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we're joined today by dan miller
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and he is the co-founder and president
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of a company called
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fundrise which is a crowdsourcing
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company in the real estate
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sector and this is a fairly new idea
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and why don't you tell us about it how
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it works and
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how you got involved sure so my brother
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and i launched fundraise in 2010 we're
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the first crowdfunding platform in the
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u.s
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initially we built the platform to fund
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our own real estate transactions so we
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were
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buying and developing properties in
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washington dc created the platform to
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let anybody invest with us in the single
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deal for as little as 100 bucks
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this is the first crowdfunded
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transaction and now we fund other real
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estate companies so scaled from doing
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our own projects to now projects all
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over the country
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so when people hear that number 100
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they're probably thinking a very small
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scale but it's not necessarily a small
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scale so why don't you tell us what
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what size the projects are and is it
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residential
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is it commercial sure it's mostly
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commercial projects in urban areas about
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under 30 million so a little below
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institutional scale
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we're normally providing about two to
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five million bucks per deal
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three years ago that was three hundred
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thousand last year it was a couple
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hundred you know six seven hundred
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thousand
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so it's growing very quickly and really
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what crowdfunding allows people to do is
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distribute investments online
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take a lot of very small investors pool
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those together into a larger check so
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just because they're small minimums
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doesn't mean the sum doesn't add up to a
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large amount so you have
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people you you put a project on your
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website and you say
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we want to buy and develop this building
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would you like to invest and you can
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invest
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any amount you want i i guess the
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minimum sounds like it might be 100
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but you get investors up to a million i
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understand yeah is there an average or a
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mean that makes sense
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for people to understand about 10 000 10
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000 is a good number people think of of
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of what the kind of average investment
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is and so we source deals we underwrite
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deals you have offices around the
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country so that process is like
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traditional real estate sourcing
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underwriting you
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have people work the markets they meet
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real estate developers they
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discuss our platform and then we put the
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deals together
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the innovative part is putting it on the
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site and allowing anybody to be part of
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the investment
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and the investor what is it that they
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get out of it what kind of return
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why would they want to do that than
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maybe some other kind of deal what's the
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advantage to them well that that the
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real value is in that you have
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technology cutting out middlemen that
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were direct between investor and real
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estate companies as opposed to having
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private equity funds or other groups in
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the middle
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and so that way you're able to have
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double digit returns for investors
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which is still the cheaper cost of
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capital for real estate companies
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so generally we're doing preferred
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equity investments so
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junior to bank debt in the deal but
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senior to equity in the deal
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so it's a kind of high term or high
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fixed deal relatively short term
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during the transition or development of
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the real estate asset
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so if someone didn't know your company
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how would they know that their money was
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secured that this was a good idea
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or it may be a good idea or or maybe not
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a good idea
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they really watch and see so that's what
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we've seen on consumer behavior people
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sign up for the site
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they rarely invest in the first 120 days
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they sign on regularly they look at
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deals they check them out they see that
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they're raising the funds that they're
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closed
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and then they invest 5 000 and then they
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start getting distributions on that deal
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and then they might invest 10 and 25.
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so we've really seen that type of
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consumer behavior happen which i think
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is similar what e-commerce was you know
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the first time you bought something
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online
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you weren't sure if it was safe to put
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your credit card in you didn't know when
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the box was going to arrive
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and now it's instantaneous you know
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same-day delivery i think similar
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consumer behavior patterns
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because you're serving them a product
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they've really never invested in before
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through a mechanism online that they
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haven't done for that many different
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types of investments
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so interestingly you're you have a niche
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here when it comes to the size of
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projects
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you're not you're not um investing in or
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developing
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200 million dollar office towers
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you're investing in in a certain size
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project which
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um those with with large amounts to
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invest tend to not
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be interested in so much could you
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explain how that
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that's really where we begin so with
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institutional investors they'll rarely
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write a check of less than 10 million of
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equity
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and that's not because the deal doesn't
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make sense if it's smaller it's because
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they have a multi-billion dollar fund
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they can put it out in so many
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increments if they have a lot of one
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million dollar investments they won't be
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able to manage it
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and so it creates this artificial
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barrier where the small medium
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enterprise
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the mid-size real estate operator who's
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established who has a real track record
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if they bring a deal that's 15 to 20
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million dollars of value
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it's very hard for them to get that
