Why is the lending community talking about crowdfunding right now?
Entrepreneurial borrowers and/or investors are drawn to an expedient financing source for smaller projects of short duration. Traditional lenders are seeing increased pressures to lend and increased pressures on profit margins, so assuming crowdfunding can withstand increased regulatory scrutiny, it might fill a niche traditional lending can’t.
A number of crowdfunding websites devoted to CRE investments have emerged recently—what’s happening?
At its core, crowdfunding is a blend of traditional lending strategies that are being made available to the general small investor. These sites feature different risk profiles for assets & investors. Some sites act as the arrangers, utilizing crowdfunding structures where the crowd acts as direct lender to the CRE borrower. Some arrangers utilize a structure where the related CRE loan is prefunded and interests in the loan are sold to investors. Other crowdfunding platforms utilize structures where the arrangers create a lending vehicle with funds collateralized by the investors’ investments. The vehicle then lends funds to the related borrowers and the investors are given ownership interests in the lending vehicle itself.
What types of loans is crowdfunding most suited for?
A CRE borrower looking for short-term financing at a low cost of funds, with minimal upfront origination fees, may find crowdfunding attractive. Origination fees currently range from 0%-4%, and the speed at which a project can be funded and the loan closed may be appealingly quick. The lack of other fees (asset management fees, etc.) and costs, coupled with very favorable interest rates, may make crowdfunding-backed CRE loans attractive to small, non-institutional borrowers looking for capital to develop their CRE projects.
What are the larger implications for CRE Finance?
The types of products these entrepreneurial borrowers are seeking through crowdfunding are not assets that lenders in CRE traditional lending typically finance. However, the proposition of utilizing technology to draw in capital that might not otherwise be available is similar to the rise of securitized lending decades ago, so traditional lenders looking to get into this space might consider acquiring an existing crowdfunding platform. For borrowers seeking an easier end-user experience or requiring a sophisticated CRE lender, crowdfunding is unlikely to provide an attractive debt strategy. The servicing of crowdfunded deals will be an interesting market to watch, and the potential workout of crowdfunded CRE deals will be sure to present issues that none of us could have imagined; crowds can often turn ugly.