By Orest Mandzy
September 28, 2017
An affiliate of Arbor Commercial Mortgage is raising equity for a San Antonio apartment, the fifth deal for its nascent crowdfunding business.
The Uniondale, N.Y., real estate company manages Arbor Realty Trust Inc., a REIT that invests in mortgage assets, and AMAC, which owns apartment properties in Florida, Maryland, New York, the Carolinas and Texas. And last year, it launched ArborCrowd, through which it so far has raised $13.2 million of equity from its crowd investors for four properties with a combined capitalization of $141.1 million.
It recently unveiled its latest offering: $3.2 million of equity in Quarry Station, a 306-unit apartment property in San Antonio’s Alamo Heights area that has a total capitalization of $40.8 million, including a $32.8 million mortgage that Arbor Commercial provided, and $5.1 million of sponsor equity.
ArborCrowd is unlike typical real estate crowdfunding platforms in that all its offerings so far have involved passive equity interests in apartment properties. Other platforms typically offer their investors – the crowd – opportunities to buy into preferred equity or some debt instrument, typically a second mortgage. Such investments provide cash flow from the start, making them an easier sell.
In addition, most other platforms operate under the best-efforts model, where a deal – the purchase or financing of a property – isn’t closed until capital is raised. And that often can take weeks, particularly because many platforms are raising capital in chunks as small as $5,000.
ArborCrowd, which markets only one deal at a time, writes a check upfront, which allows a property’s sponsor to quickly close on its acquisition, according to Adam Kaufman, managing director. He co-founded the platform with his father, Ivan Kaufman, who in 1983 had founded Arbor Mortgage. It then syndicates stakes, with minimums that typically are $25,000 or more, through its platform. Its investors, all of which are accredited, meaning they each have a net worth of at least $1 million, include doctors, dentists, lawyers and business owners. A typical ArborCrowd deal will have between 40 and 95 investors.
ArborCrowd was launched as an extension of the Arbor family’s core businesses. The company’s AMAC business regularly buys properties and syndicates interests to its network of investors, while its Arbor Realty Trust unit sees dozens of potential lending deals monthly. A platform that would syndicate equity to retail investors is “where the industry is going,” Adam Kaufman explained. It will only offer up its crowd to sponsors who will retain at least a 51 percent piece of a property’s equity. “We want the sponsor to have a significant stake, so all the interests are aligned,” Kaufman said.
He called ArborCrowd a “property-first model.” When sponsors are looking to buy a property, they could turn to ArborCrowd to fill any equity gap they might have. That’s exactly the case with the Quarry Station offering. The 24-year-old property was purchased last June by Ebex Holdings, a Beverly Hills, Calif., apartment investor, and AMAC. Given its age, it presented a solid value-add opportunity. Units could be upgraded and rented for premiums.
The property, the former Crescent at Alamo Heights, is 85 percent occupied and sits on nearly 15 acres near U.S. 281, providing quick access to downtown San Antonio. The property’s business plan calls for the Ebex/AMAC team to address deferred maintenance, perform certain upgrades and upgrade management. To that end, it’s already put United Apartment Group, which manages some 29,000 units across the country, in place. It also plans to conduct a gut renovation of roughly 20 units at a cost of some $12,500 each as a “proof of concept” of its renovation/value-add strategy. Those should rent at prices substantially greater than non-upgraded units and would be used as a value-add draw for prospective investors.
The property last year generated $1.8 million of net operating income.
ArborCrowd is aiming to turn the property over within four years, providing its investors with an internal rate of return of up to 19 percent. The company structures its investments in a manner similar to institutional investments, in that its crowd investors will get all capital until they’re fully paid back and reach an 8 percent IRR hurdle. Then, capital gets split 80 percent to investors and 20 percent to the property’s sponsor until an 18 percent IRR hurdle is reached. The capital split then becomes 70/30 until a 24 percent IRR is reached. And it becomes 60/40 after a 24 percent IRR hurdle is reached.
ArborCrowd will earn a 1.25 percent fee and 25 basis point management fee. It also will earn a 1 percent fee when the property is sold or refinanced. The disposition fee climbs to 2 percent if investors’ IRR tops 18 percent.
Kaufman said his company was trying to differentiate itself from other crowdfunding platforms through its transparency. Prospective investors get access to every financial and operating detail that sponsors have and they’re provided with regular updates.
“We’re trying to grow this business,” he said. “We want investors to really feel a sense of ownership.”