There is a certain glamour to being a big-time investor for new developments – the ribbon cutting, the golden shovels, the hobnobbing with elites. Financing a new development, particularity in a high-profile market like Manhattan, has always been an activity reserved for an ultra-high-net-worth crowd comprised of those who have the financial means and access.
Most new development projects need a lot of work and capital to just get through the permit stage. Once a project is approved by the city, the race to find the capital to fund construction begins. Construction loans are often complicated, paid out in tranches once certain goals are met, and require a level of trust between the financer and the project management. This leads most projects to the challenge of finding a select few lenders or investors that truly understand the process and can put money up fast.
Investing in new developments isn’t just an ego stroke, but can also be very good business. Developers are able to gain from the disparity between the price of constructing the building, and the price of the real estate market – a differential that can be quite high in expensive markets like Manhattan.
While potentially lucrative, new developments often have unforeseen factors that take a project over budgets and past deadline. For that reason, loans are often high interest and short term. Tim Milazzo of online commercial real estate lending marketplace StackSource sees a lot of construction loans go through his platform.
“If developers can’t get a sufficient loan from a bank, they are often willing to pay double digit interest rates elsewhere to finance their project through the construction phase,” he said. Companies like iva help out developers to get the required loans for their projects and thus the developers get the money they need.
The borrower and the lender on construction loans rely on each other. The lender has to believe the designers and builders will be able to keep their promises, while the borrowers don’t have the luxury of stopping a project mid-build to renegotiate the terms of the next wave of funding.
“If the investment platform applies proper underwriting standards with reputable borrowers, then the yield can look very attractive,” Tim continued.
Validating proper underwriting standards and the repute of borrowers takes a lot of time and paperwork. For these reasons, big projects seldom search for micro-financing. Most of these deals are kept local and have as few investors as possible.
If there is a gap between lucrative deals and willing investors, then a solution to help fill the gap is bound to arise. One person presenting a solution is Omer Amsel, co-founder and COO at StraightUp, one of the few companies that creates a marketplace for large scale developments, mostly in Manhattan, and small-time investors. As Omer puts it, “Our goal at StraightUp was always to increase access to the real estate investment market for those who are not well-connected or the super-rich elite.”
Part of opening up the real estate investment market means offering investment opportunities to accredited investors around the world. This creates an even bigger regulatory hassle as U.S. real estate has long been a way for foreign investors to clean dirty money, prompting the IRS to require additional controls and withholdings on foreign investors. In order to help track investor info and report on project performs, StraightUp has partnered with Slice, the first blockchain-based REIT for investors around the world. According to a press release, the partnership “allows foreign investors to immediately own equity in developments, providing a layer of security and trust that has been missing from the real estate investment space until now.”
By using blockchain-powered tokens, which can be purchased by either fiat or cryptocurrency, to represent stakes in an investor’s real estate portfolio, Slice has developed a trusted way to buy and sell fractions of properties. Slice said that “by tokenizing assets, investors can easily identify the properties backing their investment, prove their ownership, receive returns in real-time, and freely exchange ownership with others on the blockchain.”
This does create some possible pitfalls. By placing a token on an exchange, the value of that token can change. When I asked Omer about this he said that they found a way to keep the price from fluctuating widely: “We incentivize our sponsors to evaluate their projects and provide updates on a regular basis, and relay these updates to investors and the entire community. We believe that this will actually create a more transparent process that will prevent prices from becoming detached from the asset values.”
Blockchain technology can be used to help investors fund development projects like never before. Thanks to the trust that is created by StraighUp’s underwriting processes and Slice’s investor-vetting and reporting, developing a project with investors from around the world might become a viable option. There still might be golden shovels and ribbon cutting ceremonies for new developments, but the people behind the money might start to better resemble the average real estate investor.