Written by: Jon Chavez
The Blade | toledoblade.com
Date: September 25, 2014
Reach the Jon at email or 419-724-6128.
FINDLAY — Sometime next month, a New York real estate investor plans to buy a 30,100-square-foot retail strip center on the east side of Findlay.
But in an unusual move, the investor — Mark Mascia, president and CEO of Mascia Development LLC — plans to structure the transaction to allow for real estate “crowdfunding.”
Crowdfunding is a rapidly growing practice of raising funds for a project or venture by soliciting monetary public contributions.
The sponsor typically uses a Web site, such as Kickstarter.com, to list his project, and those interested can view the particulars and pledge money. In return, they usually get something tangible, such as the product, a service, or admission to an event. Crowdfunding has been used to fund software, inventions, games, gadgets, music CDs, movies, and concerts.
But crowdfunding for investing in real estate was legalized only a little more than a year ago. Mr. Mascia’s planned $3.4 million purchase of the 14-year-old Findlay Marketplace center is believed to be one of the first, if not the first, uses of real estate crowdfunding in northwest Ohio.
“I guess in some ways it’s a test. It is the first time I’ve offered a property on a crowdfunding basis. But it also would be the first time I also will have outside investors,” said Mr. Mascia, who grew up near Dayton.
Mr. Mascia said he does not really need crowdfunding to buy the strip center, which is 80 percent occupied and anchored by a Pet Supplies Plus store, an Armed Forces recruiting center, and an AT&T store.
He will provide about $1 million in capital, or about 30 percent of the cost. An investor who backs his projects can afford the remaining $2.4 million, if necessary.
But Mr. Mascia said he hopes to cut his investor’s stake from a possible 70 percent down to 10 or 15 percent if his crowdfunding offering through the RealCrowd.com Web site is successful. He said he has received pledges from would-be investors of $300,000.
“One of the families I work with has agreed to buy the property either way,” Mr. Mascia said. “But one of the primary factors for doing this is getting our name out. For us, it’s about exposure to new investors.”
Under terms of Mr. Mascia’s deal, a crowdfund investor must invest a minimum $25,000 and a maximum of $1 million. Their money would be tied up for an estimated 7 to 11 years, but Mr. Mascia expects investors would get an annual cash return of 10.8 percent on their investment.
Of course, in real estate, nothing is guaranteed, as the real estate crash of 2007 demonstrated.
“Ultimately there’s no guarantees. It could be something that tomorrow the economy tanks and retailers have trouble,” Mr. Mascia said. “But I believe the tenants we have in place … are not tied to the traditional retail economy. The U.S. government, for instance, won’t be stripped off.”
Pet Supplies Plus has six more years on its lease, and the other tenants have between one and five years, he said.
A potential downside, he added, is no liquidity for investors. Once money is invested, it is tied up for the investment period and can’t be retrieved.
Crowdfunding for real estate was authorized in 2012 under the federal Jumpstart Our Business Startups Act. Because of real estate’s volatile nature, the Securities and Exchange Commission limited participation in real estate crowdfunding to “accredited investors” only — individuals who earn $200,000 a year — $300,000 if married — or have $1 million in the bank.
Harlan Reichle, CEO of the Reichle Klein Group, a commercial real estate firm in Toledo, said crowdfunding might be a good fit for urban redevelopment. “The appeal is you can get the community involved in the project and there’s an opportunity for the neighbors around the property to participate in the project,” he said.
It’s also a good way to find more sources of capital beyond usual avenues, Mr. Reichle said.
“It’s an intriguing idea and for a market like Toledo — and frankly, we’re somewhat a capital-starved market — one of the issues that we have is finding investors or developers with the capital to put together a speculative project,” he said.
Paul Habibi, a real estate consultant and professor at the University of California, Los Angeles, and an investor who controls one of the largest multifamily housing portfolios in Los Angeles, said he has watched crowdfunding closely the last year and thinks that while it has merits, it may have risks that remain largely unknown.
“Crowdfunding is still somewhat in its early stages. … The problem is it usually takes the lifespan of a [real estate] deal to figure out all the ramifications,” he said. “And in many cases most the deals that are being crowdfunded are investment deals that people are planning to hold onto for a number of years.”
Crowdfunding does present two outstanding risks, Mr. Habibi said. First, is the investor sophisticated enough about real estate to do due diligence on the property involved? Second, how do you properly vet the person offering the deal?
“The [crowdfunding Web site] is usually not vetting the sponsor. To me, that’s one of the red flags,” Mr. Habibi said. And, “even good sponsors do bad deals, so that makes it hard to assess the risk.”
“But on the other hand, crowdfunding is one of the few ways for the smaller investor to get into the game they otherwise couldn’t without having a sponsor involved in the deal,” Mr. Habibi said.
Still, when asked if he would invest in a crowdfunding offering, Mr. Habibi said he would not.
“I wouldn’t feel comfortable. The business model is still in its infancy, and it remains to be seen how it will all pan out,” he said.