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finance so we plug what technology tends
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to be efficient at
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is the kind of mid-market space for the
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the real estate operators
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and provide them capital to deals that
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are often ignored by institutional
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investors
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what kinds of projects have you
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completed so far we've done
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projects in 15 different markets the
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highest profile was we raised five
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million dollars for three world trade
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center
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we sold five million dollars of the
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senior bond the senior construction loan
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on that deal
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we've done about half of our business
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between dc and new york and just
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launched offices in la and
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san francisco most of our deals like i
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said between
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five to 25 million dollars in deal size
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again we're funding another real estate
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company they come to us we're funding a
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portion of that deal
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and most of them are urban areas in
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transition so buying a apartment
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building upgrading the units
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then selling and refinancing lots of
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different types of projects but always
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in some development or transition
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so in addition to finding
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investors through the use of technology
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which wasn't so easy to do before
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the technology allowed for it and
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finding people who wouldn't have been
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able to
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invest this way before you're also you
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mentioned earlier
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cutting out the middleman so that means
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you're saying that you're cutting costs
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quite a bit could you explain how that
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whole
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cost cutting exercise works how much of
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the cost do you cut out
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i assume that's a big part of the
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business model and
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uh what what
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how how what percentage of the cost you
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cut out and how does that translate
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into how these deals work right and and
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that's really the real value that we're
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able to deliver cheaper capital the real
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estate operator and and
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better investments to the real estate
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investors ultimately if
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that's not the value proposition then
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there is no business here
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and our comparisons off into a private
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equity fund we charge
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half a percent per year to the investor
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to asset management and service
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the investments private equity fund
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normally charges two percent a year
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management fee and 20 percent of the
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upside
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over a preferred return so we kind of
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use a mock sample deal three year
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investment
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12 year 12-year i mean 12 percent annual
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return
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we charge one and a half percent over
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those three years a typical private
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equity fund will charge
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8.4 over those three years so it's
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really a huge spread that then gets
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split
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between the real estate company and the
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investor so we hear a lot about
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disruptive technologies and you're just
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talking about disrupting private equity
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in the real estate space do you think
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that that's um
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that's a scalable model that's at least
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in the uh
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at the level of project that you're
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talking about which is under 30 million
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roughly although i guess that could
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change
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it's going to change i mean i think what
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you've seen in other businesses when you
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look at digital media blogs twitter
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facebook they started out relatively
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small and then
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it became large and institutional so i
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think where where is the most efficient
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place to start
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is is the ignored portion of the market
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that institutions have difficulty
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serving because of their scale
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but i think it really will shift it's
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about creating efficiency for private
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commercial real estate
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transactions it's very inefficient
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market it's a huge market
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but you have a deal you make some phone
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calls you try to raise some funding
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there's not an efficient way to put the
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deal to have it distributed for people
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to look at it to make investments
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to have a platform like ours standardize
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it so i think it's going to bring
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efficiency to all parts of the market
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it's just going to take
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time to go to different sectors so it's
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a little bit
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like an airbnb or an uber where
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you're you're the the i guess the
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conduit that's connecting
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the the uh the person with the need uh
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with the person who can fulfill that
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need and that's uh creating less
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overhead and that sort of thing is that
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the idea
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right it the business model is called
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marketplace lending at this
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point lending club's the best known ones
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so you have borrowers you have investors
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you connect the two
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you also use your own capital to
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guarantee the funding so that you match
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you make the two stick together
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and by by creating that standardization
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you have efficiency on both sides so
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what we've seen is with the
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decentralized model it can operate much
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more efficiently
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at much cheaper costs it doesn't have
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all the centralized infrastructure that
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bank branches have with big offices and
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corporate overhead
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and so i think as you see crowdfunding
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get larger and the sums of capital be
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bigger
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i think you're really going to see a
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challenging challenge existing banking
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infrastructure that is very centralized
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with a lot of overhead and additional
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costs but it's not just
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bank infrastructure it's not just bank
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buildings and right and that sort of
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thing
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but it's also the cost of actually going
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out and finding investors which is
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i i guess labor intensive and it
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involves a lot of meetings and lunches
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and hand-holding and
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you're basically saying that's not
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necessary anymore at least in projects
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of this size at least for now
