232 Adam Kaufman, Co-Founder and Managing Director, ArborCrowd

Challenges

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.

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.

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.