EquityMultiple: An Interview with CEO Charles Clinton
Doctor on FIRE interviewed CEO Charles Clinton of EquityMultiple, a leading platform for crowdfunded commercial property investments.
Today's classic is published by new Doctor on FIRE. You can see the original Here.
I have personally invested in a handful Crowdfunded real estate Deals. I don't want to recommend investments to my readers that I don't want to invest in myself.
One of those investments that happened to be my first was with EquityMultiple.
I think it's good that they offer a variety of types of investments (equity, debt, mezzanine debt) and, as you'll learn, do a full due diligence and pass 90% of the investments on their way. I am also a fan of the comprehensive introduction to investing in commercial real estate and other items on the Resources tab.
CEO Charles Clinton was kind enough to answer a number of questions I had as an investor who doesn't know real estate inside out. Last year, I was a guest in an interview with Soren Godbersen at EquityMultipleand I'm happy that they could return the favor.
EquityMultiple is one of several crowdfunding real estate platforms. What distinguishes EquityMultiple from the others?
Right – we saw that the number of crowdfunding platforms for real estate operating in the US balloon rose to over 100 in the years following the JOBS Act. The herd has been consolidated and discarded and we have found that the remaining platforms are consolidating around some models, as far as this is intended for the investor:
- Syndication marketplaces where the sponsor (the company from which the investment originates) is connected to a network of investors via software, but the platform does not offer much intermediate care or asset management
- Single family loans, with the platform providing debt financing for fix and flips of single family homes
- EREITs, an income-generating property fund that is opaque or semi-opaque to investors, similar to the private REITs that have been around for decades
- Discrete real estate, internal care that allows individual accredited investors to access certain commercial real estate, and a degree of underwriting and curation for the deals presented.
We are closest to the last model, with a platform that allows individual investors to access institutional quality commercial real estate investments starting at just $ 5,000. However, we like to think that our platform and focus have some other unique features:
- Full-cycle asset management: We report on the performance of closed investments frequently and transparently over the entire term of each investment.
- Customer service: We see ourselves first as a real estate investment company, then as a technology company. We are not trying to "automate" the human aspects of investing, and we recognize that investing is about trust, even when it is done online. We therefore strive to be available to all investors and potential investors as best we can.
- A range of risk / reward profiles: While some platforms focus only on debt or just common stocks, we present a curated range of senior debt, preferred stocks and equity investments with a range of target return ranges and holding periods.
- Institutional CRE focus: We focus on institutional commercial real estate projects: Partnership with experienced real estate companies in multi-tenant real estate and across different types of real estate. We believe that this offers our investors better diversification options and protection against downward movements.
I understand that EquityMultiple is supported by Mission Capital, a real estate company with more than 15 years of experience. Can you tell us a bit more about Mission Capital and your relationship with them?
Absolutely, and that has to do with the institutional focus I was talking about. You can think of our partnership with Mission as another differentiator in relation to other real estate investment platforms.
Mission Capital – which has provided our seed capital funding and with which we share an office – has provided institutional real estate companies with CRE finance and other capital market solutions since the beginning of the last major economic downturn. Not only does this offer our Investment Committee excellent prospects when it comes to review business, but Mission's nationwide network of sponsors and lenders also strengthens our pipeline of potential investments.
How many EquityMultiple investments have roughly gone through the entire cycle, with investors being repaid? What returns have investors seen on completed deals?
By June 2020, we had completed 96 investments nationwide. So far 22 investments have been fully completed and most have met expectations. We have created a track record utility that shows the overall performance of the portfolio that anyone can access when creating an account (which is free).
Most of these 22 investments realized are debt securities or preferred stock transactions. This means that our investors were entitled to a contractually fixed flat rate return (and a target portion of the uptrend in preferred equity investments). As a result, our total returns at this point reflect the annualized range of returns from low to medium teens that we offer through this type of investment.
We are still at the beginning of many of our investments. The range of possible returns for equity participation is generally much larger. I would really encourage anyone who is curious to check out the Track Record tool. As our business volume has increased in recent years, we expect an increased number of exits to be included in this reporting in the coming quarters.
With crowdfunded real estate, accredited investors can invest more passively in syndicated offers. How much due diligence does EquityMultiple perform? What level of care do you expect from individual investors?
Good question. EquityMultiple has an in-house team that carefully reviews all potential investments – the company from which the business originates, the market, the details of the investment thesis and the underlying pro forma assumptions. This means that we spend weeks, if not months, evaluating and negotiating every potential investment and ultimately choose less than 10% of the deals we see.
Hopefully this gives some comfort to investors, but we believe it is important that investors understand that all investments, including ours, involve risks. Similarly, we recommend that investors carefully review the planned distribution plans and risk factors for each investment and whether they fit well with their portfolio.
For this purpose, we endeavor to structure the information on each transaction so that investors understand the investment thesis at a high level and can understand it in detail in order to feel comfortable.
We also encourage investors to ask questions freely. While we strive to present the investment details clearly and concisely, we recognize that clarifications may be necessary here and there, especially for people who are new to commercial real estate investments.
