How to Tell a Good Deal from a Bad One
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Adam Kaufman, Co-Founder & Managing Director, ArborCrowd
I am the co-founder and managing director at Arborcrowd. I have been surrounded by real estate my entire life. My entire family works in real estate. My father Ivan Kaufman began working in real estate at 24 years old and now he runs a publicly traded real estate investment trust, Arbor, it's called, and they are a leading commercial lender in space. Arbor has a lot of different arms to it and the newest arm is Arborcrowd where we focus on multifamily investment offerings to this new class of investors that the JOBS Act created in 2012.
We go after accredited investors and we created the company first in 2016 with the simple concept in mind that the industry is evolving and as a company we're always looking to evolve in the industry and this whole new class of investors can now access the same institutional quality deals and transactions that we were looking at on our desk regularly and we thought that the next best step would be to form Arborcrowd within the Arbor Family of Companies.
In doing so. We were cautious and we were hesitant. We understood that there were a lot of other companies that jumped to the opportunity with the passage of the JOBS Act and we took our time to really sit back and watch and see how these other companies were forming, the way we thought they were doing things well the way we thought they were doing things not so well.
Coming to CFRE
Ultimately when we came online in 2016 we thought that the direct to investment model of offering one investment opportunity at a time was the right way to do so in the crowd funding vehicle. And it was during an interesting time where a lot of the other crowdfunding platforms were moving to the Reg A plus model that online fund or eREIT type of model. And we didn't think that that was going to be the long-term play in the industry. So we decided to choose one deal at a time to go with on our platform and marketed to accredited investors to come in and invest in those transactions. Why did we think to do this because we think that this model really offers the most precise and accurate level of transparency into each transaction for investors to really feel equipped and armed to make investment decisions that are based on information that we are making ourselves to invest in these deals. And that's why we chose this model at that time.
Where we are with the market today I think that everybody knows it's hard to find good quality deals and you know as a company we are always looking for momentum to post deals in our platform. But what our experience lends to us is that posting quality deals will build a long-term company with happy investors. So we spend a lot of time looking at our relationships that we've cultivated over the past 30 years in the industry finding and securing it really off market transactions that are not available to the public that we are that we have been participating in for many years and doing the diligence that we think is necessary to really offer a quality deal to the crowd.
We're patient and we think that right now finding quality deals has been difficult. We think people are overpaying for their deals. And at the end of the day when the market cycle changes or shifts they're going to be caught like a deer in headlights because there's going to be no value created in these transactions. And we are at an interesting point in the industry because crowdfunding is so new and the market cycle has only been good since crowdfunding has really been enacted.
A lot of the life cycle of a lot of the deals being presented hasn't really come to fruition. So we don't really know what the crowdfunding industry is going to look like in a down market. And that's why experience and transparency matters so much to how investors are looking at deals and how we are at Arborcrowd presenting deals to investors.
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Our Own Money On the Line
You see in the industry phrases like ‘democratizing real estate’, right, making real estate available to everyone. But if everybody is getting in and they don't really know the risks and the downside and they're not really being presented with enough information to understand the risks and downside it's a very dangerous thing that ultimately I think is going to push a lot of the companies that are more technology focused or have less experience in real estate or are trying to show a lot of traction and growth in their own company and focusing less on the investors and the transactions themselves out of the industry altogether.
For us, more is everything. We only present to the crowd a deal that have been closed. We actually front the money for the transaction at closing for the deal to close and then we market and offer the investment to the crowd where the crowd money comes in and replaces our money that we put on the line on day one. Why do I say this? Because it's important for two reasons. One is that you can actually secure the deal and close at funding because a lot of the sponsors wouldn't want to say, Well where is the equity, and all of a sudden you say well hold up let me turn around to the crowd right now and raise that money.
We literally put our money on the line, ensuring that transaction closes and also showing investors that we believe in the transaction so much that we literally invested on day one before passing the equity interest over to them. If the deal doesn't fund we’re in the transaction no matter what. So why that's important is that ultimately when we go to build out the offering materials to present this information over to the crowd because the deal is closed we are able to present the crowd with a detailed business plan an offering overview and a detailed private placement memorandum of the same materials that we looked at to underwrite the transaction and literally invest in to the crowd.
