38 South Walnut St. in East Orange — Courtesy: Google
By Joshua Burd
A real estate crowdfunding platform has made its first foray into New Jersey with an apartment building in East Orange, where an owner is seeking to recapitalize the property and tap into the demand for rental housing just outside New York City.
The Manhattan-based company, EquityMultiple, has been soliciting investors for a 25-unit building at 38 South Walnut St. in the Essex County city. The firm is working on behalf of the landlord, One Wall Partners, offering $500,000 of preferred equity for what would be at least a three-year investment.
The offering is the latest sign of the spread of crowdfunding in commercial real estate.
“The reasons why people come to us are definitely varied,” said Charles Clinton, co-founder and CEO of EquityMultiple. “In the case of a group like One Wall, where they have a rock solid track record, they’re now starting to scale their business to the point that they’re not just raising money from family and friends … We’re a group that it’s natural to transition to, and we’re a way of expanding that world of family and friends investors to a much bigger group.”
Clinton said the platform is building a niche between smaller offerings and the types of projects that attract private equity and institutional investors. That typically means that, “for deals in the $2 million to $30 million world, I think we’re a very nice potential partner.”
One Wall Partners acquired the East Orange building in 2014 and has since made improvements to mechanical systems, common areas and several units, Clinton said. The building, which was 96 percent occupied late last month, offers rents that are “a bit below market right now” and have growth potential.
The potential is due in part to the building’s location just off Interstate 280, a half-mile west of the Garden State Parkway and a five-minute walk from the city’s train station. For EquityMultiple, it’s a formula that it’s eager to replicate as it looks for other opportunities around the state.
“We’re going to give a really hard look at a lot of those areas,” Clinton said. “We’re talking to a couple of different sponsor groups that focus on those areas in New Jersey because we see a lot of investors from New York really looking at those areas as growth opportunities.”
EquityMultiple and its client have been soliciting minimum investments of $10,000, with investors projected to receive a total preferred return of 14 percent. Half of that is expected to be paid quarterly starting in the first quarter of this year, while the remainder would come in the form of a projected annualized preferred return when the property is sold or refinanced.
Those who do participate are feeding the growing number of real estate crowdfunding platforms that have emerged in recent years, following a 2012 law that removed a requirement that businesses seeking to raise capital must know or be able to be introduced to their investors. An analysis by the research and advisory firm Massolution estimated that crowdfunded real estate investments in the U.S. totaled $2.5 billion in 2015, a sum that was projected to rise to at least $3.5 billion in 2016.
Clinton said the platform seeks “accredited” investors as defined by federal regulations, meaning they must earn more than $200,000 annually or have a net worth over $1 million. That pool of funding partners has grown in quantity and diversity: Initially, the platform attracted mostly real estate professionals, but it now includes the likes of doctors, lawyers, accountants and others.
He added that the platform has attracted sponsors with larger projects and those that are supplemented by institutional capital. Those clients may not necessarily need crowdfunding to fill in the gaps, Clinton said, but still recognize its growing role in the industry.
“I think … they just want to be on the ground floor of it and try it out,” Clinton said. “They don’t necessarily need $1 million for their project — they could probably find it elsewhere — but they see this as something that’s going to grow more and more over time.
“And anyone in real estate is always looking for ways to reach new investors.”