ACCESS FOR ALL

How crowdfunding is creating a new public market.

For almost 80 years, commercial real estate has been an asset class in which the average investor has been unable to participate, as it has been accessible only to wealthy individuals and institutional investors.

But now, that's changing. Crowdfunding technology and recently enacted laws have created a new public market that allows more people to invest in opportunities that were once reserved exclusively for private offerings.This form of crowdfunding enables different types of investors to pool their resources in order to potentially earn high returns through investing in the development of large-scale commercial properties. These new laws coupled with recent advances in technology are essentially leveling the playing field by giving more people access to some of the world’s prime investment assets.

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SELLING FIVE-CENTS APPLES

ON NEW YORK CITY STREETS

Interest in commercial real estate in New York began in the early 1900s. With population growth surging and a lack of residential and commercial properties to fulfil demand, early investors began to capitalize on the opportunity by investing in New York’s rapidly growing real estate development market. Real estate proved to be a relatively consistent source of income compared with other asset classes as investors were able to collect rental income regardless of economic conditions, assuming their tenants remained in business.

Real estate was especially attractive after the stock market crash of 1929, which erased an estimated $30 billion of wealth from the U.S. economy. Within months, more than 3.2 million people were unemployed, some 6,000 of them selling apples for a nickel apiece on New York City's street corners. While this was taking place, many building owners across the city were still collecting rent from their tenants.

A turning point came in 1933, when President Franklin Delano Roosevelt was inaugurated. To curtail the economic chaos within the economy, Roosevelt enacted two major laws intended to restore investors' confidence in the stock market and stabilize the financial markets.

First was the Securities Act of 1933, which required companies that offered investments to the public to disclose the nature of their business and risks of investing. This law was followed by the Securities Exchange Act of 1934, which created the Securities and Exchange Commission (SEC), a U.S. government agency that reviews companies' stock registration statements.

VIDEO: This New Type of Real Estate Investment Isn’t Just for the Rich
THE SECURITIES ACT OF 1933 SET UP PROVISIONS FOR PUBLICLY TRADED COMPANIES TO CUT DOWN ON FRAUD.

THE GREAT DIVIDE: PUBLICLY HELD OR PRIVATELY OFFERED

The 1933 and 1934 securities acts reduced certain investment risks because they helped cut down rampant fraud by unregulated stock promoters. They also worked to protect small investors by restricting the types of offerings that promoters were allowed to present to them (including much of commercial real estate).

In what became the public stock market, companies raised capital by selling shares on exchanges or through investment brokers. All investors were allowed to buy these shares, which were registered with the SEC and presented to the public with SEC-required disclosures.

Companies could also raise capital in the private market, but these investments weren't registered or advertised openly. Instead, they were sold through private offerings to a sector of individuals later known as accredited investors.

"The idea was to differentiate between people who were raising significant monies from a lot of people on a public basis, where there was the potential for fraud, from the mom and pops," explains Thomas Kearns, a commercial real estate attorney and partner at Olshan, Frome, Wolosky in New York City. As a result, those individuals allowed to participate in the private market in the 1930s were part of an elite group.

These laws stabilized investment markets but had unforeseen consequences, some of which negatively impacted the very investors the laws were supposed to protect.

The artificial divide between public and private securities locked most investors out of commercial real estate investment opportunities, among other private offerings, and eventually led to an imbalance in the financial markets by concentrating much of the country's wealth in the private sector.

"If you were just a member of the general public, you couldn't invest," Kearns says. "There was some loss of opportunity."

HOW YOU CAN OWN A PIECE OF COMMERCIAL REAL ESTATE

Investment opportunities abound in NYC, but commercial real estate has often been relegated to the super-rich. Prodigy Network is opening this door for everyone by creating a crowdfunding model of commercial real estate investing. Explore some of its recent opportunities by clicking on the buildings below.

