I (and some others) asked the CrowdVested people some questions, and got some answers. Given the additional information, what do y'all think of the prospect now? (And what other important questions remain to be asked?)
Q: So is the property in fact under contract by Paces?
A: Yes, the property is under contract by Paces. They are looking to close in early June, thought it could get pushed back.
Q: And is the CrowdVested fundraiser to be applied only to the renovation?
A: All the money invested will go to the project, less our fee of 5%. The structure works like this. The total project is about $3.6 million. That includes the acquisition price, rehab of the property, a fund for Tenant improvements and operating reserves. Paces is putting in about $200k. Investors are putting in about $1.25 million, and the bank is funding the rest. Money raised through CrowdVested will be part of the 1.25 million being raised from investors (part of the "equity" piece of the capital stack).
Q: What is the scope of renovation it is to be applied to?
A: Paces is planning on significant renovations. There is a lot of great architectural features like hardwood floors and exposed brick that will retained and enhanced. And the outside of the buildings will remain essentially the same, but cleaned up and improved (though there could be some facade changes depending on the tenants). There has been significant deferred maintenance, and the goal is to bring the buildings back to a great condition.
Q: What is the ROI/incentive to contribute to the fund?
A: The projected yield, after rent stabilization, is 12%. What that means from a practical standpoint is that during the rest of this year, there will be little positive cash flow while the property is rehabbed and new tenants put in place. Starting next year, Paces projects that positive cash-flow will yield 12% to the investors. It could be less, it could be more, and it could fluctuate from year to year. When the project is ultimately sold, the investors will get their money back and share in any capital appreciation of the project itself. Total internal rate of return is projected between 16% and 24% (it varies based on how long the hold is and a bunch of other factors).
Standard disclaimer - like any investment, a lot of bad things could happen that would prevent these types of returns. There is a disclosure document on the site that lays all of this out - you need to be logged in to see it.
Q: What happens to the deal if not enough money is raised via CrowdVested? Do the non-CrowdVested investors just put in more, or does the deal fail? If not enough people invest, do those who did get their money back?
A: If not enough money is raised by CrowdVested, the current plan is that other investors will make up the difference. Nothing would change on the on the projected returns. However, if Paces decides not to move forward with the project, or if they decide the amount raised was too small to bother with, all amounts would be returned to the investors in full.
Q: How is the CrowdVested investment structured? How are the returns (profits? dividends?) distributed, and according to what schedule? What are the tax implications?
A: The investors are being pooled into an limited liability company. That company is then investing in the project. When profits are distributed, the LLC gets one check, which is then redistributed to the investors (we also get a management fee - see below). This eliminates much of the hassle and overhead that has prevented developers in the past from wanting to make their deals available to smaller investors (there other big reason is that the law prevented these types of deals from being offered to small investors without a costly and time consuming regulatory process (think months and 10s of thousands of dollars in accounting and legal fees).
Our management fee is 10% of the profits distributed to the investors. So for example, if you invest $1000, and if the profit for that period is 10% ($100), then we would get a $10 fee (you would get $90). Note that the fee is on profits only. No profits, no fees. Also, when your investment is returned, that is without any fees.
The returns are structured like this (referred to sometimes as a "waterfall"):
Bank and vendors get paid first.
Equity Investors (including CrowdVested) get paid second.
Paces gets paid third.
So, once there is more cash flow than there are expenses, 90% of that cash-flow is paid to the investors until they receive an 8% per year return (Paces gets the other 10%). After that, the investors get 50% of the excess cash flow (Paces gets the other 50%).
Same process works on a sale of the property. The bank gets paid off first. Then the investors, then Paces. If there is any money left, 90% goes to the investors until they have gotten an annualized 8% return (if they have not gotten it already), and then the investors get 50% of the rest.
Distributions are scheduled to be made quarterly. Initially, the distributions will be small or non-existent while they are rehabbing the property and getting tenants in there. Once the property is "stabalized", distributions will come out at a normal rate.
As to taxes, investors will get taxed on the amount of distributions they receive. They may get allocated some depreciation, lowering the total tax owed, but that is not assured. When deciding whether or not to invest, just assume you won't get allocated depreciation. If you do, it will be a pleasant surprise.
Q: You mentioned "All the money invested will go to the project, less our fee of 5%." Who pays that fee, investors or Paces? Are we talking about a one-time fee at the beginning of the deal (like a front-end-load on a mutual fund), or an ongoing fee (like an expense ratio)?
A: The 5% fee is paid by Paces. They get the amount invested, less 5%. They have to pay out like they received the entire amount. This is a one-time fee.
Q: What is the investment's exit strategy? Does it "mature" and return principal like a loan or bond, or does it create an ongoing equity interest? Will CrowdVested be creating a secondary market to trade these partnership shares? What happens if an investor needs to liquidate in the short or medium term?
A: Paces has characterized this as a "long-term hold" meaning they have not set a date for a sale. But like any investor, they will look to maximize their profits and sell when most advantageous. You have an ongoing equity interest that (hopefully) is paying very nice quarterly returns.
If an investor needs to sell out early or transfer his shares, we will manage and assist in that process. The laws governing this require that you invest for the purpose of holding the investment (as opposed to buying it with the intent of reselling it). So we have to restrict transfer initially. That said, if something comes up and you need to get your money out, we will assist in the transfer when you find a buyer.
As to a secondary market, that is a great idea, and one we have been discussing, but it is not currently planned. There are some tricky legal hurdles we have to figure out.
Q: You say that "Paces is planning on significant renovations," but the renovation budget is only $42/sq. ft., which seems low to me. What work is actually being planned?
A: I'm afraid I can't speak on exactly what Paces is planning to do from a renovation standpoint. I'll try to get you some answers. But I do believe this - the bones of the property are in decent shape. I expect most of that will go toward repairing and updating systems and exterior repairs. The cosmetic and non-structural parts of the interior I would expect to be addressed primarily with the new tenants and the build-out to reflect the tenant's concept.
Q: The proposal contemplates spending $0 on engineering, but wouldn't the site development (demolishing the garage and creating additional parking spaces) require some engineering work?
A: Re Engineering costs: Good question, and I don't know the answer. It is possible that the engineering costs are included in one of the other categories. I'll try to find that out also.