How would you compare and contrast investments in crowdfunded real estate with other passive real estate investments such as REITs or REIT index funds?
REITs are similar to real estate crowdfunding in that both vehicles give individual investors access to commercial real estate at relatively low minimum amounts. There are, however, some significant differences:
- REITs are generally opaque – management decisions and even individual properties within the fund are usually hidden by the investor. On the other hand, with a platform like EquityMultiple, investors can understand exactly what they are investing in at asset level, have a better sense of where the money is going, and align their real estate portfolio more closely with risk tolerance and risk tolerance.
- As public REITs are traded, they tend to correlate strongly with the stock market. This means that there is inherently less downside protection than with private real estate (the types of assets that are now available for real estate through crowdfunding platforms). Similarly, public REITs have been more volatile in the past than private real estate.
- Private REITs did not have this problem, but in the past they were characterized by extremely high management fees (often high single digits or even over 10% compared to the annual fees of 0.5% to 1.5% for EquityMultiple investments).
- The downside: REITs are liquid, while investments made through EquityMultiple and other platforms are generally illiquid
For many investors, it can make sense to have both REITs and private commercial real estate in their portfolio. As a Blackstone study found a few years ago, portfolios that provide 20% or more for alternative assets in the private market – like real estate crowdfunding – tend to outperform those who don't.
Real estate has generally performed well since we emerged from the great recession. How would you expect crowdfunded real estate investments to develop in a cooling real estate market or in the next recession?
The short answer is: Nobody knows exactly and you shouldn't trust anyone who claims to have a crystal ball.
It would be foolish to assume that the current bull market will last forever without a major correction. It would also be too pessimistic to assume that the next downturn will destroy real estate markets as much as during the last recession and that the opportunities for returns will dry up completely.
Real estate markets do not have the same level of extreme leverage and overbuilding as they did before the Great Recession, and we continue to see returns in alternative CRE asset classes (such as data centers or self-storage) and emerging secondary and tertiary markets, in which the underlying demographic trends remain strong.
As always, diversification is key – some markets, property types and crowdfunding investments in real estate will be adversely affected in the next downturn. Others less or not at all.
Certain alternative real estate asset classes – such as self-storage, prefabricated housing communities, and student apartments – can prove to be countercyclical and generate strong returns in the next downturn. Likewise, some markets will outperform others due to specific local demand drivers and net migration factors.
Again, no one can 100% predict the specific contours of the next downturn and the impact on certain local property markets. However, investors who diversify across markets, property types and holding periods are better able to weather the storm when and how it occurs.
Platforms can be done right by investors by offering a variety and breadth of commercial real estate investments across the country. At EquityMultiple, we also try to negotiate built-in investor protection such as payment priority and interest reserves for the payment of cash distributions.
What was your background before EquityMultiple and what inspired you to found this company?
We founded the company with the shared vision of making commercial real estate investments more accessible and transparent for individual investors. In addition to stocks and bonds, private real estate transactions have generally achieved high returns and high downward protection in the past, but until recently were largely inaccessible to individual investors.
Our goal when founding the company was to use the technology and give individuals across the country the opportunity to make passive investments with experienced real estate companies, provide a level for underwriting investments, and provide single investors with a single point of contact for a diversified commercial To create real estate portfolio.
Incidentally, we have found that the product is a natural fit for many doctors – intelligent, detail-oriented, very busy professionals who do not have the time to acquire and manage commercial properties themselves and really benefit from optimized access to private CRE investments .
My background is in real estate law. Before founding EquityMultiple in 2015, I worked for Simpson Thacher, a large law firm here in New York, on some very large, complex CRE transactions – including Blackstone's $ 1.9 billion and $ 6 Motel 6 purchase Restructuring and refinancing of property in the lead up to its $ 2.5 billion IPO. My legal background definitely helps me to find my way around in the small print of real estate transactions, structure business and spy on risks.
I've always wanted to do something more entrepreneurial, but the light bulb really lit up when I got a Christmas bonus, and even though I was immersed in lucrative commercial real estate in my daily job, I really didn't have access to it as a single investor.
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Where can potential investors see current offers?
Due to SEC and FINRA regulations, all investors must answer a few initial suitability questions before entering our platform and reviewing current and previous offers – including self-certification as an accredited investor.
We welcome everyone who is interested create an accountTake a look at a short suitability questionnaire and take a look at our current and previous offers as well as the track record page mentioned above. Creating an account does not require you to take any further action.
Is there anything else you would like to tell my readers?
I would also like to mention that we plan to offer opportunity funds. – New tax-privileged real estate investments under the Investing in Opportunity Act, an under-the-radar component of the tax reform at the end of 2017. I will not go into the program in detail here (possibly the subject of a future interview!), but interested investors can visit our resources page about Opportunity Funds.
(PoF: Thank you, Charles, for taking the time to answer my questions in detail. I appreciate your openness to describing both the potential risks and the benefits of these (for us, not you) commercial real estate investment opportunities.
I also appreciate the offer from a 1% increase in earnings for my readers about their first debts or preferred investments with EquityMultiple. The readers also thank you.)