Showing 6 posts in Real Estate.
I hope everyone can join me in a webinar on April 21, 2017, entitled Real Estate in Mergers and Acquisitions.
I’ll be part of a panel that includes my environmental partner, Leah Knowlton, on challenges in dealing with real estate in M&A documentation and negotiations.
Registration information available on the National Business Institute website.
Gearing up for the Crowdfunding Expo at Cobb Galleria on May 1st I’ve been reading up on developments in crowdfunding real estate. Last week’s announcement of a crowdfund offering for the Hard Rock Hotel in Palm Springs made news, but there is a lot more going on in real estate crowdfunding here in Georgia.
One of the leaders in this space is GroundFloor.
GroundFloor was founded by Brian Dally, a Harvard-trained lawyer who had several entrepreneurial successes before turning his attention to crowdfunding real estate, and Nick Bhargava, a lawyer who has worked for both the SEC and FINRA.
GroundFloor has closed three financings in Georgia so far, all of which have been residential rehabilitation projects. One of those projects was in Midtown Atlanta while the other two were just outside the Atlanta perimeter. The Midtown Atlanta deal took the form of a senior secured loan to the project developer while the other two were “mezzanine” loans where the loan will stand behind another lender who is in senior position on the collateral.
What makes GroundFloor’s approach intriguing is that it has used a single offering memorandum to sell successive tranches of notes, the proceeds of which have been used to fund a single loan to the project borrower. (Here is their Securities Purchase Agreement). In other words, while investors have committed their funds to specific projects, the investors do not, themselves, make a loan to the borrower. Rather, the investors purchase notes issued by a GroundFloor affiliate which, in turn, makes a single secured loan to the borrower. The notes purchased by investors are non-recourse to the issuer, with repayment of the investors’ principal and interest coming solely from the borrower’s repayment of its loan from GroundFloor.
This multi-investor-single-loan approach is very similar to the approach utilized by Lending Club, except that Lending Club’s notes are registered with the SEC. GroundFloor takes advantage of our intrastate crowdfund rule – the Invest Georgia Exemption (or “IGE”) – to sell its notes exclusively to Georgia investors. The notes are exempt under Section 3(a)(11) of the 1933 Act and exempt from the Georgia Securities Act by virtue of the IGE.
GroundFloor’s approach allows the platform to spread the cost of preparing a PPM and legal documents across multiple projects. Structuring its investments as loans (rather than equity investments) gives investors a greater level of security (since their investments ultimately fund a secured loan to the borrower).
RealtyMogul has announced a "crowdfund" offering of securities in the Hard Rock Café & Hotel in Palm Springs, California and the announcement is getting a lot of media attention.
While I applaud any entrepreneur who can successfully launch a fundraising campaign and garner medial attention, I am concerned that some of the non-legal press may be confusing for investors and some entrepreneurs.
Strictly speaking, the Hard Rock offering is not a true crowdfund offering. Rather, RealtyMogul has formed a special purpose LLC (Realty Mogul 20, LLC) that is offering membership interests to the public under SEC Rule 506(c). As such, investments in this offering are strictly limited to persons who qualify as “accredited investors” under SEC rules.
Investors will invest their cash with Realty Mogul 20, LLC and that entity, in turn, will make an investment in Kittridge Hotels & Resorts, LLC, the entity that manages the Hard Rock Café in Palm Springs.
Confusion may arise because the SEC has proposed (but not yet adopted) crowdfunding rules under the 2012 JOBS Act. These rules, when adopted, will permit issuers to offer securities publicly to potential investors (including those who are not accredited investors). Until these proposed SEC rules become effective, however, crowdfund offerings to non-accredited investors remains prohibited.
Another interesting twist is the way in which the sponsors are attempting to exempt their structure from the Investment Advisors Act. In the investor disclosure documents the sponsors describe that the company (Realty Mogul 20, LLC) will not be an investment company under the 1940 Act. They also disclose an affiliated entity that is registered as a broker dealer (presumably to collect a placement fee for the offering). They disclose that the company will be exempt from the 1940 under Section 3(c)(1) (the chief exemption for private funds, recently narrowed by the Dodd-Frank Act) and yet the fund manager will not be registered under the Investment Advisors Act because the underlying investment is an investment in real estate.
This approach to avoiding the use of a registered investment advisor as the fund manager is often attempted in real estate investment funds. The approach is not entirely free from risk, however, as there is relatively little SEC guidance on when a private fund is primarily engaged in making an investment in real estate (an activity that does not require an RIA) as opposed to an investment in securities (which does require an RIA).
The Crowdnetic February 2014 report on private offerings contains a wealth of information on trends in private offerings. The Crowdnetic report is intended to cover "private issuers publicly raising" (PIPR) funds under Regulation D. The report is compiled from data collected from Form Ds filed with the SEC under Rule 506.
As of the end of February, 2014:
- There were 2,594 active PIPRs with capital commitments of approximately $116.6 million;
- Of these, 37% were for Service companies and 25% were for Technology companies;
- Of the cash raised in February, the greatest amount was for real estate development (comprising $17 million of the $36 million raised in the month);
- Geographically, the western U.S. accounted for the greatest number of PIPRs and the greatest amount of cash raised. (The South came in second); and
- Although the highest number of offerings are equity offerings, convertible debt offerings raise more cash.
Crowdnetic's approach of compiling and publicly-releasing this data is a smart one. As the number and size of PIPR offerings increase the opportunities for data-mining, and the value relating to those efforts, will also increase.
Please make plans to join me at Real Estate Crowdfunding 2014 at the Cobb Galleria on May, 2014. (Registration here).
Sponsored by CrowdFundBeat, the event should include players in real estate crowdfunding in Atlanta and the Southeast.
Keynote speaker Brian Kemp, Georgia's Secretary of State and Commissioner of Securities, will likely address his motivations in adopting the Invest Georgia Exemption which allows Georgia-based companies to raise money through intrastate crowdfunding.
Meanwhile, here in Atlanta, GroundFloor has launched its inaugural real estate project in Midtown Atlanta.
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