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From Single Family to Senior Living
Global Senior Housing, the company that Nick Walsh co-founded with his father, develops senior living projects in the western United States. Before forming the company and moving to San Diego, they had developed residential subdivisions in Idaho. Despite being relatively new to the to the senior housing space and having only a small company, they currently have projects in Texas, Arizona and Idaho.
Nick’s path brought him from the last downturn when they started looking at what asset classes they could get into to develop projects that was less cyclical than the residential industry – that they had been involved in in Idaho. Through an associate who developed smaller senior housing projects like cottage type products or projects where there are multiple smaller buildings on a site, they were introduced to the space.
They figured that senior housing is a lot like the hotel industry in that it is operations intensive and felt that as long as you get a good site and line up good financing partners, the operations really is what makes and breaks the success of a project. So going into the senior industry they wanted to partner with a successful experienced operator who knew what they were doing and leverage off their experience versus trying to start a new operating team themselves.
Their Idaho based operating partner had a building prototype that they had built before and were confident operating. Nick came on to partner with them to raise the capital and to find and acquire sites so they generated parameters that they use to look at demographics in the supply and demand in certain areas. They started by focusing on Texas and canvassed the whole state looking for the right markets that were under-served for Assisted Living and Memory Care and that had the right demographics for a project to build. That is how they found their first project and that project, which is in Houston, they funded by crowdfunding the finance.
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First Senior Housing Deal; First CFRE Deal
Nick had not done a CFRE deal before having adopted more traditional financing routes in their residential subdivision business in Idaho. There it was really localized and they knew a group of investors that understood the residential market and were happy to finance their deals. Going down to Texas to do senior housing, they knew that they needed to expand their pool of investors and preferred private syndications for projects of this size where they were raising equity under $5 million. Under that level they feel like syndication is the best option and so wanting to expand their investor based, they started looking at the crowdfunding platforms as the quickest way to achieve that goal.
Initially, Nick came across the idea of crowd funding when he was talking to a few attorneys at real estate conferences who were starting to put together PPM Reg D crowdfund deals at the time that the JOBS Act was getting approved and they were formulating the rules for that. There was a lot of buzz in the industry about crowdfunding as a way to raise money.
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Selecting the platform that they were to use was a process even back then when there was probably 20 or 30 companies out there already. Nick started his search process by looking at who was doing ground up development. A lot of the platforms were in their infancy and most were doing deals with existing income streams so finding those doing ground up narrowed the field down to just a handful. Adding the extra layer of wanting to do a senior housing deal narrowed things down even further. Nick looked at each platform and who had raised done a successful raise on a senior housing project before, and that is how he landed on the company that they ended up partnering with , CrowdStreet. They had just completed a successful raise for a larger skilled nursing developer that Nick had read about in a senior housing publication and that is what prompted him to call them.
Early discussions addressed the inexperience of Nick and his father in the senior housing space and that is where their joint venture with their operator partner came into play. They were able to leverage off their partner’s experience in the industry and bring land development and construction as their role in the joint venture. At that point in time they already had a project entitled now so they were raising equity for an entitled project and their role for the rest of the project was to manage the financing and manage the construction of that building and rely on their operator’s resume in operations which helped with their approval with CrowdStreet, as well as with the equity investors they reached out to.
Underwriting & Fees
Interestingly, when Nick first approached CrowdStreet he approached them with a different project that they turned down because the market was a tertiary market in Texas and they explained investors would not likely be interested in such a location. This allowed Nick to bring another in a major metro; something more attuned to what investors were looking for. Most investors were looking for a city that they knew that they felt comfortable and that is why the project in Houston met the criteria.
The underwriting requirements that CrowdStreet looked at, of course, included the sponsor group; who the operator was and who the developer was. They had a third party market study that justified the demand in the market for the building that they were going to build. Beyond that, one thing that they really liked about CrowdStreet was that they looked at the deal structure and did not really mandate the deal structure like some other platforms do, but instead guided them through what would be successful. Nick had to put up the fees for the raise whether they were successful or not, and they found that CrowdStreet did not want a blemish their reputation with a raise that was unsuccessful. After the upfront fee, there is an annual maintenance fee for use of the software which sits on the Global Senior Housing website under the investor link.
