Podcast

How to Think About Investing During Times of Crisis & Volatility

2Q20

There is always opportunity following times of disruption.

Read The Transcript

Alex Libin of Mercer Street Partners describes what investors can expect during these unprecedented times. Despite times of uncertainty, Alex is optimistic about finding realistic and promising deal flow. He shares his thoughts on both the short/medium/long-term economic impact of the Coronavirus on real estate investments, markets and asset classes in this week’s episode.

Key Insights:

  • How does an investment strategy at a REIT differ from that of private investing?
  • How should investors compare investing in a REIT to a private syndication?
  • In what asset classes and markets does Mercer Street prefer?
  • Short and long-term economic impacts the COVID-19 pandemic will have on the real estate markets.
  • How Mercer Street is protecting their investors’ assets.
  • Strong lender relationships help maintain a higher degree of stability during times of uncertainty.
  • What is a CapEx Reserve and why is it important during times of volatility?
  • How will a low-interest-rate environment affect deal flow?
  • What are the investment opportunities in affordable housing and mobile home asset classes and why are they interesting?

Guest Bio

Alex Libin is a Managing Partner of Mercer Street where he is responsible for the firm’s day-to-day operations and is a member of the investment committee. Alex also leads Mercer Street’s Delaware Statutory Trust (“DST”) platform.

Prior to founding Mercer Street in 2016, Alex was the Assistant General Counsel of United Realty Trust Inc., a public non-traded REIT based in New York City. While at the REIT, Alex led the firm’s affiliate DST program which sponsored DST offerings in New York, New Jersey, and North Carolina.

Before joining United Realty, Alex was an associate at the law firm of Duval and Stachenfeld, LLP, working primarily within the firm’s real estate lending practice. Alex is a past board member of the Children’s Media Project, Safe Horizon’s Junior Board, and the Dutchess County Arts Council. Alex has a BA from New York University and a JD from the Benjamin N. Cardozo School of Law.

Podcast Transcript

Welcome to Real Wealth Real Health, the show that empowers you with insights, information and inspiration to achieve your version of financial wellness. Learn how to balance living a full life today with planning for the future. This podcast is brought to you by Alpha Investing, a real estate centric private capital network that provides exclusive investment opportunities to its members. And now, here are your hosts AdaPia d’Errico and Daniel Cocca.

AdaPia d’Errico:
Hello everyone. Welcome back to another episode of Real Wealth Real Health. This is AdaPia d’Errico and today it is my pleasure to introduce you to Mark Roderick. In his own words, Mark describes himself as a very boring corporate and securities lawyer at Flaster Greenberg PC in Cherry Hill, New Jersey. Since the JOBS Act of 2012, he spent all of his time in the crowdfunding space. Today is considered one of the leading crowdfunding and fintech lawyers in the US. He writes for the widely read blog, crowdfundingattorney.com, which provides readers with a wealth of legal and practical information for portals and issuers. He also speaks at numerous crowdfunding events across the country, and represents industry participants across the country and around the world.

AdaPia d’Errico:
Mark, you have been in crowdfunding in real estate in multiple sectors fintech, finance for many, many decades. Both Dan and I know you and have known you for many year. You and I were first connected in the beginning days of crowdfunding. Sometimes when I think about that and when I speak to people I say, “I’ve been around for a long time.” And it’s really only been like five or six years that online investing and the ability for people to receive funding and to make investments into alternatives that were previously only available to VCs or angels or just this whole other segment of people. It’s really hasn’t been that long, but it feels like a lifetime. You’ve been in it from the legal and highly technical perspective. So we really appreciate you coming on the show to talk about your perspective, your experience, your stories, and to help our listeners understand what crowdfunding is, how it relates to real estate, how it affects their ability to invest and if it’s something that they should be considering when diversifying their portfolios. So, welcome to the podcast.

Mark Roderick:
I’m delighted to be here. And I’m delighted to be here with both of you. I do know you both very well, have for a long time. We’re all sort of old timers, as you say in this crowdfunding business, which only means you’ve been around for five or six or seven years, but we have gone through a lot. The industry has changed a lot.

AdaPia d’Errico:
Yeah. So can you tell us a little bit because I know you as Mark Roderick, in crowdfunding, what’s a little bit of your background and how did that background get you? And how did you become interested in crowdfunding?