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yes we think of ourselves like an
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outsourced capital markets division for
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a lot of these firms
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mid-sized real estate operators they
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don't have a full-time person on a
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capital markets desk
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and we're arranging financing we're
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giving them a sense of what the quotes
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for different capital is going to be
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we're giving them connection to the
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investors but we're handling
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the investor relations the distributions
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the tax documents so
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it's very much centralizing that role
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letting the real estate developer focus
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on their jobs sourcing deals developing
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deals
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and us managing the entire capital
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raising infrastructure
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so compared to how it used to be done
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and what it used to cost to do that
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how does your cost structure compare in
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other words how much are you cutting out
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right right when you say you're cutting
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out the middle man what percentage of
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fees and costs are you cutting
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so generally somebody who syndicates
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equity will charge three to five percent
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uh minimum potentially higher for them
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to corral and raise the capital
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private equity funds will charge two to
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twenty so you have on the investor side
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at least a five to ten percent
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fee that the investor indirectly pays or
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directly
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private reits are another market that's
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similar for private real estate
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transactions that's a 15
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up front fee when you enter the
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investment so you're talking about
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pretty
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huge fees that that we think technology
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is going under versus your fee would be
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what half a percent per year and then we
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charge the borrower one and a half
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percent
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at closing um so it's it's for the
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borrower it's cheaper capital
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for the investors it's more access to
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investments and also opens up a new part
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of the market traditionally
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with uh you know with a real estate
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syndication you're limiting it to people
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investing 100
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000 or more and so you're talking about
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a huge unmet
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part of the market that hasn't been able
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to invest in single real estate
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transactions
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there's something else about this also
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about the
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the kinds of projects that you do where
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the people that invest
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oftentimes will have some connection to
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it maybe it's in their neighborhood or
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maybe
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they know somebody that's involved in in
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that building
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somehow and so they it feels more real
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to them
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somehow that's that's where we began i
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mean we were developing urban info
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projects with
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leasing to chefs and restaurateurs that
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people knew locally converting old
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historic buildings that people were very
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excited about
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and we always had people come and talk
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to us about you know what are you doing
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why what are these projects looking like
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and how are they coming out we thought
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why don't we go out to those investors
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let them invest in it they might own a
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home in the neighborhood they have
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already understood the real estate
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they have a lot of other data around it
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that makes them excited to invest
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that might not be purely financial but
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doesn't mean it's wrong and so we just
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did our first project in detroit
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we're going to raise capital for the old
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tiger stadium redevelopment
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and in the same way it's old baseball
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stadium everyone in detroit's been to it
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they want to be part of revitalizing
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that area and bringing it back
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and so i think you're seeing what we're
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able to do is because you're selling
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these investments to retail investors
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they're buying you know they're buying a
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product that has more texture
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as opposed to just a 16 ir there's other
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components that they're able to evaluate
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so how big of a project is that and what
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percentage of that amount do you think
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you'll be able to help that project's
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about 30 million um
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and it's gonna be at 20 equity will
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raise between a half a million to a
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million
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um and we now fund with our own balance
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sheets so we guarantee the funds at
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closing with our own cash
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and then put it up on the site so it
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really for the real estate company
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they're not taking the risk of raising
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the money online that's been one of the
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big things that shifted that
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we centralize the asset management we
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centralize the investor reporting
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and we make sure that the funds are
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there at the appropriate time so this is
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the part of
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commercial real estate development
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that's going to be changing big time in
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your estimation
00:12:45
what parts will remain the same there's
00:12:46
obviously a people element to some of
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this and so yeah
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deal sourcing we've seen most of our
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deals come offline for with our
00:12:53
kind of regional offices people being in
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market knowing the neighborhoods meeting
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the developers in person
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done very few deals where we haven't met
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the developer or where they originated
00:13:01
online
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so we're finding that putting the deals
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together is a very offline process
00:13:06
we're finding underwriting due diligence
00:13:08
there's certain information needs to be
00:13:10
collected
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it has to be ordered from these
00:13:12
third-party groups appraisals
00:13:13
environmental surveys
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and somebody has to centrally underwrite
00:13:17
it two functions that we're looking at
00:13:19
there to
00:13:20
to you know use the people more
00:13:22
efficiently is kind of crowdsourcing
00:13:23
that aspect where
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if a broker somebody brings us a deal
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they can upload it and share fees with
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us
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or maybe you start to have experts in
00:13:30
certain markets who underwrite the deal
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and
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into the crowd kind of become a credible
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third party group but right now it's us
00:13:36
handling all those aspects so
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i would say the sourcing underwriting
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and closing is very old school
00:13:41
it's the distributing the investment the
00:13:43
marketing of it online the investor
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reporting
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that's where we've done it had a
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fundamental shift
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thanks very much for joining us thank
00:13:50
you so much
00:14:14
you
