Crowdfunding fails to gain traction in Canada

Some see the online product as more of a marketing ploy than a financial strategy

Western Investor
May 26, 2016

Alix Cormick of Venture Law Corp.: why crowdfund when bank financing is so easy and cheap? - submitted

While Toronto-based NexusCrowd Inc., which launched in September 2015, has raised an estimated $1.5 million for commercial real estate projects through the first crowdfunding real estate portal in Canada, the concept has failed to gain traction in B.C. and some experts say it remains more of a marketing gambit than a financial strategy.

Real estate crowdfunding is a financing approach where many investors team up to provide the equity or debt required to buy, finance or develop a property or real estate project, typically via an online crowdfunding platform.

In 2015, a new prospectus exemption was introduced within the BC Securities Commission, called the Start-up Crowdfunding Exemption. Project owners can raise a maximum of $250,000 in capital twice annually and retail investors can invest a maximum of $1,500 per campaign. The exemption opens up previously inaccessible real estate investments to smaller investors.

But some question why a property developer would consider crowdfunding in these days of cheap money and high real estate demand.

 “Why would a viable commercial real estate developer go with crowdfunding when banks are offering loans at 3%?, mused Alixe Cormick, a lawyer with Venture Law Corp. of Vancouver.

Cormick noted that the NexusCrowd portal raised just $500,000 for each of three commercial real estate offerings. ”This was not seminal for the projects,” she said, suggesting it was more a way of raising media coverage than money. Indeed, the NexusCrowd funding came to only about 25 per cent of the $5.8 million needed by Downing Street Realty Partners, which has three industrial properties in Greater Toronto that require redevelopment and remediation spending. Under the NexusCrowd model, participants can sign up at its website and participate in commercial real estate investments for as little as $10,000.

NexusCrowd CEO Hitesh Rahtod, however, said there is a financial niche that crowdfunding can fill.

"Banks will not lend against development projects until the development has met certain requirements, including having equity and other subordinated debt in place. That means developers require other funding sources prior to receiving bank loans," Rahtod said, adding that some small and mid-size developers do not have access to large capital pools because their deal sizes are not large enough to attract institutional lenders. "That is where NexusCrowd fits in. Just because they are smaller developers does not mean they aren't good developers," he said. 

Marc Canale, a partner at Downing Street, said his company had watched the development of crowdfunding for commercial real estate in the U.S. and was eager for an opportunity to participate in this emerging financing market.

“It is new to Canada, [but] there are 175 firms in the U.S. I think that there are a few of them popping up in Canada and I think there will be many more.”

Most of the U.S. crowdfunding portals are used for small-scale multi-family rental projects and “fix-and-flip” residential investments, according to Bret Conkin, founder of Vancouver-based CrowdfundSuite, which consults to the nascent industry. Although new to Canada, more than $2.6 billion in global real estate projects were crowdfunded in 2015, up 156 per cent from 2014, he added.

Conkin said two other real estate portals had opened recently in Canada: Open Avenue in Ontario and MetroFunder, based in Vancouver. But MetroFunder’s web site had been apparently shut down when Western Investor tried to access it recently. Conkin said the two startups “don’t appear to have any traction in terms of raising investment.”

Cormick, who provides legal advice on real estate investing, explained that crowdfunding is simply an online version of the offering memorandum, which is often used by developers to gauge interest in and raise capital for a real estate project. 

“Crowdfunding takes the offering memorandum online and makes it  the investment process fully transparent, both to investors and regulators,” Cormick said, “In that aspect it is a good thing.”

Frank O'Brien is the editor of Western Canada's biggest commercial real estate newspaper, Western Investor, as well as a contributing editor at West Coast Condominium, real estate contributor to Business in Vancouver and a regular media commentator on real estate investment.
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