Elizabeth Kulik and Barry Barovick, along with Jason Kulik, recently launched ProHatch, or what they call a crowdfunding incubator. It’s not the first crowdfunding website out there, as the better-known Kickstarter and Indiegogo are already senior companies in the space for "crowd" financing.
One of the major differences between ProHatch and those that have launched before is that Elizabeth Kulik and Barovick are longtime veterans of the real estate industry, both having been in the C-suite of Grubb & Ellis, with Barovick at one time holding the title of CEO.
Although ProHatch offers crowdfunding services for a number of different services and industries, one of its focuses is real estate, which is, of course, a subject near and dear to the hearts of Kulik and Barovick.
I recently spoke with the two, asking how crowdfunding could change the way real estate would be financed in the future.
First, a definition of crowdfunding, and I’ll use the one Kulik gave to me: It is the sourcing of capital in small amounts from large amounts of people, which is really a phenomenon attributed to the popularity of the Internet. By going online, reaching a vast number of people has gotten easier, and brings a whole other level to what has traditionally been a linear chain in capital formation.
As one columnist wrote earlier this year in the Wall Street Journal, "Though crowdfunding is still in its infancy, the ability to raise capital via the Internet may in time become a significant spur for economic growth — to say nothing of giving ordinary investors the opportunity to get in on the ground floor of the next big idea."
On ProHatch, there are four ways to fund: donation, reward, equity and lending. Only the first two are active at the moment, as equity and lending have to wait until the Securities and Exchange Commission implements provisions in the JOBS Act, which was passed by Congress last year. The legislation is actually the Jumpstart Our Business Startups Act, and it is supposed to remove the barriers in securities laws that prevent entrepreneurs from using crowdfunding to sell equity to ordinary investors and let companies raise up to $1 million via the Internet.
Until that happens, investors are left with donation (no returns other than the personal reason for contribution) and reward (donations are incentivized, such as being able to attend the groundbreaking of a new community center being built).
This is not to dismiss the potential of the donation-rewards sector of crowdfunding, as it can be used very effectively for public space and community-based real estate projects such as historic preservation, urban renewal, social service housing, and specific neighborhood benefit developments.
"If you are a multifamily developer who is building housing for Alzheimer’s patients or some other social benefit, then you should immediately turn to crowdfunding," Kulik said. "This is a great opportunity for community projects."
While each type of community project has its own idiosyncrasies, as all real estate projects do, "they all share a powerful connection with the community that can translate into funding any aspect of a real estate-related project," Kulik said. "Acquisitions, capital improvements, repositioning, retrofits, development (and) facilities operations all conceivably match if the story is compelling and resonates with the crowd."
Using the crowdfunding website Indiegogo, the Tesla Museum of America in Colorado Springs, Colo., raised $1.3 million to pay for the down payment on the museum’s land.
The big change for this new capital sector will come when the SEC finalizes regulations and allows equity-based crowdfunding. Barovick sees a whole new world of funding for real estate opening up that will slice into such traditional approaches to capital gathering as real estate investment trust (REIT) formation.
"If you look at the early days of the REIT market in the 1980s and into the 1990s, where developers and institutions found a way through shareholder interest to probe public real estate opportunities, well, the same thing is happening now with crowdfunding," Barovick said.
Globally, REITs and listed property companies constitute a more than $700 billion market, comprising a listed-REIT and real estate investment universe of more than $1 trillion.
"Crowdfunding," Barovick said, "may be able to take a slice of this market in the future, as it is a powerful means of accessing social capital for businesses and personal projects, which can certainly involve real estate."
I asked about the risk of crowdfund investing, and Barovick said it’s the same as in any business in terms of returns.
"The entrepreneur of a business platform you are investing in will provide — at least on our platform — a pro forma presenting the opportunity and growth plan," Barovick said. "This is a business opportunity that someone is presenting on the Internet for investment purposes."
Since capital formation through crowdfunding is spread wider, the risk is lessened, and since it is on a smaller scale and in more hands, presumably there will be more transparency and more people will understand and like or dislike the investment. If there is something fraudulent in the offering, at least one in a thousand potential investors would spot it.
"It really doesn’t change the reality of a real estate investment. It’s still about the performance or the return," Kulik said. "This just changes the investor target, takes it out of the institutional investor zone, and puts it in the hands of the people who may know the project best or who can benefit from the project in their community."
ProHatch is currently collecting and evaluating potential developments so when it fully opens for crowdfunding business, it will have a complete compliment of projects. ProHatch vets all potential investments.
Crowdfunding is still not the solution for a large, commercial real estate development, although early stage costs such as a feasibility study, architecture necessities and marketing plans can be financed by the "crowd."