I’ve written before about one investor’s borrowing experience with crowdfunding lenders, but in this column, let’s take a look at what things look like on the equity side.
The equity financing capabilities usually come on with larger commercial projects. Single-family projects, for example, don’t usually get additional equity financing unless many of such properties (a “pool”) are involved. This doesn’t mean that residential properties are off-limits, though. Equity financing can be available for apartment buildings of five units or more (although they’re often much bigger than that), as well as for other classes of commercial real estate, such as retail centers, office buildings, hotels, senior centers, student housing, self-storage facilities, medical office buildings, and more.
Let’s look at a few examples of how these work.
Equity Financing: Indianapolis Industrial Property
The small industrial property below is something I invested in myself. The sponsoring real estate company is a prominent one, handling value-add industrial projects throughout the Midwest. Like most companies, though, it prefers to spread its own funds over several projects, so it invited other investors to share in the financing of this one.
This industrial complex is made up of four light industrial buildings and is located near Indianapolis. The building started off being 78 percent occupied, with 25 tenants spanning various industries. The sponsoring real estate company’s operating plan was to improve the appeal of the property with parking lot repairs and cosmetic upgrades to the common areas. The company also planned to hire a local leasing team to leverage the strong submarket fundamentals so as to stabilize the property.
I’ve been lucky so far with this one. After its first full quarter of operations following the investment, the project was performing above expectations in large part due to increased occupancy at the project above pro forma. The increase in occupancy was achieved through renewing existing leases with near term expirations, expanding growing tenants, and signing new leases. Within a few months, the property was more than 90 percent leased, and several months later it was 98 percent leased.
Distributions to investors began earlier than expected, and they have been coming in regularly ever since. If all continues to go well, the sponsor will be able to sell the property at a nice gain.
Equity Financing: Phoenix Office Building
Another investment I’ve been watching up close, since it was handled by the company I work for, was a Phoenix office building. Here, the sponsor had the opportunity to create condominiums within a retail complex, and had hopes of selling the anchor lease to an investor for more than half of the total purchase price. In purchasing the building, the sponsor hoped to gain a solid asset with a relatively low basis and robust cash flow. The property is a mixed-use building that includes a prominent retail bank branch as well as a diverse mix of professional office tenants, including a law firm, appraiser, dental management firm, CPA, radio station, car financing company, and a property management firm.
This was another good story. The sponsoring real estate company made quick strides in completing some value-add upgrades to the property, following through on the condominium creation process, and retaining prominent brokers to help with marketing efforts for both the bank lease and the overall property. The sponsor also identified an expansion opportunity with one tenant, and was successful in marketing the property to bring the investment to a successful conclusion
Ultimately, the sponsor was able to first sell the anchor space, and then the remainder of the building. It was all done ahead of schedule and for a price that pleased everyone. Investors in the crowdfunded project gained an annualized return of nearly 18 percent and had to hold the investment for only 19 months.
It’s worth noting that equity real estate investments, while riskier than loans, offer potentially the highest returns for investors, oftentimes with depreciation tax benefits. Of course where an exit occurs earlier than expected, it’s even better.
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