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Direct Investor Contact
From the investors perspective, they are dealing directly with Nick and his company and not with CrowdStreet. This was a differentiating factor from a lot of platforms that appealed to Nick. Some platforms operate like equity shops where they will actually fund a deal and then backfill all the raise with investors and sell it later on. CrowdStreet is more of a marketplace where they are really just a middleman between developer and investor. They are exposing a project to their pool of investors but when it comes down to it, investors are calling the developer to ask questions that help them decide whether they want to invest or not. It was the direct investor contact that Nick was looking for. He wanted to build his company’s investor pool and build those relationships with the investors direct so that when they went and did the next deal they would be there.
The process with CrowdStreet was as follows. Nick’s company was given a checklist of documents that they needed to submit for the raise before they went live. They were assigned a designated investor relations person as well as customer relations person who checks in from time to time to make sure thes sponsor has everything that they need to communicate with investors effectively and to make sure everybody is happy. If an investor has a question sometimes they contact CrowdStreet and CrowdStreet will connect the sponsor, but sometimes they may just connect with the sponsor directly by either email direct telephone call.
CrowdStreet’s role with Global Senior Housing was solely that of a middleman marketplace that gets paid a fee to broadcast the project to their investor network. They had no input into the agreements or structure of the deal that Global was proposing, and no rights to intervene should the project falter at any point for any reason. The operating agreement, inside a private placement memorandum with a subscription agreement, was one that Global generated and then put out to investors on a take it or leave it basis. Investors dealt solely and directly with Global in this regard. In some cases, investors would say ‘hey, I like this deal if you had a higher preferred return’, or ‘I'd like this deal if you were putting in more sponsored equity,’ and they would still invest, even without modifications, and some would go in a different direction. Most understand that at the point the deal is being syndicated and is posted on the marketplace, it is really a take it or leave it proposition.
75 Days to Full Funding
Once the deal went live, the total raise took about 75 days before the last dollar was deposited into escrow. Total amount raised was $1.2 million on top of which they had about another $300,000 in sponsor equity that Global principals were placing into the project. The $1.2 million of outside equity came from 44 investors. There was a range of investments sizes and this was one thing that CrowdStreet helped structure. Global initially wanted to come in with a $50,000 minimum but CrowdStreet said that they thought the deal would be a lot more successful if the minimum was set at $25,000. In the end their investors ranged from some at $25,000 and up to $100,000. While Nick did a little marketing on their own primarily to investors in Idaho who wanted to get into the senior living space, the majority of investors came from CrowdStreet's marketplace. There were many investors from Texas since the project was in Houston, but overall there was a wide range of geographical dispersion with most from the West coast or the western states and a few from the northeast and East coast.
Every investor was accredited and CrowdStreet ran all of the accreditation processing for the investors. Of the investor pool, probably half were real estate professionals who understood the background and the real estate industry and who just wanted to diversify into crowdfunding projects. The other half were other professionals and family trusts who were taking their money from stocks and diversifying into real estate through crowdfunding.
Time Intensive Process
The biggest challenge, Nick found, was the way the timing worked on the raise. It started really quickly after launch, with probably half the money they needed raised in the first 20 days or so. Then it slowed down because when a project is placed on the marketplace it comes up first so everybody sees it at the top of the list. Once more projects get posted, Nick found that his project dropped down and he thought that perhaps it took someone a little bit longer to find their deal. He felt that an important consideration when selecting a site to list a deal on was to look at how many deals are posted. If there are none, that might indicate inactivity; but if there are too many there might be a concern that one’s own deal might get caught up in the wash and not really get the attention that it needs to complete the raise.
Another challenge to raising from the crowd was that Nick found himself spending a lot of time on the phone with potential investors; a lot of time answering e-mails; a lot of time with each potential investor so they could vet out the projects. It took up a lot of time and energy and so Nick advises sponsors that that if they do not have someone in their company who is fully devoted to investor relations to the raise to field those calls, then the process could probably bog you down.
