Using online crowdfunding, entrepreneurs have funded books, movies, new products and much more. Now an Ontario developer wants to employ the funding method to attract investors for new real estate projects.
On its website, Kitchener-Waterloo’s Open Avenue says with its crowdfunding model “unlike large-scale REIT and investment funds, you get to choose which investment properties to fund, giving you the ability to diversify your investment portfolio, and the potential to transform your community.”
“We see it as an opportunity to bring real estate investing to the masses, where anyone can get involved in real estate and not have to worry about dealing with tenants, lining up financing for an entire project and that kind of thing,” McKillican told Property Biz Canada.
$500-$1,000 minimum investment
Provided the Ontario Securities Commission approves the model as a legitimate way to attract capital, Open Avenue is looking at $500 to $1,000 as a minimum investment with a cap of $2,500.
Individuals qualifying under the accredited investor exemption of the securities act – meaning they earn more than $200,000 annually or have more than $1 million in assets, excluding their primary residence – could invest more.
The rate of returns are comparable to REITS or potentially greater if you get the right project, McKillican said. He anticipates a development project would give a 12 to 18 per cent return on investment while a property that’s already renovated and leased would provide a return of eight per cent.
“But what should really drive people to crowdfunding is being able to invest in specific projects in their community that they understand and that they can take pride in owning a specific piece of real estate, as opposed to a REIT where you just blindly invest into a pool of properties across the country,” McKillican said.
Three of the four men behind Open Avenue are principals in Revel Developments, while McKillican partners with the company on a project-by-project basis. Revel Developments, a Kitchener-Waterloo firm founded four years ago, has more than 1,000 apartment units valued at more than $150 million.
To begin with, Open Avenue would only crowdfund Revel Development projects, but McKillican said the long-term plan is to open up the model to developers across the country.
“To start, we’re looking at building some traction in our local community,” McKillican said.
Looking at creating exemption
In the meantime, the Ontario Securities Commission is looking at creating an exemption for crowdfunding after holding public hearings and studying the funding model.
In its progress report on prospectus exemptions for capital fund raising, the commission said a need exists for securities regulators to address the emergence of crowdfunding as a new way for some start-ups and small and medium enterprises to raise capital.
Through its public hearings, the commission said it found significant support for the introduction of a crowdfunding exemption in Ontario that would allow issuers to use the Internet to access large numbers of investors in a cost-effective manner through an online platform.
According to the commission report, however, at least one advocacy investor group cautioned that the crowdfunding exemption could create too “great a risk of fraud and potential for investor harm.”
Concern also exists that while the model must provide investors with adequate protection, it must not impose excessive regulatory costs on issuers and funding portals. “These stakeholders disagreed, however, on how to achieve this objective,” the commission noted.
“Many of the stakeholders who did not support crowdfunding did not believe that it was possible to achieve this balance.”
Popular in the U.S.
While crowdfunding for real estate is still in its early days in Canada – Open Avenue says it’s the first such portal in the country – the model is taking off south of the border. Forbes.com recently reported that there are at least 10 crowdfunded real estate portals in the United States.
They include F-Squared Investments, which allows individuals to invest in farmland, and Prodigy Network, whose members have invested $171.8 million into a skyscraper that will be Bogota, Colombia’s tallest building, according to Forbes.
Back in Kitchener-Waterloo, McKillican acknowledges the stumbling block is currently the security commission’s regulations; however, he said for the time being they’ll continue working with accredited investors. And if and when the crowdfunding exemption clears, Open Avenue will be open and ready for small investors’ business.