Fully Transparent Transactions
The terms aren't changing. The deals not changing. We present to them you know 30 or 40 pages of an offering overview that outlines everything from you know where their investment is going to what's happening on a property level to increase value to the market demographics and jobs being created that can support the value that we're projecting on a rent level. So we do a lot of work putting together that offering material and really what it is doing is repurposing the material that we looked at to underwrite the transactions and present that to the crowd and we take a lot of time to do so and we go into an enormous amount of detail to present to the crowd so people ultimately feel when they're going to invest that they were able to really understand the transaction in the same way, in a digestible way, that we were looking at it from day one.
We usually have third party reports that we commissioned those costs money and you can't share them but we can share the findings of them you know exactly what was drawn out of those reports and we can cite them. You can't distribute those third party reports but we will share in our offering overview to a great level of detail just why we think a market is the way the market can support the business plan based on facts because we do not we are not investment advisers. We don't advise on the investment we simply present facts based on the facts that we understand and know.
We basically pass on the information on why we thought this deal was good and bad. We present the good and the bad of the deal the risks and the positives. Ultimately we think the transaction is worth investing in and what we do in the offering overview is that really you will not find anywhere else be present even the partnerships so we require that our sponsors other the other equity in the deal who are running the day to day of the deal, co-invest with the crowd so they could invest significant amount of their own dollars so that really the interest is aligned at the end of the day and in our offering overviews you'll see the background presented of these sponsors to the detail of their realized and unrealized investments and their performance there so that investors can really open up the offering overview and say Who am I going into business with, who am I partnering with. What has their track record been like. And we present that information as is so that investors can make a decision on their own whether they would like to invest or not with those with those partners.
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Long Term Perspective
We are not the principal on these deals but we're not going out and actually soliciting sponsors because we have these relationships with the sponsors over 30 years who are securing financing or debt from Arbor Realty Trust who we are transacting with every single day that we are all of a sudden offering additional equity to and the crowd coming in to great quality off market transactions that crowd the crowd can't really find as an opportunity anywhere else. We don't have to do much work soliciting sponsors. We're really just opening up our network for the crowd investors to invest alongside the sponsors.
It's an alternate source of equity for many of the borrowers who come to Arbor because if they are constantly participating and buying transactions. Maybe bigger transactions that they're participating in. Now they can secure through Arbor crowd vehicle as a company they can secure additional equity via crowdfunding.
What we'll do is we don't charge anything for the deal we basically say we have a passive equity vehicle namely the crowd to come in to give you additional equity and they're happy with those terms you know they're happy to get more equity they're always looking for more equity they don't have to source it from family and friends or from institutional capital so they're happy to receive the equity. To the crowd we're IRR driven and it basically present to them either or as in our offering overviews net of the fees charged to the deal which we think are common real estate fees.
What type of terms do we look for from sponsors. We really look at each deal individually and look at the strength of each deal and what our focus is we focus on multi-family particularly workforce housing from good sponsors so the terms that we look for and the fees they charge. It really depends on the strength of the deal because we like to present to the crowd you know mid to high teens IRRs in secondary and tertiary markets. If the deals can support you know those returns to the crowd before going on the platform we'll look individually at each deal and look at it differently for what it can support on a sponsor requirement level. One additional thing I'll talk about so we are not, Arborcrowd as a company does not also co-invest in the deal.
Our Business Model
However, part of the Arbor family companies includes our private equity shop, AMAC. And oftentimes in the transactions that we've posted to the platform they have invested in the transaction and have the same principals as a crowd. So another Arbor family company or entity AMAC or private equity shop also invest in some of the transactions alongside the equity and that's outside of Arborcrowd as a company. Because they have the same principals, Ivan and me or my brother Maurice, people feel generally pretty good about the fact that that vehicle is coming and investing in the equities as well.
How does Arborcrowd make money. We charge fees but we think our standard real estate fees which we present very clearly in our offering overviews. We charge an acquisition of a point to a point to five, a disposition fee of a point and a AUM fee of about a quarter of a point to half a point and a refinance fee of a point, if there is a refinance on the property. Now the returns that we project in the business plan are net of these fees. None of our investors have to go in to do the calculations on their own. We show these calculations in the offering overview and the returns that we project on the deal level are net of these fees.
We tend to just underwrite really conservatively and be careful about the deals we present on the platform which is why we're so selective. You won't go to our platform every day and see a deal posted live to invest in. And that's just because the market right now we do not think is going is so great to buy in and is not going to survive. You know the projections right now are not going to survive a downturn so we're really carefully selective in the deals that we post on the platform and we're really conservative in our underwriting as a whole. And that's really what sets us apart from a lot of the other platforms with they're constantly rolling out new deals for investors to invest in that we've passed up on a lot of transactions they've crossed our desk and we have not decided to invest in them.
