Capital Markets Trio Launches First Public Offering For Crowdfunding Platform That Operates Like A REIT
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It can be difficult launching a successful crowdfunding platform due to oversaturation and a cloud of stigma, but commercial real estate investors Jeffrey Karsh, Joseph Kessel and Eliot Bencuya have pulled it off with a new model of investment.
The trio, who boast a collective 40-plus years of experience in commercial real estate investment and more than $5B in transactions, launched crowdfunding platform stREITwise last year. After several months of beta testing, the company plans to officially launch its first public offering Wednesday.
“The idea to create stREITwise came not from a technology background,” said Bencuya, stREITwise's chief investment officer. “[We] felt that technology could empower [us] to provide access … to an investor base who previously could not at all — or only at a great cost — gain exposure to commercial real estate in their investment portfolio.”
StREITwise is different from its peers in that it is a crowdfunding platform that operates like a nontraded REIT. The company principals, through two separate entities, own and operate the assets they are raising capital to acquire.
The company is offering up to $50M in shares for 1st stREIT Office Inc., a commercial real estate investment firm that will acquire and manage office assets in secondary and tertiary markets, according to public documents filed with the Securities and Exchange Commission.
The offering is sponsored by Tryperion Partners and managed by Tryperion subsidiary SW Manager LLC — both of which are owned by stREITwise principals.
“For now, stREITwise is focused primarily on office assets, but our principals have experience in all asset classes and in the future we may grow in a measured fashion to include all property types,” Bencuya said.
Betting On The Not-So-Sexy Markets
StREITwise is bypassing office buildings in core cities in search of yield in secondary and tertiary markets like St. Louis — where it purchased its first asset using the funds raised in its beta round.
“Previously, it was really only high net worth investors who had access to these private market real estate deals,” stREITwise co-founder and CEO Jeffrey Karsh said in a video describing the company’s current offering. “But now, because of new regulations under the Jobs Act, stREITwise is able to offer a diverse portfolio of real estate to accredited and non-accredited investors alike, for as little as $1K.”
The company raised about $22M in the 10 months since its beta test launched in September, acquiring The Panera Bread complex — one of St. Louis’ most prestigious office parks — for $20M, as reported by the St. Louis Post-Dispatch.
“St. Louis is great. The economy is robust and diverse. You have a very educated workforce produced by institutions such as Washington University and others. The employee base is fueling numerous Fortune 500 companies that are headquartered here. There’s a significant healthcare presence that is growing and you have a market that is overlooked by investment managers because it doesn’t carry the same cachet as a sexy primary market,” Bencuya said in the same video.
The Panera Bread office complex along 3630 South Geyer Road consists of about 290K SF of Class-A office real estate. Tenants include Panera Bread, Wells Fargo, New Balance and Nationwide Insurance.
“We’re looking forward to at least one or two more acquisitions this year,” Bencuya said. “We have a very strong pipeline but can’t announce any specific assets that we are going to purchase yet.”
Clouded By Stigma
Though no longer in its infancy following the passing of the 2011 American Jobs Act — which loosened regulations to allow companies to pool money from everyday folks — crowdfunding is still fraught with stigma when it comes to fee structures and a lack of transparency.
“A lot of the competitive sites bury the fees deep into the document that nobody sees or reads. We present our fees right in our business plan,” said Adam Kaufman, managing director of New York real estate crowdfunding firm ArborCrowd. “Really, for this industry transparency is going to be key to keeping investors coming back.”
Another concern regarding crowdfunding investment, Kaufman said, is that many platforms raise funds from people who have never invested in the stock market, let alone real estate, before. As such, these investors have no point of reference for safe investment strategies and are not up to date on real estate fundamentals, macroeconomic trends or the business cycle — all of which is information needed to make informed investment decisions.
“This is very dangerous,” Kaufman said. “Now you’re asking people who don’t have investment expertise to invest in an entirely new asset class.”
To quiet the naysayers wary of crowdfunding scams, Kaufman said it is important for companies to not only make their fee structures explicitly clear to future investors, but also to educate investors about the assets their money will be used to acquire and why the properties would make a solid investment.
Several years ago the crowdfunding space was oversaturated with startups created by tech entrepreneurs hoping to make a quick buck, but growing involvement from institutional players has stomped out much of that competition.
As crowdfunding platforms backed by deep-pocked institutional players like ArborCrowd — which is in the Arbor Realty Trust and Arbor Management Acquisition Co. family — increasingly enter the space, they have been able to scale quickly, making it harder for startups to gain market share and stand out above the rest.
StREITwise is hoping to defy those odds.
“The biggest differentiator [for stREITwise] is that we are not a platform that raises capital to allocate money with real estate operators through joint ventures or through passive investments nor are we backed by venture capital that requires that we scale our fee base quickly to grow into a certain valuation,” Bencuya said. “Rather, we raise capital steadily to make and manage direct real estate investments ourselves.”
This eliminates some of the fees associated with the traditional crowdfunding model, Bencuya said. By raising capital directly through its site, the startup is also eliminating fees associated with financial advisers, broker-dealers and others — all of which can eat into investors’ upfront investment.
The company guarantees investors the lowest fee structures and have historically been able to distribute 10% annualized dividends. It is also required to file quarterly updates with the SEC, which increases transparency for investors.
Investors using stREITwise must come up with a minimum $1K investment and can acquire as much of the $50M in shares as they want — starting at $10/share. For tax purposes, stREITwise qualifies as a REIT.
“We expect to use substantially all of the net proceeds from this offering to acquire a diversified portfolio of office properties with a focus on markets where we feel that the risk-return characteristics are favorable,” the company wrote in its offering circular. “We may also invest, to a limited extent, in other real estate-related assets.”