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What is Real Estate Crowdfunding?
Learn how to build wealth and earn passive income in real estate while someone else does all the work.
226 Dror Poleg, Rethinking Real Estate
Consultancy
Today Dror operates a small consultancy based in New York City advising large scale real estate owners and operators and private equity firms on innovation in real estate. He covers anything from understanding long term trends that are driven by technology such as, changes to the nature of work, how people get married, or education trends, autonomous vehicles different things that impact the real estate industry, longer term to more immediate terms such as different technologies and tools and business models that they can implement today in order to produce more value out of their assets, up to really looking at the underwriting of specific deals that involve some innovative components mostly co-working, flexible office, co-living, or anything along that spectrum. On the other side of his business he works with startups that are focused specifically on the real estate industry. This includes anything from modular construction, building management systems, different sensors and IOT, to kind of more communal ventures and operating systems for a whole neighborhood.
Leaders of The Crowd
Conversations with Crowdfunding Visionaries and How Real Estate Stole the Show
Discover how laws that gave us crowdfunding were solely meant to finance small companies and yet inadvertently opened the doors to allow you to invest in real estate like never before.
Read the book and listen to the actual conversations.
Private Equity
Private equity in Real Estate is, basically, using private money as opposed to public money in order to fund the equity or to acquire and operate real estate projects. Similarly, REITs are public equity that allow retail investors to own a piece of a real estate portfolio, and private equity mostly refers to funds that are managed in order to acquire and generate as much value as possible out of, usually, large scale real estate projects. These funds are usually capitalized by institutional investors or high net worth individuals.
For a private equity fund the clearest division is between what is called the general partners, people that are actually actively managing the fund and its assets and are also partners in the fund and the limited partners.  The general partners sometimes put in some of their own capital into the fund and the limited partners are people that bring money into the fund but do not have any managerial responsibility and thus no liability in some ways, at least in terms of their legal exposure. Limited partners do, of course, have liability in terms of being able to lose the money the invest and have no control over, or limited control over, how the general partner manages the fund.
How to Fund Your Deals
7 Steps to Raising Equity Online
Typical Structure
It's an interesting because the daily life of a fund manager is changing in line with technology. Most of these funds originally have relatively small teams. If they have several offices or focus on different geographies they might have a handful of people in each area. That would mean, several general partners who are really the ones managing the fund, and then a few analysts. Sometimes, depending on the type of assets that they invest in they would have additional people that have operational capabilities or specific expertise, let's say in shopping malls or, office leasing.
People that can help when you do due diligence on an asset or when you oversee the people that are operating the actual asset then you can kind of know when you know things cost too much, or you can leverage relationships that you have for other assets in order to make that specific asset better. But part of what is changing now is that real estate as a whole is becoming much more operationally intensive. And if in the past the operators were almost like commodities, and the owner could just hire people to do certain tasks, today more and more you see that the good owners, which means a good fund managers, are people that have unique operational expertise as well, or unique relationships and in some cases even unique technology
Raising Capital
The general partners go to institutions and the institutions there are individuals who are responsible for huge amounts of assets that they have to deploy and they have to allocate a certain amount. An institutional private equity will fund to raise $50 or $100 million from any individual institution, and that will typically be based on the relationship, probably with, maybe just one guy at the institution that they have, whose job it is to allocate those funds. Now at the institutions they're going to have investment committees and whatever else they're out to authorize the divestments.
How Fund Makes Money
Deal Types
Depending on the strategy of the fund, there are four main strategies that private equity funds look at, starting from core investment which are really the most stable best quality asset in the center of main cities. Core pluswhich are assets of the same kind but that might have some, some very limited value add potential such as leases that are lapsing or renovations or certain little things that could improve them, then complete value addwhich are assets that are still relatively good and developed but have some more major potential for value creation.
Deal Execution
Controls
They challenged them on the rent roll and on each specific tenant that they had; Why did we give them these terms? Why not those terms? Black rock looked at underlying assumptions about the additional space that will be filled et cetera. Once they became partners, they sat on the board, they had a seat on the board of the project, and in the operating agreement which was signed when they invested, they also defined certain key decisions that they have a say about, or even a veto on. The original company remained operating the asset but major decisions such as major capital investments, changes to more than a certain percentage of the tenant mix and other things had to be approved with them or by them.
