Paul Lester takes a look at the growing popularity of crowdfunding and asks whether it could work for commercial property owners
Property crowdfunding has received a lot of press recently, with headlines such as “buy-to-let for just £10”, and a number of sites are now dedicated to residential property crowdfunding. The problems that many businesses across the UK have encountered obtaining finance on reasonable terms, if at all, have led to many businesses to consider crowdfunding as an alternative to bank loans or venture capital. Although still relatively small in scale, it is growing in popularity. So, is it something that could work for commercial property owners?
Which type?
Crowdfunding comes in different forms: donation-based, rewards-based, loan-based (also called “peer-to-peer lending” or “lend to save”) or investment-based (also called “equity-based”). The usual way it works is by multiple individual investors, usually investing relatively small amounts, being matched through an online platform to particular organisations looking for finance or investment. Money can either be raised in an unplanned and unstructured way, where people come together spontaneously to support a cause that has captured their imaginations, or through an established and dedicated platform like Funding Circle or Seedrs.
Whereas a donation-based scheme might work for charities raising funds for a one-off project, and a pre-payment or rewards-based scheme could be suitable for a start-up or a small scale business in the arts, neither of these would work for commercial property businesses, which in most cases would need to look at either a loan-based or an equity-based scheme.
With investment-based crowdfunding (IBC), people invest directly in your business through shares or other securities, facilitated through the online platform. The process of IBC for private companies is not dissimilar to any other equity-based investment in your company, requiring a suite of legal documentation including a subscription and shareholders’ agreement.
With loan-based crowdfunding (LBC), which accounts for about 90% of the crowdfunding market, businesses will pay interest on the amount loaned to them and be expected to repay the capital, just like any other loan. The potential advantages are stated to be lower interest rates, more transparent fees, and a faster timeframe within which to access the money.
Public appeal
With both IBC and LBC, the more successful campaigns are from businesses which have public appeal. The growing popularity of investment in buy–to-let property means that the public has seemed keen to capitalise on the opportunities to own an investment property without having to raise all the funds for it. Most residential property investment is through IBC, where each property is put into a separate management company known as a special purpose vehicle (SPV) and investors buy shares in that company, usually with a five-year lock-in unless a buyer for those shares can be found. One provider for example, offers two options, where investors can choose to share in income and capital growth (if any) or can opt for a fixed income model but with no share of profit on sale.
Clearly this kind of arrangement will not work for most commercial property businesses which own multiple properties in a single company. There are some loan-based (or “lend-to-save”) schemes available as well, where investors put money into buy-to-let loans that are provided to borrowers seeking finance for their own properties. This could work in a similar way for commercial property owners, although there would clearly be considerations for existing finance and security arrangements.
Viral marketing
One of the biggest selling points for crowdfunding relates to marketing. It can be a cheap but efficient way of promoting your business because many platforms link to social media, which creates a potential for viral marketing. This is why it can work well for start-ups, businesses looking to raise a small amount of finance, or businesses which have popular appeal and/or an identifiable and attractive goal or project which can be easily “sold” to the crowd. It may be harder raising funds for day-to-day operational costs. The appeal of commercial property businesses may not be strong enough to get sufficient investors interested in their propositions unless they have an offering which can grab the imagination of the general public.
So, while there is no inherent reason why crowdfunding could not be used by commercial property owners, it is unlikely to replace either bank finance or traditional equity investment schemes as a way to raise substantial funds.
Crowdfunding gets the corks popping
While usually seen as an option only for small or medium-sized enterprises, crowdfunding has recently been used to raise just under £4m for a listed company. Chapel Down, an award-winning winery in Kent, undertook the UK’s largest crowdfunding initiative in September 2014.
The company, whose shares were already traded on ISDX, used Seedrs, a UK-based platform, to raise the full amount of funds it was looking for in just three weeks. Investors spending more than £140 on shares were given a third off the price of the company’s wine as well as free wine tasting and tours.
Using crowdfunding, rather than seeking City money, also gave the brand exposure to a new market – with a potential 6,000 new shareholders also likely to become loyal customers and advocates of the brand.
The new funds are to be used to plant more vines, build a new winery and construct distribution and storage facilities, as well as building a brewery and a visitor centre.
Paul Lester is a partner at Cripps
