Would you invest in a 40-year-old warehouse in Avon with no control over how it’s run or when it might be sold?
Twelve investors did just that, pooling together about $250,000 to join an investment group that bought the warehouse last year for $14.3 million.
Crowdfunding has mostly been associated with tech startups and inventors, who broadcast a mass appeal for donations that can range from just a few bucks to thousands of dollars. But since Congress passed the 2012 JOBS or Jumpstart Our Business Startups Act, there have been about 80 companies trying to expand the world of real estate investing.
“It’s opening up real estate to smaller retail investors,” said Josh Klimkiewicz, whose Boston-based firm, Acquire Real Estate LLC, put together the crowdfunding deal for the Avon warehouse. “Crowdfunding is going to be part of the future.”
And why not? Commercial real estate in particular has produced strong returns, significantly outperforming US stocks even during the bull market of the past few years.
“I think it’s fantastic,” said Steve Weikal, a researcher and lecturer at the MIT Center for Real Estate. “Crowdfunding has the real potential to disrupt the entire real estate industry.”
Typically commercial real estate deals have been limited to big-money investors, such as pension funds or specialty shops whose executives have years of experience. Because of the complex financing often involved in such deals, real estate investing has not generally been a province for novices. And opening it up to the masses does make some investment professionals uneasy.
“Frankly, it scares me a bit,” said Susan Milona, a Boston-based financial advisor for Brown Advisory, an investment firm that represents institutional and high-net-worth investors. She questioned whether the companies rushing to cash in on the crowdfunding craze have the right background to help inexperienced investors.
“Who are these companies? What research have they done?” Milona asked. “You need a very vigorous, step-by-step research process before you invest in any real estate.”
Some of the executives behind the new crowdfunding companies do have years of experience in the real estate world. Klimkiewicz, for example, started Acquire Research after working at commercial real estate firm CBRE-New England, where he was vice president of capital markets.
Brandon Jenkins, the cofounder of Fundrise, one of the most prominent firms, worked at a commercial real estate investment firm in Washington. Fundrise, has invested about $100 million in more than 40 real estate deals across the country, and Jenkins expects to do his first deal in the Boston area soon.
Some firms, such as Acquire Real Estate, only accept funds from so-called accredited investors, which the US Securities and Exchange Commission defines as having incomes above $200,000 — or $300,000 for a married couple — or have assets beyond their primary home worth more than $1 million.
Companies that offer crowdfunding opportunities to those wealthier investors don’t have to have those offerings registered and reviewed by the SEC, while those soliciting money from nonaccredited investors do. Fundrise solicits from either type, so long as the investor can afford the minimum $1,000 investment.
Investors make money by sharing in the income from rents the property generates, and any profit from a sale. But the terms of each investment, as well as the fees investors must pay, can vary greatly from company to company, from deal to deal. Fundrise and Acquire Real Estate each charge investors a 1 percent fee on total investment. If the property is sold, Acquire, for example, charges an additional 5 percent on the original investment.
Depending on a crowdfunding firm’s policies, investors can sometime back out of a deal early. Acquire Real Estate has set up an internal online exchange in which only other accredited investors from the firm can bid to buy out that interest.
Weikel from MIT cautions investors to carefully analyze all documents and research the company making the offering.
Klimkiewicz concentrates on investments below $15 million, which he says are generally too small for most large institutional investors. His firm researches potential deals — such as collecting data on a property’s rental income, tenants, past sales, and estimated returns — and then sets up a limited liability company that will participate in the deal alongside other investors.
For the Avon warehouse, Acquire raised more than $250,000 from 12 accredited investors for its limited liability company. But final say over the Avon operation goes to the new owner and manager, Novaya Real Estate Ventures, a veteran Boston real estate firm that owns or invests in many properties around the region.
Another recent deal by Acquire assembled a group of 15 investors to invest $1 million in the $7.6 million purchase of a 38,700-square-foot shopping center in Middlebury, Vt. Acquire will oversee distributions of any income or returns to those investors.
The new owner is Crosspoint Associates Inc., a commercial real estate firm in Waltham, Its director of acquisitions and leasing, Jon Hueber, was at first skeptical about letting Acquire into the deal, mainly because he didn’t want to deal with its 15 individual investors. But Hueber has previously worked with Klimkiewicz, who convinced Hueber that he would have to deal only with Acquire, not its individual investors.
“In the end, I felt comfortable about it,” Hueber said. “I really do think this will benefit small investors.”
One of Acquire investors in the Vermont shopping center is Travis D’Amato, who worked with Klimkiewicz at CBRE-New England and is now a broker at Jones Lang Lasalle, a commercial real estate firm. For years, D’Amato helped put together huge commercial deals on behalf of others. Now, through Acquire he himself has the chance to invest.
“It’s a way for me to diversify my own personal investment portfolio,” said D’Amato, who declined to specify how much he invested. “It’s simply a great way to invest in real estate, but with a much smaller chunk of change.”