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