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 $95 million it cost to buy and fix up the existing hotel, $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 $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 U.S. 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 (JOBS) Act, which
eased rules for sales of some investments. This year, crowdfunding for commercial real estate will more than double to $2.57 billion, the research firm Massolution estimated in March. That's a tiny fraction of nationwide sales volume, which totaled $255.1 billion in the first half, data from Real Capital Analytics Inc. 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.
KICKSTARTER PROJECTS
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 $1.2 million to $1.5 million. The units — ranging from 562 to 662 square feet (52 to 62 square meters), 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 $20,000 each. They can expect a return on their investment of 19% to 23%, mostly from sales of the units and some from hotel fees, according to Prodigy. About 90% of the crowdsourced money came from outside the U.S., said Brian Newman, the company's business-development chief.
INTERNATIONAL INVESTORS
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 $5,000. Mr. Miller said the effort raised $5 million, in spite of some resistance from investment banks that originated the bonds.
BUYER DEMAND
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, Mr. 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 $3,879.79, according to the offering plan. That's about $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 Mr. Newman.
Prodigy has three other crowdfunding projects in New York. Mr. 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.”
