Crowdfunding slow to gain traction in commercial real estate

Some industry insiders in B.C. see the online product as more of a marketing tool than a financing strategy

While Toronto-based NexusCrowd Inc. has raised an estimated $1.5 million for commercial real estate projects through the first crowdfunding real estate portal in Canada, the concept has failed to gain traction in B.C., and some experts say it remains more a marketing gambit than a financial strategy.

Real estate crowdfunding is a financing approach where many investors team up to provide the equity or debt required to buy, finance or develop a property or real estate project, typically via an online crowdfunding platform.

In 2015, a new prospectus exemption called the startup crowdfunding exemption was introduced within the BC Securities Commission. Project owners can raise a maximum of $250,000 in capital twice annually and retail investors can invest a maximum of $1,500 per campaign. The exemption opens up previously inaccessible real estate investments to smaller investors.

But some question why developers would consider crowdfunding in these days of cheap money and high real estate demand.

“Why would a viable commercial real estate developer go with crowdfunding when banks are offering loans below 3%?” mused Alixe Cormick, a lawyer with Venture Law Corp. of Vancouver.

Cormick noted that the NexusCrowd portal raised just $500,000 for each of three commercial real estate offerings.

“This was not seminal for the projects,” she said, suggesting it was more a way of raising media coverage than a way of raising money.

Indeed, the NexusCrowd funding came to only about 25% of the $5.8 million needed by Downing Street Realty Partners, which has three industrial properties in Greater Toronto that require redevelopment and remediation spending. Under the NexusCrowd model, participants can sign up at its website and participate in commercial real estate investments for as little as $10,000.

Marc Canale, a partner at Downing Street, said his company had watched the development of crowdfunding for commercial real estate in the U.S. and was eager for an opportunity to participate in this emerging financing market.

“It is new to Canada, [but] there are 175 firms in the U.S. I think that there are a few of them popping up in Canada, and I think there will be many more.”

Most of the U.S. crowdfunding portals are used for small-scale multi-family rental projects and “fix-and-flip” residential investments, according to Bret Conkin, founder of Vancouver-based CrowdfundSuite, which consults to the nascent industry. Although the practice is new to Canada, more than $2.6 billion in global real estate projects were crowdfunded in 2015, up 156% from 2014, he added.

Conkin said two other real estate portals had opened recently in Canada: Open Avenue in Ontario and MetroFunder, based in Vancouver. But MetroFunder’s website had apparently been shut down when BIV tried to access it last week. Conkin said the two startups “don’t appear to have any traction in terms of raising investment.”

Cormick, who provides legal advice on real estate investing, explained that crowdfunding is simply an online version of the offering memorandum of understanding, which is often used by developers to gauge interest in and raise capital for a real estate project.

“Crowdfunding takes the offering memorandum of understanding online and makes [the investment process] fully transparent, both to investors and regulators,” Cormick said. “In that aspect it is a good thing.”