12 June 2015
Elizabeth Braman, Chief Production Officer at Realty Mogul, discusses crowdfunding for hospitality real estate projects and the benefits to investors in the following video.
Elizabeth spoke with David Sudeck, a senior partner in the JMBM Global Hospitality Group®, as part of our video interview series on hotel finance and investment opportunities in 2015.
A transcript is below the video.
David Sudeck: I’m David Sudeck. I’m with Jeffer Mangels Global Hospitality Group®. We’re here at the 25th Annual Meet the Money® Conference. I’m here with Elizabeth Braman, Chief Production Officer at Realty Mogul. Welcome.
Elizabeth Braman: Thank you.
David Sudeck: First of all, how have you been enjoying the conference–I’m assuming this is your first conference?
Elizabeth Braman: It is my first conference, it’s fantastic. It’s really nice to see all the hospitality stakeholders all getting together and talking about capital in the marketplace.
Elizabeth Braman of Realty Mogul and David Sudeck of JMBM
David Sudeck: And Realty Mogul’s focus is hospitality and non-hospitality, right?
Elizabeth Braman: Yes. We do all asset classes that are cash flow in real estate across the country.
David Sudeck: So, no new construction?
Elizabeth Braman: No ground up construction, no development deals. We’re really focused on deals with a value-add component, but definitely cash flowing at some time in the near future.
David Sudeck: Got it. Walk us through typical deal, a case study of sorts.
Elizabeth Braman: Case study of sorts. Okay, it probably is going to be in a primarily secondary market somewhere in the United States that still has a good cap rate, so we’re really not in the low cap rate environment. Probably looking at something at a 7% or higher, which in hospitality is easily achievable in many areas in the country.
We’re looking at something that has a value-add component, so something where there’s still some work to be done, so we usually don’t come into a transaction that’s fully stabilized and is a buy-and-hold. We’re really looking at something where there is somewhat of a pop for our investors at some point in the transaction, because our crowd, our network of 16,000+ accredited investors that are investing in real estate are really looking for something where they have an alternative to a lot of the REITs out there. They’re looking for something where they can get both cash flow, and a little bit more yield than they can find elsewhere.
David Sudeck: Got it. What’s the structure their investment typically?
Elizabeth Braman: So they’re investing anywhere from $10,000 up into an LLC and we combine all of those investors, as LP, into an LLC that we’re the managing partner of, and then we invest as one–almost like we’re acting as a high net worth investor on behalf of our investors, and are coming into a transaction either as the total capital, always as the LP to our sponsors as the GP. What that provides to them is a really elegant solution for raising capital. We get one K1, one distribution and one quarterly report, and then we take care of all of our investors, using our technology, on our side of the transaction.
David Sudeck: Interesting. Fascinating. And who came up with this concept and tell me when you opened for business? What was the Day One?
Elizabeth Braman: Day One was about two years ago. Our CEO, Jilliene Helman, was really the brain trust behind this concept of crowdfunding for real estate. She saw an opportunity in the Jobs Act to raise capital for real estate investments. Interestingly enough, we’re not really doing what was generally conceived to be crowdfunding. We don’t raise capital from unaccredited investors and we’re not doing a ton of general solicitations, although our first general solicitation was our 506c was for a hotel. We raised capital for…
David Sudeck:…the Hard Rock.
Elizabeth Braman: That was the Hard Rock.
David Sudeck: Nice high profile place to start!
Elizabeth Braman: It was a very high-profile place to start, and it was great from the prospective of a huge marking blitz. We got a 110,000,000 unique impressions online for that opportunity, and everything from The Guardian to The Wall Street Journal, to Bloomberg, so got tremendous amount of press. It was a great opportunity there to show how crowdfunding can actually provide value to hospitality owners, in that that partnership allowed us to give to our investors the ability to invest as an owner in an operating hotel. And, by doing so, we were able to give them some perks in terms of discounts to the hotel and to the restaurants.
David Sudeck: They became insiders at the Hard Rock Hotel.
Elizabeth Braman: They became insiders and they get to have an owner’s card and tell everyone that they own a piece of the Hard Rock. But the Jobs Act allowed us to launch our company, and in the last two years we’ve gone out and raised over $40,000,000 in equity capital for smaller transactions, $1,000,000 to $3,000,000 check size, across the country using our network of accredited investors in cash flowing real estate.
David Sudeck: Are you planning to keep it on the smaller side of one or three million or do you want to grow your investments?
Elizabeth Braman: We will be growing our investments in time. Our last three investments have all been in the $3,000,000 plus range, so we’re definitely looking to write bigger checks. We’ll go up to 90% of the equity on a given transaction, which now as we’ve just launched our commercial lending division, allows us to get to 97% percent of the capital stack. So, on a $10,000,000 transaction, we will provide – let’s say $7,000,000 as a first trustee with a conventional lending source, either a bridge or a CMBS debt at market terms. And then we’ll raise up to 90% percent of the equity on the transaction. So, if you had a $10,000,000 transaction, $7,000,000 might be debt, $2.7 million of that would be the equity, and the sponsors would come in with $300,000 to round it out. So, where we are little unique in the marketplace is our ability to be a full cap stack provider to our sponsors/borrowers.
David Sudeck: So, without giving away anything confidential, what’s the source of the debt portion? Is that also crowdfunding?
Elizabeth Braman: That’s primarily institutions. We’ve found that the institutions have a greater appetite for low-yielding longer-term investments. So, we have institutional capital partners on the bridge, and on the CMBS side of things we could offer up to the crowd–they might be more interested if we added some mezz to the transaction, depending on the term, but…
David Sudeck: It’s slightly lower yield, but slightly less in the risk capital stack.
