Fintech is a growing phenomenon in the real estate sector as industry players look for innovative ways to bring projects to market.
A few months back I had the pleasure to converse with Bob de Wit, CEO of the Greater Vancouver Home Builders’ Association (GVHBA), about the emerging option of real estate crowdfunding.
Bob had some frequently asked questions by developers and investors when discussing crowdfunding in real estate, so I have written this article to share these insights with readers of ITBusiness.ca. While there was some focus on regulations in B.C. in the article, the insights here are pertinent to developers and fintech enthusiasts across the country.
Bob: Why crowdfund real estate?
Bret: Investors are attracted to the returns, diversification, and access to new deals, flexibility and speed.
Developers see real benefits in a new pool of investors at a much lower cost than traditional funding avenues as well as the ability to obtain community support for projects.
Bob: How would you define the target audience — what’s the profile of the developer most likely to use crowd funding?
Bret: That is a great question. I’ve written another article for ITBusiness.ca that features a snapshot of the current traction in Canada today featuring insights from leading Canadian portals NexusCrowd and R2. Learn more here.
The experience in the U.S. is all over the place. Tons of fix and flips but also extensive multi-family residential, resort development, commercial and industrial. In other words, all sorts of developers are involved so the profile is broad.
I’ve also identified some developer profiles that would be most likely to use crowdfunding:
- Developers in all sectors of the market from brownfield, greenfield, subdivision, industrial, residential to the reposition and redevelopment and fix and flippers who see the benefits of raising capital whether debt or equity through a wide investor base. All of these groups are all using crowdfunding to raise capital in other jurisdictions.
- Developers raising capital for multimillion dollar projects. The 67-storey B.D. Bacata in Columbia currently under construction raised $170 million USD from 3,800 Columbians as part of its capital stack. Successful multimillion-dollar capital raises are the norm on ProdigyNetwork.com.
- Developers involved with single family home developments and fix and flip projects. Developers focused on micro developments are also successfully raising capital (mainly debt) through platforms outside of Canada such as Patch of Land and iFunding.
Developers who are likely to be successful in raising the capital they need include:
- Developers who have successfully syndicated a development project before. Crowdfunding is a form of syndication with the added bonus of simplifying the messaging and follow-up communication with potential investors;
- Developers who have a strong reputation in the community. These developers have a natural crowd of supporters they can tap into in a crowdfunding campaign;
- Developers who have a broad social network. This network may not be accredited but they know the developer and understand the risk;
- Developers who have structured their projects to have an attractive return to investors with the least amount of risk; and
- Developers who are looking for a less costly or less time consuming process to secure debt funding.
Bob: What would the deal look like, or need to look like?
Bret: As above, the investment type varies but for now they are supplements to other raises to bring in new investors to resell to and provide marketing benefits. Right now all the investors need to be accredited but that may change over time.
Crowdfunding does not change how investments in real estate deals are structured. Instead it opens the door to a new category of investor and is a more efficient way to raise capital once you have spent the time necessary to build on your network/crowd.
Bob: How would it work/comply with B.C.’s regulatory environment? BCSC? REDMA?
Bret: In regards to BCSC:
The start-up crowdfunding exemption could be used by a GVHBA member who is building one-off homes or doing restoration/renovation and flip. The exemption only allows them to raise up to $500,000 in two tranches of $250,000 each 90 days apart, so it is not that useful for larger builders unless they are looking for community buy in to green light a project or support commercial retailers going into a project, or have smaller vendors or people in their circle that they would like to involve but don’t fall under the FFBA or AI exemption. Builders looking to raise larger amounts can combine the start-up crowdfunding exemption with an accredited investor (AI) exemption or if it looks like the interest of non-accredited investor is strong they can prepare an offering memorandum (OM) as a next step offering.
The integrated crowdfunding exemption is not available here in B.C. and likely will not be adopted for at least a couple of years as B.C. waits to see what sort of uptake the other provinces experience with this exemption.
Larger developers and real estate focused funds are currently using the OM and AI exemptions to raise capital in B.C. Some GVHBA members may not even realize this is how their peers are raising capital. Offerings under both of these exemptions benefit from the amplification an online listing brings to attracting investors to a project. These issuers can also use their own websites to “crowdfund” but they miss out from the spill over effect of being on a designated funding platform.
At the moment there is no true real estate specific funding platform in western Canada. Platforms, which rely on OM and AI exemption, are required to be registered as an EMD. Platforms relying exclusively on the start-up crowdfunding exemption are not required to register as a dealer but need to clear a regulatory review in each province where they intend to operate. Real estate developers looking to raise capital can use one of the generalist funding platforms operating in BC such as FrontFundr and Optimize Capital Markets.
In regards to REDMA:
The Real Estate Development Marketing Act (REDMA) is unlikely to be triggered at any time as the developer is not selling or marketing a development unit (a defined term which triggers the application of the REDMA) whereby the investor has a right to occupy or acquire the property as a result of the investment.
The bottom line is there are no significant roadblocks to a developer raising capital through equity crowdfunding in Canada.
I hope you find these insights on financial technology’s application to real estate development interesting and I encourage you to reach out with any comments or questions related to this space.