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Education is Key
I have a background also in advertising technology you know power the power of big brands finding their consumers online and how to do that. I have had some experience there but I think the common mistake that people are making in crowdfunding is actually focusing on the technology because at the end of the day for us the technology really serves as the access point to the product. And if we lose sight of that product by focusing on the technology at the end of the day when the investments do not perform well you lose your investors and nobody cares about the technology.
I think that all investors really want at the end of the day is technology that serves them to access that product they want basic fundamentals to really access manage their portfolio how are they getting the information and once the transaction closes, how is information being delivered to them. And that's really the power of the tech in this industry. It's really servicing the product and the investors to access the product. And that's in our view towards technology overall. And unfortunately I think a lot of other companies have taken the opposite approach and they've invested a lot of money into their technology and now they really don't have the deals to support that. And in a few years from now I think there's going to be a lot of conversation around how much is that technology worth and whoever is left, do they want it even so I think to wrap to really address your question, we look at real estate first in this industry and we look at technology to service the product which is real estate.
We haven't had too many challenges with the sponsors. We're working with. Ultimately I think it's just about educating them that crowd funding is a means in which to raise capital right now. And they the common response is Well what is that. I've never heard of that or how did you do that. And I think after a brief conversation usually you get a that's very interesting and you've been successful doing that and you know you can raise the capital by doing that. And when I say yes, they say we're interested to see how that happens. And they're really not too involved on the capital raising side other than providing all of their information and track record to us. And once it happens I think you know they're a part of it and they see a little bit of how it happens that they get excited by it but they don't really look to adopt it on their own because they're busy out there finding properties investing managing properties and they really look at the funding side of the fund raising side as a different aspect of the business.
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Good Deals No Hype
The biggest problem with investors is that there are so many crowdfunding companies out there and they offer a really flashy returns. You know really they have a lot of you know glitzy sexy projected returns and they're not showing their risk so much so when investors come to our platform and we're traditionally more conservative it takes a bit more of time to explain to our investors or potential investors.
You know the diligence and the expertise that we have in the industry that really drives the type of deals that we present to them. It takes that extra conversation especially when you're competing against flashing lights that read You know 25 percent IRR you know that equity multiples 3x. People are basically looking at those numbers, they're investing today because they're being told you know promise I should say really these returns. And when they come to our site they see more realistic returns. But you know if you give us the time to explain you are stable a more stable approach towards selecting these deals it's a little bit more time consuming and requires more of a conversation.
We've cultivated a big investor group and potential investor group on the basis of education. So when we don't have a deal live or even when we do we're constantly sending out educational pieces or articles or basically describing you know different aspects of real estate how to understand real estate how to look at how we approach underwriting how we approach different markets even sharing some of our investor stories and you know their backgrounds which investors to really build up the community so that when a deal is ready to invest in a lot of our investors feel like they're equipped with enough of the devices to make the investment decision of whether to invest or not.
The Future is Bright
We focus an enormous amount on education and the distribution of content. Additionally we do a lot of webinars so when a deal goes live we'll do a sponsor webinar where you'll have me and the sponsor of that deal walk give the investors the chance to see that business hear the business plan I should say walk through my eyes and the sponsors eyes and you know field live Q And A's at the end. We'll do a lot of education related content to even FAQ sessions or infographics and content to really deliver each deal and real estate as a market in general to drive the details home to make investors feel like they're investing something they know how to invest in and that they really feel a part of. We put a tremendous amount of effort in that community.
In the past couple of years alone you've seen crowdfunding will be a small slice of the overall commercial real estate market in general grow tremendously. And I think as investors become aware that they can now invest in commercial real estate to diversify their investments and their portfolio and or access these investments that were really previously excluded from them exclusive to them. I think it has a tremendous amount of growth that is really going to play a significant amount of of of dollars in the overall commercial real estate landscape and people are going to look at crowdfunding as a legitimate source of capital that is more everyday more regular.
So I think that growth is going to be great. And I think particularly on the equity side you know there's so much money that's going to enter the market it will shift actually how people look at sourcing capital whether they go for institutional dollars or not. And the amount of players in the space as a whole. So I think there's a tremendous amount of growth that will be where we are seeing today and we'll continue to grow. I think the dangers and the perils in that growth are that you know it has to be regulated and done effectively and that's on the responsibility of the different platforms out there.