Jason Fritton and his team spent over a year working on a secured debt investment structure for their real estate crowdfunding startup Patch of Land. Through extensive research and consultation they developed an investment structure using the underlying collateral as security, which is a first for real estate crowdfunding.
“In the past everyone has used a borrower dependent payment note, but those were not actually secured by the underlying collateral. You were essentially funding into a venture-backed company and that’s about it,” explained Fritton, Patch of Land’s CEO and co-founder. “Investors didn’t really have any true security. Now we can tell our investors that yes, you are secured by the underlying asset.”
One would assume that after all of that product development work, Fritton would put the secret recipe in a vault and hide the key. But the executive team at Patch of Land felt that the investment structure advanced the asset-based marketplace lending industry forward so significantly that they decided to publish their work openly for competitors and investors to study.
Since then, other industry players have indicated that they intend to follow the company’s lead. For example, recently RealtyShares announced that it had also adopted a similar secured fractionalized debt investment structure, which matches Patch of Land’s structure to the tee, according to Fritton.
Amy Wan, Patch of Land’s general counsel, said, “The general counsels of numerous other platforms have reached out to us to learn how to structure a secured fractionalized debt offering. It’s now inevitable that all major RECF platforms will adopt our best-in-class structure, otherwise they may be left in the dust for selling investors an inferior product.”
Properties were being offered for a fraction of their actual value but nobody could fund them because the funding didn’t exist. I thought, hey, crowdfunding could be used for this.
Innovation is part of Patch of Land’s DNA. Fritton was a trailblazer in the real estate crowdfunding marketplace. In 2010, a tumultuous year for the housing market, he attended a real estate auction in Chicago where he discovered plenty of inventory but few buyers. “At the time it was a wasteland,” Fritton recalled. “Properties were being offered for a fraction of their actual value but nobody could fund them because the funding didn’t exist. I thought, hey, crowdfunding could be used for this.”
Fritton went to his attorney with the big idea. “I said, this is what I want to do. I want to take it online, I want to bring in contractors and provide them with a valuable service and at the same time provide a valuable investment opportunity.” His attorney quickly rebuffed the concept. “He said, ‘that’s great, I’d invest in that, but if you do it you’re going to jail.’ Most people don’t realize that public solicitation of securities is illegal.”
Undeterred, Fritton became an advocate for real estate crowdfunding. “I tend to be a stubborn guy and I found out that Congressman Dole and Congressman McHenry were cosponsoring the crowdfunding exemptions in the JOBS Act, which turned out to be the 2012 JOBS Act, so I lit up the phones and showed up at events.”
Real estate projects often receive funding through syndication. A sponsor finds the property, puts up some of the capital and solicits investors for the rest. The problem with syndication is that the law specified that you needed a preexisting relationship with a potential investor before you could solicit them. The JOBS Act made real estate crowdfunding possible, in part, because is loosened those solicitation rules, eliminating the preexisting relationship requirement.
Fritton, along with his brother Brian, an enterprise-level software engineer and system architect, built the Patch of Land platform to capitalize on the new rules that he advocated for. In addition to innovative investment structures, the Fritton brothers are focused on creating an even more robust platform to facilitate their rapid growth. “We have outgrown the vast majority of our competitors at this point by a very wide margin but we are still just infants in this field,” noted Fritton. “When we move from 20, 30 or 40 offerings a month to 2,000 offerings a month, we need a level of automation and efficiency that’s hard to develop.”
Fritton believes that Patch of Land fills the void between slow, over-regulated banks, and hard money lenders that cannot supply timely or consistent sources of capital. The company’s transparent solution (anyone can go online and review the investment offerings without registering) is attracting a wide variety of investors. “I’ve got dentists in Kalamazoo, I’ve got hedge-fund managers in New York, I’ve got a guy that’s got $100 million sitting in bank accounts because he doesn’t trust the public markets,” added Fritton.
Since launching their platform two years ago, Patch of Land has funded over 130 projects, pre-funding and then crowdfunding more than $40 million with an average blended rate of return of 12.2%. The company has also moved all of its existing loans to the new secured debt investment structure that they freely shared with the industry.
According to Fritton, even with all of the new real estate crowdfunding platforms available, their is still room for massive growth, in part because much of the real estate investment industry has yet to catch-up. “A lot of folks we talk to are working off of nineteen-nineties technology, like Excel spreadsheets and Outlook, but they’re doing a couple hundred million a year in sales. So we have an opportunity to come in and bring a level of efficiency and automation into this industry that hasn’t existed before.”