Crowdfunded Development, or Investment Bank Snipe?
Just because it’s advertised on a crowdfunding site, a Regulation D offering to accredited investors shouldn’t be equated with crowdfunding, says Thomas Krebs, former director of the Alabama Securities Commission.
It posted Sept. 29, under the headline “All Eyes on Crowdfunded Loans Tucked Into Commercial Real Estate Bonds: Morgan Stanley points to crowdfunding in CMBS deals.” All told, it was just five paragraphs, three hyperlinks and a stock photo from Bloomberg Business — but those five paragraphs included certain financial market trigger phrases, including “special servicing” and “crowdfunding.”
“Three loans worth a collective $71 million, which were made to real estate investment firm Colony Hills Capital and underpin two CMBS deals, have found their way to special servicing,” Tracy Alloway wrote. “Most intriguingly, Morgan Stanley says the properties comprised a portfolio that received $12 million of crowdfunding on EarlyShares.com.”
The item concludes with Morgan Stanley’s analyst, Richard Hill, noting that crowdfunding is “an untested ownership structure” in commercial mortgage-backed securities “which makes the future of these three Colony Hill loans something to watch.”
The 2013 multifamily unit deal done by Colony Hills Capital was described at the time as one of the most lucrative real estate transactions in Mobile’s history, involving five large apartment complexes. While it was an Alabama transaction, it touched on the nationwide phenomenon of investors looking for new opportunities in real estate in the wake of the 2008 housing collapse. Millennials, the storyline goes, don’t want houses so apartments are the new “it” investment.
But not so fast, according to Colony Hills Capital CEO Glenn Hanson, who points out that the company’s portfolio is performing better than budget. “There is what is called a technical default involving documentation between Colony Hills Capital and Keybank. While we believe the action was severe on the part of the bank, they have an argument that they felt if not handled would put them in violation with the trust that holds the mortgage. That then would cause the special servicer they own to lose control of about $400 billion worth of mortgages. Today banks error on the side of conservatism,” Hanson wrote in an email to Business Alabama.
The definition of crowdfunding may also influence this story, according to Thomas Krebs, former director of the Alabama Securities Commission. Colony Hills Capital did a series of Regulation D offerings pursuant to SEC Rule 506, one of which is connected to the Mobile projects listed in the Bloomberg article, Krebs says. A Regulation D offering under Rule 506 is a private placement of securities offered only to “Accredited Investors,” persons with over $1 million net worth. Further SEC rules allow some offerings to be advertised on sites such as Realcrowd.com. So it’s not crowdfunding in the sense of mom and pop throwing a few bucks into the kitty.
Colony Hill’s Hanson remains wary of bank analysts weighing in on his side of the street. “If I were to guess, I’d say people like Morgan Stanley don’t want investors to go directly to the deals, which is probably wishful thinking,” he says.