Real estate crowdfunding versus a direct sponsor investment

A crowdfunding platform and a sponsor raising directly can offer you the same building, with the same photographs, projections, and construction team. The difference sits in a document most investors skim: the one naming the entity you are actually admitted to.

Everything follows from that — who votes, who signs, and whose name is on your K-1. This is written by a developer that raises directly, so put the questions below to us as readily as to anyone else.

Start with the entity you are admitted to

Two shapes are common, and the marketing does not distinguish them. In a direct subscription you are admitted to the sponsor’s own entity — the partnership or LLC that owns the project, or the fund that owns those entities. Your name goes on its register, the operating agreement you sign governs the building’s ownership, and your counterparty is the sponsor. That is the document stack described in how investing in a private real estate fund actually works.

In the other, the platform forms an entity of its own — a feeder, sometimes called an SPV or a series — which subscribes to the sponsor’s partnership as a single investor. You are admitted to the feeder. On the sponsor’s register there is one name, and it is the feeder’s; your manager is an affiliate of the platform.

Not every platform uses a feeder; some are introduction only, and you sign the sponsor’s own documents. Neither shape is disreputable, and neither is visible from the outside, so settle which one you are being offered first: whose name is on the operating agreement, and which entity will send you a K-1.

Settle the exemption at the same time. It is an obligation of whoever is issuing, and it decides what disclosure you receive and who may invest. Our own offerings are available to accredited investors only, made under Rule 506(c) of Regulation D, which lets us describe them publicly and requires us to verify your accredited status rather than accept a self-certification.

What a feeder changes about voting and consent

A private real estate agreement gives investors consent rights over defined matters: extending the vehicle’s life, amending the agreement, replacing the manager, sometimes approving a sale. Where a feeder sits in between, the holder of those rights is the feeder, and its manager exercises them.

Whether your view reaches the sponsor depends on a clause in the feeder’s own agreement. Some pass votes through proportionally and abstain where investors do not respond. Some let the manager vote the whole position at its discretion. That clause is the difference between voting and being polled.

Transfers work the same way. Interests in private offerings are already restricted, not freely transferable, and without a public market, and a feeder adds a second consent from a second manager. Capital calls tighten too: the feeder has to fund on the sponsor’s timetable, so its deadline for you is shorter than the sponsor’s deadline for it. Read the default remedy in both agreements.

Reporting arrives through whoever is in between

Direct, you receive the sponsor’s reporting. Through a feeder you receive the feeder’s, assembled out of the sponsor’s — a step and a translation. Ask whether you get the sponsor’s own quarterly reporting unedited, and how long the relay takes.

Tax runs the same way, and a tiered structure already stacks the wait. A feeder adds a tier above the sponsor rather than beneath it: one more set of books has to close before your form can be prepared, and K-1s generally arrive later than brokerage forms to begin with. Why a K-1 arrives late, and later still through a tier sets out that timetable. The question to settle before you subscribe is whose name and EIN appear on the form, because that is who your CPA has to chase in April.

The platform’s compensation is a layer, not a substitute

A platform does not replace the sponsor’s fee schedule. The acquisition fee, the development fee, construction compensation, property and asset management, and the promote all sit where they sat, on the bases fees in a private real estate deal sets out. The platform is compensated in addition — out of your money at the feeder level, out of the sponsor’s own economics, or both — and which of the three decides whether the layer costs you anything. So ask.

• Is a fee charged inside the feeder, and is it struck on committed or on invested capital?
• Is anything taken out of distributions before they reach you, and is it shown as a deduction or netted quietly?
• Does the sponsor pay a listing, servicing, or placement fee, and did its own fee schedule change to accommodate it?
• Is anyone paid more if you subscribe than if you decline?

That last one is a disclosure question, not an accusation.

What a platform’s diligence covers, and what it excludes

Screening is real work, and platforms describe it in similar terms: confirming the entities exist and are in good standing, checking the principals’ background and litigation history, reading the sponsor’s materials for internal consistency. A listing means a screen was passed.

What it does not mean is set out in the platform’s own agreements, and those disclaimers are accurate rather than evasive. Platforms generally state that they do not independently verify sponsor-supplied information, do not act as your adviser or fiduciary, do not stand behind projections prepared by someone else, and do not supervise construction or operations. Read them as a description of scope: the mandate, the fee schedule, the waterfall, the guarantee obligations, and the construction contract are still yours to read.

Who answers the phone in year three

Development runs long, and the questions that matter arrive years after subscription: a lease-up filling more slowly than the schedule assumed, a construction loan approaching maturity in a rate environment nobody modelled, an extension proposed, a capital call landing.

Direct, you call the sponsor, and the firm answering owns the schedule, the loan, and the leasing. Through a platform you call the platform, which asks the sponsor and relays the answer. That works when it is staffed. The risk is attention rather than bad faith: an intermediary that did not build the building has less reason to know its schedule than the firm that did.

So ask who prepares the quarterly report, who answers a question about the building rather than about your account, and whether there is a name. Development, construction, and property management sit inside one company here, which is what vertical integration means for a development investor, so a question about a building reaches the people who built it.

If the platform stops operating, the building does not

The layer is administrative rather than economic. The partnership owns the land and the building. The loan is between a lender and that partnership. The operating agreement binds whoever signed it. A platform ceasing to operate changes none of that, and your position is not a claim on the platform.

What it disturbs, and only where a feeder exists, is administration.

• The feeder needs a manager. Where a platform affiliate is the manager, someone has to succeed it.
• Somebody has to keep the register, prepare the feeder’s return, and issue your K-1.
• Distributions routed through the platform’s payment arrangements have to be re-routed.
• The feeder’s consent rights in the sponsor’s partnership have to be exercised by someone.

The documents should settle it before you need them to. How can the feeder’s manager resign or be removed, and who succeeds it? Who holds the books and records? Does investor cash ever sit in an account the platform controls? If the answers are not in the documents, that is itself an answer.

A direct subscription does not answer those questions. It removes them: one entity, one manager, one register.

The wrapper is not the underwriting

None of this tells you whether the deal is any good. Structure decides who signs and who reports; underwriting decides whether there is anything to report. Put one question to any sponsor, met through a platform or directly: are the rents in the pro forma trended?

Ours are not — the pro formas use untrended rents, and what that changes during a lease-up is where the reason sits. It is a statement about method rather than about results, and the point of asking is that the answer can be tested now rather than waited for. The twelve communities are where that method is applied, and the terms of both funds are published row by row.

Whether the offering is one named building or a pool of them is a separate question from the platform one, worked through in a real estate fund versus a single-property syndication.

What to ask before you subscribe

• Which entity am I admitted to, and whose name is on its operating agreement?
• Are votes passed through to me, or exercised by a manager on my behalf?
• Who issues my K-1, and how many sets of books close before it can be prepared?
• What is the platform paid, by whom, and is it inside or outside the sponsor’s fee schedule?
• Who answers a question about the building itself in year three, and is there a name?
• If the feeder’s manager stops operating, who succeeds it, and who decides?

Answer those and the layer question is settled. The investment question is not, and it is larger. Real estate development involves substantial risk, including construction delay and cost overrun, lease-up risk, interest-rate and refinancing risk, leverage, illiquidity, and loss of capital. An entity placed between you and the sponsor adds exposures of its own: a manager you did not choose, information that arrives second-hand, and rights exercised on your behalf. No return is guaranteed. Where this article and a fund’s offering documents differ, the documents govern, and our investor relations team will take the question directly.