Increased Investor Pool
One handicap Nick found with the process was due to the compressed timeline from launch to completion of the raise; it was a very condensed period of time. They were unable to post the project until they had entitlements and were ready to start construction – a CrowdStreet requirement. Their traditional methodology on other projects was that they would start talking to folks throughout the entitlement process, giving them six to 12 months to gather the investor group together. CrowdStreet, on the other hand, looks for products that are ready to go because they do not want to post a project and have investors commit, only to have to then wait for the entitlements which could be an extra three to six months down the line. Investors want to place their money immediately; they are not going to be around in six months or have those funds to invest in six months.
Most appealing to Nick about the process was in their ability to increase their investor pool and work directly with investors. They have now talked to some investors who have already told them that they want to invest in more deals together. It was a good way to expand their investor pool and Nick liked the idea of giving people, through crowdfunding, the idea that no matter where they are they have the ability to do their own research and invest in a real estate project. Perhaps they did not have any experience in senior housing but they were still able to own a piece of a project.
Distributions Along the Way
While the project did require that Nick devoted considerable time to it, he understands the attraction of going to a private equity fund where there is just one person to deal with who is asking all the questions. Crowdfunding real estate deals may not be for everybody. Global found, however, that for raises of under $5 million in equity, it is hard to catch the private equity fund manager’s attention. Even if they could, another issue with private equity is that the capital is more expensive. With CrowdFunding, the sponsor can get less expensive capital in terms of both the kinds of payouts that investors expect, but also with the deal structures where control remains more firmly in the sponsor’s hands. Remember, there is no negotiation with crowdfund investors; the sponsor can structure the deal however they like, and investors have a choice to invest or not invest. With private equity groups they are going to negotiate with the sponsor, take more of the project through a larger percentage of the backend and in the operating agreement they want certain management controls that the crowd does not demand. These kinds of controls range from more stringent reporting requirements or audited financials for instance, all the way to management decision making controls on certain things like when the sponsor can sell or refinance, or restricted budgetary controls. In short, compared to the crowd, a private equity group takes more of the management out of the sponsor’s hands.
Another difference, Nick found, was that whereas private equity funds will not require distributions until the deal has been completed, with crowd funding Global has to distribute every quarter a preferred interest check. This, CrowdStreet explained to him, was very important and started from the very inception of the project. Indeed, Global had to raise a little bit more money to begin with in order to be able to make these distributions. The strategy on the Houston crowd funded deal is for a three year recapitalization and a five year sale. The most advantageous exit for Global, however, would be to develop and sell a portfolio of these cottage style product across Texas, way 8 smaller projects versus just trying to go out and sell one-off as each are completed.
The Next Deal
Those in the Houston deal may be the only ones to crowd fund with Global. Subsequent to the CrowdStreet raise Global Senior Housing partnered with a Dallas based equity group who syndicates their investors. It is a similar situation with where the money is coming from private investors, but their partner did the syndication work and came in as a co-owner. They brought their own money and so the distinction between them and CrowdStreet was that they are syndicating in a similar way but they are also putting some risk equity in the deals as well. The money was more expensive and while the benefit of not having to do the syndication work themselves cost them quite bit in ownership, Nick felt it was worthwhile. This has allowed Global to scale more rapidly. They were able to partner with a group that provides programmatic equity for multiple projects as well as one that understands the local markets they are active in. For example, they have been supportive of the project that Global originally took to Crowdstreet that was not approved because it was in a tertiary market. Their new equity partner is in Texas, understood the market; the manager was able to drive down to take a look at the site and approve the investment.
Going forward, however, Nick does have at least one crowd fund project on the horizon. They are looking at an acquisition, a reposition project in Austin, Texas. They found that when investors looked their other project and/or sign up on CrowdStreet, they indicate which markets they have in interest investing in. Austin popped up on a lot of lists for a lot of investors and so that is one potential deal that has in place cash flow and that is in Austin. Deal size is $1.3 million of equity so maybe that will be the next crowd fund raise that Global decides to do.