Commercial real estate has always been a draw for high net worth investors looking for stable assets that generate steady income. But the reason that commercial real estate investing has always been a bit of a rich person’s game isn’t because they are the only group that wants low-risk dividend earning investments. Most investors don’t have the pocketbook to buy a commercial property or can write checks big enough to make them a worthwhile client for an investment advisory firm.
This is where certain intrepid technology companies have stepped in to create solutions that allow buildings to be easily purchased by large groups of investors that all put in relatively small sums of money. Tokenization and blockchain have been touted as the key to unlocking the commercial real estate asset class for the masses but these are not the only ways to safely store information and don’t solve the biggest roadblock for buying and selling shares of a business: regulatory compliance.
The SEC has ruled that ICO’s, the main way that tokenization and blockchain solutions are able to create a market for fractional ownership of an asset, are considered securities. That means that they have to go through the same painstaking filing process as a company that is going public on a stock exchange. So, the companies that are likely to change the way the world invests in commercial real estate are not the ones with the best tech, but the ones that have been able to get approval from the SEC.
The first company that has been successfully able to get the governmental go-ahead to sell “shares” of a building is BuildingBits. I spoke to the company’s CEO Alex Aginsky about how he sees the commercial real estate investing landscape changing and how that influenced the way that he started his company. First, it is important to understand the distinction in how they are able to create their offering. “What we did is to have each building have what is effectively an IPO,” Alex told me. “Thanks to the new Reg A plus we can market these to non-accredited investors, this took us a year and a half but that was big for us. We are the only company that can do this so far.”
Alex thinks that the increased access to properties will bring in money from investors that would not have traditionally been interested in the space. He has found that to already be true. “The typical demographic of our investors are the late millennial to Gen-Xer from thirty to fifty. They are usually very tech savvy and an early adopter of other fintech like Robinhood or Acorn,” he said. The platform seems to have attracted quite a bit of first time commercial real estate investors. The average investment size is three to five thousand dollars.
Some of this might have to do with the types of properties that Alex and his team curate. To keep things simple they stick primarily to “A credit single tenant, triple net properties in primary and secondary markets that have leases in place.” This helps investors understanding investments, complicated properties and more importantly complicated leases are often hard to value. It also lets them keep down on management costs: “triple net” leases means that the tenant pays for maintenance, insurance and taxes.
Focusing on these types of properties allows BuildingBits to have a little bit of a different business model than most other asset managers. “We don’t have a carry so we are not a typical sponsor,” Alex says. “We are a direct issuer so we don’t need a broker-dealer license or charge a commission. We earn money by helping the seller to sell their asset on our platform to hundreds or even thousands of investors and earning a very small real estate commission (usually only 1%) from both the buyer and the seller at the time of Sale. We also take a management fee that is seventy-five basis points on the value of the asset. This includes property management and asset management.”
Alex equates this shift in the way we own properties to the early days of the stock market. Creating a way to have fractional ownership and an open market for commercial properties will have lasting effects on the industry. He also points out that this doesn’t mean that every property is a good candidate for this type of ownership structure, “Not every business is a good candidate to issue stock and not every building is a good candidate either,” he said.
Having a vehicle to find and invest in properties all over the country will spur more investment into areas that might not have been on the retail investment community’s radar before. Alex says that he has seen many properties get investment from afar but the majority of the investments are local. “We have seen most of the investments in our platform happen in areas that are close to where the investors are,” he told me. “I think that many people will invest not only for the return but because they have an emotional attachment to the building.”
Whenever someone asks me for advice about investing in real estate, the first thing I always tell them is to “invest in what you know.” And now thanks to new technologies, the power of the crowd, and companies like BuildingBits, you may be able to create your own miniature real estate portfolio. You no longer need to be a millionaire to have an ownership stake in the building that houses your local coffee shop or dentist.