CROWDFUNDED BUILDINGS

Because of its crowdfunding structure, Prodigy Network’s commercial real estate investments have a lower entrance threshold than many would imagine. The first of these opportunities was AKA UN, completed in 2015. Since then, four more buildings have been fully funded.

Downtown

Uptown

    Other investors

    Most commercial real estate is owned by a combination of regional, national and institutional investors. These owners include developers, investment funds, REITs and even the government. Above are just some of the buildings owned by the top 50 commercial real estate owners in the city.

    Downtown

    Uptown

    Explore each of Prodigy Network’s investment opportunities by clicking on the buildings above.

    CROWDFUNDED BUILDINGS

    Because of its crowdfunding structure, Prodigy Network’s commercial real estate investments have a lower entrance threshold than many would imagine. The first of these opportunities was AKA UN, completed in 2015. Since then, four more buildings have been fully funded.

    OTHER BUILDINGS

    Most commercial real estate is owned by a combination of regional, national and institutional investors. These owners include developers, investment funds, REITs and even the government. Above are just some of the buildings owned by the top 50 commercial real estate owners in the city.

    AKA WALL STREET

    84 WILLIAM ST

    • Minimum investment $10,000
    • Estimated building cost $197.5 million
    • Approximate equity capital invested $87.5 million
    • Average investment by a Prodigy investor $153,000
    • ROI 10-14%
    • Total square feet 88,000

    THE ASSEMBLAGE / JOHN STREET

    17 JOHN ST

    • Minimum investment $10,000
    • Estimated building cost $188 million
    • Approximate equity capital invested open offering
    • Average investment by a Prodigy investor $109,000
    • ROI 12%
    • Total square feet 119,000
    • Units 79

    THE ASSEMBLAGE / PARK

    331 PARK AVE SOUTH

    • Minimum investment $10,000
    • Estimated building cost $111 million
    • Approximate equity capital invested open offering
    • Average investment by a Prodigy investor $226,000
    • ROI 11-15%
    • Total square feet 42,000

    THE ASSEMBLAGE / NOMAD

    114 EAST 25TH ST

    • Minimum investment $10,000
    • Estimated building cost $110 million
    • Approximate equity capital invested open offering
    • Average investment by a Prodigy investor $120,000
    • ROI 10%
    • Total square feet 48,000

    AKA UNITED NATIONS

    234 EAST 46TH ST.

    • Minimum investment $10,000
    • Estimated building cost $126.5 million
    • Amount raised through crowdfunding $46.5 million
    • Average investment by a Prodigy investor $100,000
    • ROI 12-16%
    • Total square feet 60,000
    • Square feet per unit 630
    • Units 95

    IMBALANCE OF RISK & REWARD

    TRIGGERS GREAT RECESSION

    DURING THE GREAT RECESSION, U.S. GDP DROPPED 4.3% AND THE UNEMPLOYMENT RATE JUMPED TO 9.5%.

    Sixty-seven years after the Great Depression ended, the United States experienced another severe economic crisis that became known as the Great Recession.

    While the causes were complex, there's no question that the uneven concentration of wealth, lack of transparency in the financial system, misalignment of return on capital, and complex financial instruments called derivatives, contributed to this period of tremendous turmoil in the U.S. economy.

    During the Great Recession, the U.S. gross domestic product dropped 4.3 percent and the unemployment rate nearly doubled from less than 5 percent to 9.5 percent. Though the recession technically ended in 2009, the unemployment rate continued to rise and later hit a high of 10 percent.

    BD Bacatá is Colombia’s tallest skyscraper and the first of its kind to be funded with crowdfunding.

    In the years that followed, economic growth was sluggish and U.S. stock markets experienced continued volatility as the Federal Reserve tried to stabilize the economy. Ripples were felt in many individuals' investment portfolios.

    However, investors who owned large commercial real estate assets in major U.S. cities were fortunate as these investments proved more resilient.

