Antonio, TX) Rural Rental Housing Association – LIHTC Legislative Update
- (Key Largo, FL) Council for Affordable Rural Housing – How National Appraisal Practices Impact USDA Assisted Properties
- (San Francisco, CA) National Council of State Housing Agencies – Changes and Challenges in Rural Housing Development
- (Chicago, IL) AHF Live – Preservation of Older LIHTC Deals
- (Franklin, TN) Regional RAD Training (Upcoming)
- (South Bend, IN) Regional RAD Training (Upcoming)
*as seen on housingfinance.com
**as seen on costar.com
***as seen on multifamilybiz.com and bankrate.com
****as seen on seniorhousingnews.com