Default Triggers
The investor can, de facto, replace certain people in management. In an extreme situation they can replace the manager completely as operators of the assets, who would remain their partners in ownership until there's a new buyer but who would have to cede the actual operation to another operator. There may be a budget approval procedure each year with quarterly reviews. During that process, if they want to make life difficult for the manager in terms of how they spend money on a project they can make it difficult.
There are bad boy clauses, key man clauses.  These limit what the manager can do if they have some really talented person there that the manager might want to move to another new project that's something that they may not be able to do. There's all sorts of things. In China mostly the bad boy was about indemnifying investors in case the manager did certain things like bribing or doing something that is illegal, locally or internationally. These terms are very similar in the US too. The investor’s goal is to be completely indemnified as much as possible from anything that the manager does but on the other hand they want to have as much power as they can get away with, in balance with the previous point.
Promote & Fees
Deal structures can vary. In some cases, the sponsor could be a straight up partner, or it could be a 50/50 partnership. In those cases there's no waterfall and there's no promote. Basically, both own the asset. If the asset does well, both make money. In that case it also means that probably the 50 percent that the private equity fund owns, or was sold to it by the sponsor who originally brought in the project. So assuming that the sponsor already made some money already, on that piece of the deal on that half and when they both sell in the end, they're going to make more money.
Other structures, have a promote which is very similar to how it works in smaller deals. The sponsor can get sometimes a small piece in the beginning just for bringing the deal. Something between half a percent to 2 percent, which sometimes is expected to be reinvested or kept as part of the deal. Then upon exit or other major financial events such as refinancing there's a promote structure that means that once the returns for the private equity investors meet a certain hurdle, and that depends on the type of the asset. It could be 5 percent 8 percent, 12 percent 15 percent. Then the rest of the returns are split between the two partners. Whether it's 80-20, 70-30, 50-50, or even with a few different steps and a more complex waterfall.
Impact of Tech on Real Estate
Technology at large, meaning not one technology but different technologies together, are creating dramatic changes in the real estate industry, starting from the way they impact the way people work, the way people raise their families, the way people move or don't move, the stability of jobs in general the fact that even people that are doing well and are educated and experts, don't have 20 or 30 year careers with the same company which means that, they are less likely to stay in the same place less likely to take a mortgage, sometimes less likely to even want to own anything. Technology is impacting real estate this way which is indirect but it's very significant.
More directly, technology is basically redefining all the basic tenets of real estate value, starting from the meaning of location, and the value of location, and the meaning of visibility and accessibility. The meaning of regulation. We've seen in the past few years, the technology redefined each one of these aspects because of, you know, ride sharing, autonomous vehicles, remote working, online marketing, which means that you get your lead not by being in the most prominent location but actually most of your tenants come through online channels and other channels.
The fact that disruptors can leverage the crowd to undermine regulation and rules. If you look at what, for example Airbnb has been doing. The hotel industry was assuming that since Airbinb was illegal, it's not going to compete with them but they've seen that Airbnb has so many users that depend on it, and love it, both the people that lease space and the people that are guests, that governments in many cities basically succumb to or had to adjust regulation, in ways that people couldn't imagine before. Technology is undermining all of these things and that boils down to maybe the most important point which basically means that real estate as a whole, even the most stable asset that people assumed previously, that are valuable forever, just because they are where they are so they have inherent value.
These assets are becoming destabilized to the point where unless they're operated very intensively and very creatively and probably, reinvented and readjusted constantly, they do not retain their value. To cite an example, if you look at office buildings in central Manhattan, that until a few years ago people assumed that they can just buy them and they'll have a stable yield and it’s a very boring business. Today they are competing with people like We Work in the building becomes dependent on its operator. If we look at retail, retail on Fifth Avenue again, until a few years, the safest bet on earth. No longer safe. A hotel next to Disneyland. Likewise, Airbnb suddenly comes over, partners with a local developer, and starts competing with your hotel and create new supply that is not zoned as a hotel even, sometimes, basically serves your potential customers.
That's the ultimate impact of technology really destabilizing what real estate means. This has immense implications to the institutional investors which means immense implications for our own pensions and our own savings for the future, what we can assume about the returns that we're going to see. Something to keep in mind.
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