By Lawrence Fassler
The recent acquisition by StoreSmart Self-Storage of the Apollo Storage facility in Melbourne, Fla., was not a run-of-the-mill transaction. Approximately 95 percent of the equity financing for the deal was provided through crowdfunding—investors pooling capital on the Internet to invest in real estate. In the StoreSmart deal, the crowdfunding effort was handled by Realty Mogul, a real estate crowdfunding website, and its broker-dealer partner, WealthForge LLC.
StoreSmart raised approximately $3 million through crowdfunding to assist in the $9.25 million acquisition. The new facility comprises 112,030 square feet in 964 units, with an additional 8,800 square feet under construction. It’s the second asset for which the company has raised money through crowdfunding.
Why Crowdfunding?
Raising equity funds can be quite a chore for even an experienced self-storage investor. It requires having a broad network of investors who can write checks large enough to make the effort worthwhile, or knowing wealth managers or investment advisers who can help market the opportunity to others. Throughout the process, one has to be aware of securities-law restrictions and other legal issues that may entangle the unwary.
For large enough properties, there are institutional capital providers—pension funds, insurance companies and family offices of very wealthy individuals—though time and effort must still be spent to find these capital sources. For many self-storage properties, however, size can also be an obstacle. Many property valuations fall in the $5 to $15 million range. That’s significant, but not always large enough to draw the focused attention of larger institutional investors.
Crowdfunding sites organize pools of qualified investors for whom an investment in a well-run self-storage facility may be quite attractive. The better sites pool those investors into a single legal entity, so the self-storage owner only has to deal with that single “investor.”
How It Works
Crowdfunding for equity investments—as opposed to “donation” sites like Kickstarter—still generally require sites to limit themselves to “accredited” investors. For individuals, this means they must have a net worth greater than $1 million (excluding their primary residence), or have earned more than $200,000 annually for each of the last few years. There are seven to eight million Americans who fit that demographic. However, that’s in addition to some institutional investors who might also want to participate in a self-storage investment—if they only knew how to find it.
The Internet has made possible wide access to news, information, products and, now, real estate investments. Communications technology and its facilitation of crowdfunding has enabled smaller investors to participate more broadly in specific investments. Through an online platform, investors across the country can now review projects at their convenience, say, sitting with their laptop or tablet at the kitchen table at 10 p.m. after the kids have gone to bed.
Investor interest in self-storage seems to be strong. “Self-storage facilities continue to be a popular asset class for real estate crowdfunding because they have the potential to produce steady income to investors,” says Jilliene Helman, CEO and founder of Realty Mogul. “Regardless of how the economy is doing, people will always need to store their stuff. We have now completed multiple transactions in the sector, and each has been well-received by our investors.”
Gaining access to a trove of investors is only part of the solution provided by the better crowdfunding sites. It’d be quite a chore for an operator to deal with all those investors himself. That’s a lot of communication and tax-reporting work. As mentioned earlier, the better sites pool those investors into a single entity. The crowdfunding company then handles the investor communications, distributions and tax-reporting tasks.
Transaction Timing
The work on a particular transaction usually begins when the property has been identified and the self-storage operator is negotiating the purchase and sale agreement, according to Austin Fan, Realty Mogul’s vice president of investments. It’s at that point that Realty Mogul and WealthForge start doing their own internal review of the transaction. If it’s approved internally by both organizations, it usually takes a few days to organize the opportunity’s presentation on the website, Fan says.
“We work with the operator to make sure his information is being presented correctly. The fundraising period itself is usually completed in a month or so, which generally leaves the operator with ample time in advance of the transaction’s closing,” he adds.
Heaven Sent?
For self-storage operators, a partnership with crowdfunding site could be a match made in heaven. “It has certainly saved StoreSmart a lot of time and resources,” says Brad Sherman, managing principal of StoreSmart. “We’re able to focus on our core strength—acquiring and operating great self-storage properties—and we’ve effectively outsourced most of the chores associated with investor communications. At the same time, our brand strength has been elevated through our exposure to a vast investor base.”
The advent of real estate crowdfunding sites seems tailor-made for self-storage investors and owners. The financing strategy gives them access to a pool of investors from across the country, many of whom are looking to get into the industry or expand their investment. Handled correctly, the post-financing chores of investor communications and tax reporting can also be minimized. What’s not to like?
Lawrence Fassler is the general counsel for Realty Mogul, which offers equity securities through WealthForge LLC, a member of the Financial Industry Regulatory Authority and Securities Investor Protection Corp. Previously, he operated a real estate construction firm and worked for more than 15 years as an attorney with Silicon Valley and New York law firms. For more information, visit www.realtymogul.com.
