JOBS Act Propels Real-Estate Crowdfunding Platform

Oct 21 2014 | 2:57am ET

If D.J. Paul were a real estate development, he would be described as “multi-use.”

Before co-founding the New York-based real-estate crowdfunding platform Propellr with his college roommate, Todd Lippiatt, Paul studied philosophy, sold mortgage-backed securities, produced movies and lobbied Washington to get the JOBS Act passed—among other pursuits.

“All the while,” he told FINalternatives in a recent phone interview, “I always have kept my hand in real estate. Both sides of my very divorced family were real-estate developers in one form or another, or financiers, so that's always kind of been the baseline.”

With the passage of the JOBS Act, which, in addition to allowing hedge-fund advertising, required the Securities and Exchange Commission to adopt rules to facilitate crowdfunding, Paul's career took a fresh turn: He served as chief strategy officer for Gate Global Impact, a company specializing in electronic market infrastructure, and co-founded Crowdfunder, a Los Angeles-based intermediary platform, but it wasn't until he reconnected with Lippiatt that his post-JOBS Act path became clear.

“I've known Todd for an awful long time,” Paul says. “He started a real-estate financial structuring firm back in 2007 and he's always had a head for technology. That's the reason he was valuable on Wall Street in the first place, but he went out on his own. He started a firm that sources real estate financing for larger-scale commercial projects."

“At a certain point, he saw what I was doing and said, 'I think we should be doing what we’re doing utilizing the things that you're doing.'”

And so was born Propellr, a one-stop online shop for real-estate development financing.

“We have been sourcing financing for real estate for the better part of eight years at this point,” Paul says, “and now we're utilizing the tools available as a result of the JOBS Act to scale that already profitable business.”

Deals “come in over the transom,” and Propellr does “the basic compliance, and then the due diligence, and then the underwriting, and then we structure a deal and then we push it out to our investors."

Their edge, according to Paul, is that they offer accredited individuals the chance to invest alongside institutions—the hedge funds, family offices and private equity firms that currently account for about 80% of Propellr's investors—on the same terms.

“Individual investors like me would normally not have access to a deal of that size, unless we place our money with a hedge fund or some sort of fund,” Paul says. “But to have access to it directly and at the same terms, that's quite advantageous. There's various percentages that are taken out by middlemen and if you're looking at, for example, a 14% raw return, by the time it's trickled through the various promoters and funds of funds and hedge funds, that 14% can lose 300, 400 basis points and end up being a 10% return—which is nothing to sneeze at, but I'd rather have 14 than 10.”

For the developer, Paul says, the advantage of Propellr over more traditional sources is, first, “those traditional banks are not lending, and when they are lending, they're only lending for first position. You may be able to go to a bank for your first position, and they'll line up the 50% to 60% loan-to-value, but you still have 40% of the project you need to fund and you have to fund it with something else. One advantage of coming to us is, we will place all of it; it's a one-stop shop.”

Another advantage, he says, is that, in the end, Propellr “tends to be cheaper.”

“We tend to lend at a higher loan-to-value, at a slightly higher interest rate than most institutions will do. That means that you don't have to give up as much equity, you can own more of your project—5%, 10%, sometimes 25% more than you would have owned if you'd done the traditional thing, where you run around and put the pieces together yourself. You'll have more debt, there'll be more leverage, but you'll own more of the upside.”

Propellr's inerest rates range anywhere from 6% to 14%. “Obviously, a project that comes in that has a loan-to-value of 50% would get a much lower interest rate than one that needs 70% loan-to-value,” Paul says. But other factors also figure in—the land, the developer's previous work, their own investment in the project. “We like alignment and the more alignment that we have, the more skin in the game our partners have, the more comfortable we are with giving them better terms.”

Propellr prefers to fund larger transactions—Paul says he'd prefer to fund one $100 million project than a bunch of smaller ones—which means it tends towards projects in urban areas like New York and Los Angeles, although they've also done a mixed-use commercial project in Aspen, Colo., and are currently considering a hotel project in Hawaii.

Paul says he hopes eventually to invert the roughly 80/20 split between institutional and accredited individual investors on the platform, but that will mean accepting limits on the potential for growth. Since 1982, the SEC has defined an accredited investor as one with an income of at least $200,000 or wealth of $1 million, excluding the value of his or her home.

“If everything stays status quo right now,” Paul says, “the total number of accredited investors in the United States is only eight million, of whom only about 12% participate on a regular basis: There are only about 1 million people who participate in this $1 trillion market. What does scale look like to this? We're not talking about Facebook numbers, right? If you get 20%, which would be massive, of all the people who tend to invest in these things, you're still only talking about 200,000 families, which would be amazing, but nevertheless, when people talk about 'We're the next Big Thing,' and they mention a technology platform that's done well, that did an IPO, I look a bit askance because I have to think, 'Well, what does scale look like to you?’”

Not surprisingly the SEC's decision to revisit (and possibly rewrite) its “accredited investor” definition is of great interest to Paul.

“I've actually written to the SEC advocating for expanding the definition, opening it up to more people,” he says. “Right now, as you know, it's ‘crowdfunding for rich people’—you have to be wealthy in order to participate. That was never what Congress intended back in the '30s, nor what the Supreme Court decided in 1953. What they said was an accredited investor, a sophisticated investor, is someone who can ‘fend for themselves.’ And being able to take a financial hit is certainly one realistic method for determining whether or not someone can fend for themselves, but there are other ways someone could fend for themselves. Instead of rich you could just be smart, or well-educated.”

“Right now, if you are a stockbroker and pass your Series 7 and you only made $175,000 and you hadn't been in business long enough to accumulate $1 million worth of wealth, exclusive of your home. You would legally be allowed to sell Reg D private placements but you could not buy them for your own account. That's kind of nuts.”

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