    WEALTHY INVESTORS HAVE CHOSEN COMMERCIAL REAL ESTATE IN THE 10 MOST POPULOUS U.S. CITIES TO PROTECT THEMSELVES AGAINST LOSING CAPITAL IN EVERY CRISIS SINCE THE GREAT DEPRESSION.

    -RODRIGO NIÑO

    "Wealthy investors have chosen commercial real estate in the 10 most populous U.S. cities in an effort to protect themselves against losing capital during financial crisis," says Rodrigo Niño, founder and CEO of Prodigy Network, a commercial real estate development company that operates one of the world's largest crowdfunding investment platforms.

    CATALYST FOR CHANGE

    POLICY CREATES OPPORTUNITY

    THE JOBS ACT CREATED AN OPPORTUNITY FOR THE GENERAL PUBLIC TO USE CROWDFUNDING TO INVEST IN PRIVATE EQUITY OFFERINGS.

    Following the Great Recession, individuals around the world searched for better ways to invest their capital to protect themselves from future economic downturns.

    In 2013, the public was given this opportunity with the JOBS Act. Among other provisions, it allowed unaccredited individuals to invest in some private offerings for the first time since the Securities Act of 1933 was passed 80 years prior. This change democratized investments by opening the private market to all investors.

    "Crowdfunding offers the perfect synergy between positive impact for the community and return of capital for the individual," Niño says.

    With the JOBS Act and crowdfunding technology, investors no longer need to be wealthy to invest in commercial real estate development.

    AKA United Nations, the first Prodigy Network crowdfunded building to be constructed, is just two blocks from UN headquarters on Manhattan’s East Side.
    Invest in commercial real estate in NYC. CREATE ACCOUNT

    PROOF OF CONCEPT

    The concept of crowdfunding in commercial real estate may be relatively new in the U.S., but it has already proved successful in South America. In 2009, Niño and Prodigy Network raised $190 million from 3,950 investors to develop Colombia's tallest skyscraper in Bogota. The 66-story tower, known as BD Bacatá, includes a hotel, apartments and office space.

    Karim R. Lakhani, associate professor of business administration at Harvard Business School, wrote a case study documenting the success of this investment property and the potential of this new public investment market.

    "Colombia did not have a ban on solicitation, and therefore, small investors, accredited or not, could participate in large projects through a third-party fiduciary system," Lakhani wrote. "However, this had never been done at the scale required for a massive skyscraper."

    BD Bacatá had Niño on the search for more opportunities. After much research, Niño started the first crowdfunded building in the U.S., deciding on New York City. For the AKA United Nations project, Niño and Prodigy Network raised $12 million in just four months from investors in 11 countries. Their return on their investment exceeded 15 percent per year.

    HOW IT WORKS

    CROWD-INVESTING

    Technology is critical to the success of commercial real estate crowdfunding.

    "Technology enables very granular aggregation of funds from investors from all over the world so they can access opportunities that only the wealthy could participate in previously," Niño says. "Irrespective of the wealth they previously had, individuals can now get the same returns as larger investors by pooling together."

    Funds for each project are held in a separate account until a third party fund administrator has evidence that enough funds have been raised to move forward with the project. Only then are funds released and invested into the property.

    "What we do is simple," Niño says. "We help investors access what we believe is the best commercial real estate in the world."

    Crowdfunding works in part because everyone can participate in it.

    "For years, you had private placements with a small group of known investors who did deals with each other. There was no mechanism for those real estate operators to bring the public in easily. That's one of the beauties of the crowdfunding rules," Kearns says. "It's a big opportunity, particularly if people want to invest in their community and things they know about."

    Crowdfunding provides an opportunity for individuals who were once restricted from the private market, and the possibilities aren't limited to commercial real estate.

    "Eventually we will open our platform to select third-party developers in the United States and around the world," says Niño.

    This new concept of investing is creating a new public market, allowing access for all.