Elizabeth Braman: Right, it’s like we can do preferred equity, we can do JV equity as well, which is all crowd-sourced. So, yeah, it’s nice.
David Sudeck: What’s been the target internal rate of return? How are you measuring the investment?
Elizabeth Braman: It really depends on the asset class and location. So, it’s all risk-adjusted return. So, if you had something that was in a more core market, we’ve done multi-family and let’s say a class A multi in a tier-two market, we have had stuff that’s as low as 13 IRR with an 8% average cash-on-cash. If you’re looking at your hospitality deals and it’s in the more secondary market, you might see something north of 20 on the IRR, and north of 10 on the cash-on-cash on average for a 5-year hold.
David Sudeck: Got it. In terms of investments, where are your investments coming from? Are they repeat recurring investment by existing, or are you getting a lot sign up of new investors?
Elizabeth Braman: We’re getting a lot of both. Most of our sponsors that we’ve done a transactions with are coming back for two, three transactions, which is fantastic. Once you get through the process of the first time, it’s a lot easier. Although interestingly enough, equity is taking us a lot less time than a commercial debt deal. Most of the time, we’re waiting on the debt on a transaction, which is why we’re now offering the debt, so that we can help to control the process, and give our borrowers and sponsors more certainty of execution by providing both. Usually on equity raises, it can be as fast as 30 days or less, and then on the second one it’s even faster. So, the raise itself is relatively quick.
David Sudeck: In terms of the process it’s basically someone gives you the underlying fundamentals of their investment, you vet it, and then you post it on Realty Mogul?
Elizabeth Braman: Yes.
David Sudeck: And then individuals log-in or is there an announcement that there is now an opportunity to invest?
Elizabeth Braman: We send out an email blast to every member in our database. All of our credited investors have pre-existing relationships with us, which is required for Reg D offerings. So we have a cooling off period if you’re new to the site. But, all of our investors will get notification that a new investment opportunity is available. They log-in, we have a full diligence package. We do very thorough underwriting on all of our transactions and work with our sponsors to present the financials in a way that were mutually agreed upon. But, yes, every one of our transactions has been pre-vetted and we work through a broker-dealer in order to maintain compliance on the sale of securities.
David Sudeck: And what is the long term look like, does this person stay in permanently in the investment or is there an exit of some sort?
Elizabeth Braman: Usually it’s a five-year hold. We’ve done as long as a ten-year hold, but there’s usually an exit strategy. Although, to be fair to our sponsors, there’s not a required exit. So if the market turns, it’s one of the value-adds of our capital, as oppose to a fund, where there is a close end to it, and it doesn’t matter whether it’s the wrong time in the market or not. My guess is that at some point there’ll be a secondary [exit] that will allow our investors to sell off transactions, although that’s on the long-term horizon. For right now they’re completely liquid asset investments. We tell our investors that they’re in for as long as this sponsor wants to be into the transaction—that they’re not able to get out until the sponsors sells. That said, depending on how much equity we’ve raised for the transaction, we might have the buy-sell provision, depending on our control rights that have been negotiated.
David Sudeck: Have you been over-subscribed on any of these transactions?
Elizabeth Braman: Most of our hospitality deals are highly over-subscribed, so that is exciting. It shows there’s a huge amount of demand particularly in hospitality, because it’s a yieldy investment, because there’s a little bit more excitement to those transactions. People like the stories behind the hospitality, they are sexy. Multi-family–it’s not the hardest transaction to get into. It’s really much harder for arm-chair investors to get into a hotel deal.
David Sudeck: Got it. How do you see the market changing and your platform changing? I mean, obviously we’re in a low interest rate environment which is helping?
Elizabeth Braman: Yes, it’s definitely helping and I think that you’re probably going to see additional cap rate compression. I think you’re going to see rising interest rates. I think that the 20 plus IRR deals that most people are demanding and wanting are going to be dropping somewhat just by the nature of the completion in the marketplace. There aren’t that many good, solid real estate transactions, and we won’t push yield just for the sake of pushing yield. We’ll present to our investors what we think are sound investments that our sponsors are able to execute on. So, we believe in our transactions. Nothing is guaranteed, of course – but…
David Sudeck: Good risk factor…
Elizabeth Braman: Yeah, I know…let me throw that in there: “Nothing is guaranteed.”
David Sudeck: Yeah, nothing is guaranteed.
Elizabeth Braman: Yeah, you can drop that footnote any time I speak. But I think the appetite of the market– even just looking at the debt we provide–there is so much capital out there in the market place that it’s definitely compressing things all around.
David Sudeck: Are you getting any Family Office or Institutional?
Elizabeth Braman: Absolutely.
David Sudeck: You are?
Elizabeth Braman: Our debt on our platform is highly institution-focused. Borrowers in the marketplace want lower rates, and they can get lower rates, and institutions are willing to take on those transactions with lower yield–so, yes.
David Sudeck: We hope you have a greater focus on hospitality. We look forward to having you in the marketplace as much as possible.
Elizabeth Braman: You bet. Thank you.
David Sudeck: And congratulations on your success.
Elizabeth Braman: I appreciate it. It’s a pleasure to be here. Thank you.
David Sudeck: Take care.
Our Perspective. We represent hotel owners, developers and investors. We have helped our clients find business and legal solutions for more than $125 billion of hotel transactions, involving more than 4,700 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or +1 (310) 201-3526.
Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why. Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.