Is Crowdfunding a Viable Equity Source for Development?

Crowdfunding platforms have soared into popularity in recent years as an alternative capital source—both for debt and equity. Crowdfunding platforms have been used largely for real estate investment of existing assets, but developers may be opening up to using crowdfunding as an equity source for ground-up development. Jonathan Genton of Genton Property Group has used crowdfunding platforms on ground-up construction, but says that the uncertainty of funding has been a challenge. Still, other developers are becoming more interested in crowdfunding as part of the construction capital stack.

“Crowdfunding is something that people are thinking about and it gets a lot of interest. For developers to access capital, I think that it is growing and it could be a sea change in how we do business. The way that we have done business for years is pretty durable,” Genton, founder and CEO of Genton Property Group, tells GlobeSt.com. “You have a broker network and a bank network. A lot of those people have a lot invested and a lot of focus on business development and accessing developers to solve their equity and or debt needs. It works really well, so when I looked at crowdfunding from that perspective, it was interesting. It is a tool that is powerful and interesting. I think that it will become more prevalent has times moves on.”

In recent years, construction funding options have been limited and difficult to obtain, especially for smaller developers with small projects. However, Genton doesn’t see crowdfunding as an alternative to construction debt but rather as a replacement equity source. “Construction financing market is extraordinarily difficult. It has been difficult for a couple of years, depending on your asset class,” he says. “The commercial lending business is probably very difficult for a lot of borrowers. In my case, I don’t see crowdfunding as a replacement for construction financing. I tend to think about it as a replacement for equity. I need certainty of close and certainty of execution. Crowdfunding tends to come in over a period of time, and I haven’t seen the magnitude of construction dollars that we use on a crowdfunding platform.”

The real benefit of crowdfunding, from Genton’s view, is the access to investor and capital sources that one would not otherwise be able to reach. Because the current traditional funding system is reliable and healthy—a point that Genton stresses—crowdfunding is not a necessity but rather an alternative. “Crowdfunding doesn’t replace due diligence, durability of markets or track record of the developer,” he says. “It simply makes those things more important and it allows those things to be viewed and decided upon by a much wider range of potential investors that I could access without it.”

While there are certainly benefits to crowdfunding, it also comes with unique challenges. For Genton, the principal obstacle is timing. When you host a crowdfunding offering, it could be funded in days or months, but developers like Genton are beholden to a strict schedule and cannot risk running out of funding while waiting for the offering to close. “The risk is really certainty of close,” he adds. “If I am working with an equity fund or high net worth investor that I have done business with for 20 years, I have a high degree of certainty on their behavior.”