Crowdfunding property deals on horizon with JOBS Act
New U.S. securities laws intended to help startup companies raise money are poised to benefit real estate investors as well, allowing individuals to buy stakes in offices and other commercial buildings once off limits to them.
The Jumpstart Our Business Startups Act will ease restrictions on investments in closely held companies, including those set up to own commercial property, by people making less than $200,000 a year and with a net worth of less than $1 million. Before the law's passage, such firms could market and sell shares to individuals who exceed those levels, known as accredited investors.
The JOBS Act probably will lead to more property-investing programs like those being pioneered by Fundrise, a startup that recently raised $325,000 from 175 people, giving them a 28 percent stake in a two-story building that the firm bought in its home city of Washington. Because Fundrise began soliciting investors before the law's change, the company had to get permission from the U.S. Securities and Exchange Commission.
"When we started, we had no inkling the JOBS Act would come along," Ben Miller, who co-founded Fundrise with his brother Daniel, said in a telephone interview. "It took us nine months to get the first offering qualified with the SEC, and with the JOBS Act it should end up taking us a day."
The law, which changed parts of the Securities Act of 1933, will allow non-accredited investors to put $2,000 a year or 5 percent of their income or net worth whatever amount is greatest into closely held ventures. While the law went into effect in April 2012, property investors aren't able to take advantage of it yet because proposed investor-safeguard rules are still being worked on by the SEC. The commission missed its own end-of-the-year deadline for drafting the regulations.
"Whatever rules they come out with, it has to be less restrictive than they are today," Miller said.
Investing "through friends and family" was one of the few ways for investors to gain access to property purchases before passage of the JOBS Act, said Paul Habibi, a real estate professor at the University of California, Los Angeles. The new law is "something that could work on smaller deals and it definitely has some promise."
A full implementation of the JOBS Act will help companies such as Fundrise, which currently solicits money from non-accredited investors only if they're residents of states where the offering is registered. Once the JOBS Act rules are in place, the company and other firms will be able to sell equity to investors throughout the U.S.
With Fundrise's first property the 5,380-square-foot 1351 H St. NE investors are entitled to a portion of the real estate's value and a share of its rent, as well as part of the potential profits from the sole tenant, Maketto, an upscale Asian restaurant.
Gina Schaefer, who owns hardware stores in Washington and Baltimore, said she and her husband, Marc Friedman, 39, used Fundrise to buy a portion of 1351 H St. NE for $10,000 as a way to become more involved in their community and make the kind of investment they couldn't before.