[NEW YORK] New York's first real estate project financed significantly though crowdfunding is set to open, a step forward for a nascent investing model that has yet to prove itself in commercial property.
AKA United Nations, an extended-stay hotel-condominium on East 46th Street near Second Avenue, will start taking guests Sept 10. Sales of the suites have already begun. Of the US$95 million it cost to buy and fix up the existing hotel, US$12 million was raised from online pledges.
It's "the first ever crowdfunded building in New York coming to completion, from A to Z," said Rodrigo Nino, chief executive officer of Prodigy Network, which is gut-renovating the building with partners. Until now, "everything has been about promises." Real estate crowdfunding - in which participants chip in as little as US$100, in some cases, for a stake in a property - has struggled to establish its bonafides in a market where there's no shortage of institutional capital, especially in places as attractive as New York. Most of the 152 US crowdfunding websites listed by trade publication Times Realty News are jockeying to finance modest buildings in smaller cities and towns.
The movement is still young, spurred by the 2012 Jumpstart Our Business Startups Act, which eased rules for sales of some investments. This year, crowdfunding for commercial real estate will more than double to US$2.57 billion, the research firm Massolution estimated in March. That's a tiny fraction of nationwide sales volume, which totalled US$255.1 billion in the first half, data from Real Capital Analytics show.
"The attention crowdfunding has received is out of proportion with its market share," said Sam Chandan, president of New York-based Chandan Economics, a provider of real estate data and analysis.
Amassing small contributions for real estate has far to go before it can upend the industry the way Kickstarter did for creative endeavors from video games to films to music CDs. The "Veronica Mars" movie, a card game called Exploding Kittens and GoldieBlox, a toy set that teaches girls engineering skills, were among those at least partially funded through the site.
For real estate, the process is more complicated. Investors typically must be accredited, documenting their ability to take risks with their money, often by presenting tax returns.
At AKA UN, a block and a half west of the General Assembly Building, Prodigy is marketing 95 one-bedroom condos, priced from US$1.2 million to US$1.5 million. The units - ranging from 562 to 662 square feet, all with kitchens and most with a balcony - will be rented as extended-stay hotel suites until they find buyers.
The crowdfunding campaign drew 116 backers, pledging at least US$20,000 each. They can expect a return on their investment of 19 per cent to 23 per cent, mostly from sales of the units and some from hotel fees, according to Prodigy. About 90 per cent of the crowdsourced money came from outside the US, said Brian Newman, the company's business-development chief.
Mr Nino started his first crowdfunding campaign in 2010 in his native Colombia, raising money to build BD Bacata, Bogota's tallest tower. That gave him a base of Latin American investors and a leg up on newer websites.
"That's his advantage," said Lew Feldman, co-chair of the crowdfunding practice at law firm Goodwin Procter LLP. "He has cheap capital coming in from overseas that he combines with crowdfunding capital from here." Mr Feldman said that to his knowledge AKA UN raised the most money through crowdfunding than any previous single project in New York.
Prodigy's campaign "shows the real estate industry that crowdfunding isn't just a theoretical model," said Ben Miller, co-founder of Fundrise.com, a competing site.
Fundrise in January sold interests in bonds backing 3 World Trade Center, an 80-story skyscraper under construction in lower Manhattan, for as little as US$5,000. Mr Miller said the effort raised US$5 million, in spite of some resistance from investment banks that originated the bonds.
At AKA UN, the condos, all furnished, would appeal to international buyers who visit the city occasionally and may want to rent out the property the rest of the time, Newman said. Once the units sell, crowdfunding investors will no longer receive income from hotel fees.
The payoff for AKA's backers would depend on demand for the condos, which cost more than comparable apartments in the neighborhood and come with higher monthly charges.
A 628-square-foot unit on the second floor, for example, has a monthly carrying charge of US$3,879.79, according to the offering plan. That's about US$6.17 a square foot, more than three times the average fee for a Manhattan condo in the second quarter, said Jonathan Miller, president of appraiser Miller Samuel Inc.
The carrying charges would subsidize the hotel operations and services such as housekeeping that owners will benefit from, an amenity regular apartment buildings don't have, according to Newman.
Prodigy has three other crowdfunding projects in New York. Nino said he turned to the Internet to help break the stranglehold that big institutions and rich elites have on commercial real estate.
"There's a ton of people making too much money and a growing number of people not making enough," he said. "In a crowd economy, you get individual growth, and the crowd gets a positive impact as well."