ArborCrowd’s Adam Kaufman on the Next Evolution of Multifamily Crowdfunding
Crowdfunding real estate projects may not be a new concept, but ArborCrowd is putting its own spin on the sector, enabling individuals to make equity investments in institutional-quality multifamily properties alongside experienced dealmakers.
As the son of Ivan Kaufman—the president and CEO of Arbor Realty Trust—real estate was always in Adam Kaufman’s blood and more than just a topic of conversation in the Kaufman household, “It was the conversation.”
After attending the University of Pennsylvania, Kaufman, now 27, worked for an advertising technology company, learning how brands reached their consumers online. By 2016 he was applying that knowledge to the commercial real estate industry with the goal of opening the multifamily space up to a new class of investors.
Commercial Observer: How did ArborCrowd get started?
Adam Kaufman: In 2012, Obama signed the Jumpstart Our Business Startups act, which established crowdfunding provisions and removed the ban on general solicitation.
Then in 2015 the RegA+ plus [equity crowdfunding] model went into effect, which allowed for companies to raise $20 million or $50 million funds—depending on which structure they chose—over a 12-month period of time, focusing on a particular strategy and going after nonaccredited investors. We structured our first deal in July 2016.
How does your platform compare with others in the crowdfunding space?
We decided that the long-term view of this industry was going to be dependent on the quality of the transactions. So we do one deal a time and focus on quality. We’re also very focused on transparency. We felt that to go to a retail investor and ask them to invest without knowing exactly what they are investing in—well, if something goes wrong, you’re looking at a class-action lawsuit. Giving investors insight into transactions is absolutely essential.
How do you educate someone who doesn’t know too much about multifamily assets?
We develop overview materials in a way that’s very accessible, regardless of your knowledge of commercial real estate. If an investor is comfortable with some of the main comparative terms that crowdfunding uses—like IRR, sponsor, equity multiple—they can look through a business plan and it will makes sense. Because at the end of the day, we focus on multifamily workforce housing, and that’s the bread and butter of America. When you pair that with good sponsorship who is putting their money in each deal alongside you, plus the 30 years of institutional underwriting and knowledge that Arbor has, it’s a great combination.
How much equity are sponsors contributing to each deal?
It depends on each deal. We [at ArborCrowd] write a check between $2 million and $6 million per transaction and seek opportunities between $20 million and $70 million. So, depending on the total equity check for the transaction, we know the size of the check that we’re comfortable in writing. We want the sponsor to invest a significant portion—20 or 30 percent—in the deal.
Describe a typical transaction.
We have many existing relationships in the real estate world and we receive many loan requests. So we’ll sit down with a sponsor and say, “We know you may not be very liquid right now, so we can offer you passive noninterfering equity in this deal that could free you up to buy more properties.” We’ll underwrite the deal from an equity perspective with the same principals that we’ve applied over the past 30 years to ask, “Does this deal make sense? And is this is a strong sponsor?” If so, we’ll write the check up front and be at the closing table with it. We’ll then put our marketing materials together and launch the deal to the crowd to backfill it.
That’s different, writing the check up front.
Yes, and the deal closes because we wrote that check, so we get access to the good quality deals. Plus, we’re showing investors that we believe in this deal so much that we put money on the line to close on it. That gives them a level of comfort and confidence.
Is there much appetite for value-add opportunities?
What we’ve seen is that investors really focus on cash flow. It’s not necessarily the strength of the sponsorship or someone having been in the market for 15 years. It’s a question of whether there’s cash flow in year one or year two. We find those [cash flowing] deals sell a lot better and faster on the platform.
Are investors only investing in their home states?
They’re investing all over the U.S. but they are very passionate about investing in their state and even neighborhoods. We let the investors take property tours, and they love it. That’s why we believe in our model so much. That innate sense of “I want to see, own, feel the property I’m investing in.” That’s what our model offers.
Do you think that’s partly because Arbor has such deep roots in real estate so you can understand how attached people are to the properties they own?
Yes. At the end of the day, you have to give people the opportunity to feel that connection. You have to understand that sense of ownership, and that’s why we chose equity over debt. We get asked why we aren’t crowdfunding in the debt space, because that’s our expertise, but debt is a legal instrument that’s one step removed from the level of ownership. To get a first-time investor to understand the nuances of debt is a very difficult thing and a dangerous thing to ask of someone who is new to the industry.
In a value-add situation, if there are any changes to a business plan that may affect the property’s cash flow do the investors have a say?
It depends on each situation. We’ll negotiate on what the strategy is and certain major decision rights for the investors. Oftentimes they have the rights to vote on their preferences. They can’t necessarily cause an action to occur, but they can cast their vote and that rolls up to the manager level, so there’s a voice on behalf of the crowd. But it’s all about the communication post-closing. We do quarterly reporting and detail everything that is happening with the property. So investors are taken along for the lifetime of the deal.