Mark Roderick:
Well, do you want me to go into my previous lives or sort of start when I was born as Mark Roderick? I’ll start with the current life. In my next life I want to come back as SEC commissioner, I think. But in the in my current life, so I have been practicing law for a long time. And during that time, I have always represented entrepreneurs in everything they have done from a business/legal perspective, including a lot of real estate entrepreneurs. Whether they’re starting new companies or technology or buying and selling companies, all that kind of stuff. Well, one of the things that you do when you’re representing entrepreneurs is you help them raise money, right? Because entrepreneurs are always looking for capital. That’s why they call it capitalism. I’ve been involved in that sector forever. And if you have been involved in that sector, and I know both of you have, you remember what it was like before crowdfunding.

Mark Roderick:
So very time consuming, very difficult. You raise money by calling people that you know, your lawyer, your account, your friends, your aunt, your niece. And you have all these sort of disconnected opaque private networks where you’re trying to raise capital, very, very inefficient lots of middlemen. So that was the system that I was used to just like everyone else in that space. Now I’m going to answer your question. So here comes the JOBS Act on the horizon, the 2012 Jumpstart Our Businesses Act. In short, what that act allowed for the first time in American history is it allowed entrepreneurs to raise money online. If you had lived through the previous 15 or 20 years, something that was impossible to ignore was the internet, the internet growing all around us and sort of taking over one chunk of our lives after another from… I was one of the first people to buy a book on Amazon. “Hey, what about this?” And to book a flight on Expedia, and on, on and on.

Mark Roderick:
By 2012, unless you hadn’t been paying attention, you had seen what the internet does when it comes to industry. So it always says the same thing regardless of industry. It connects buyers and sellers directly, and it eliminates bypasses middleman. And by doing that, it makes markets much more efficient. It’s very cruel to middlemen like Barnes and Noble and all the rest, but it does that in every industry that it touches. So here’s the JOBS Act, what is the JOBS Act doing? It is saying, “Internet come transform the capital formation industry in this country.” Which is a multi trillion dollar a year industry. So, “Internet now you can connect Ireson sellers.” Meaning investors on the one hand and entrepreneurs on the other hand. Now, all those middlemen suddenly are not nearly as important as they thought they were. And having seen what the internet had done in all these other industries, whether serious things like retail or matchmaking. Some very high percentage of all relationships these days come from online services. The internet is just sort of taking over one aspect of our lives after another.

Mark Roderick:
I realized that it was about to do that to the capital formation industry. And that’s what crowdfunding is. It’s just the internet. I always say, fortunately, there are tons of legal rules because otherwise you wouldn’t have to hire me, and how can I earn a living? But at its heart, it’s just the internet. So when I saw that I said, “This is going to be super cool, challenging, exciting, great for the economy.” We’ll talk more about that later. But that’s sort of a very long answer of how I got into the crowdfunding business.

AdaPia d’Errico:
Yeah. That’s amazing because you’re seeing it from this legal perspective. I was sort of doing ‘crowdfunding’ starting in about 2009 when I was working with entrepreneurs more on the creative side. I was doing Kickstarter and Indiegogo Campaigns. So I understood the donation and the reward base model of crowdfunding because it was helping a different type of entrepreneur in a way, maybe like the side project entrepreneur or just the creatives, who had always had a really hard time making a business or making a living with their art, essentially. But because I had and have a deep finance background, when I heard that the JOBS Act was coming up, I thought, “Oh, how amazing? I could turn fans into shareholders.” Which of course didn’t really happen at scale until 2016. But I do remember when I heard for the first time about real estate crowdfunding, and I thought, “How amazing? Maybe I can buy this big house on the Canals in Venice, Venice, California, and turn it into my house, but also a co-working space. And I’ll get all these investors to buy it because I can’t afford a $4 million house.” It’s probably worth like 30 now.

AdaPia d’Errico:
But at the same time that also wasn’t possible because of the regulations in the real estate space, which wouldn’t allow crowdfunding of a residential property. And so anyway for me, like you said, if you were awake and alive and aware, you knew crowdfunding was coming but it wasn’t always able to function exactly in the capital raising way that maybe we all hoped for in the beginning. Has that been your experience? I mean, you’ve seen it from more the legal perspective. I saw it as a person that wanted to raise money but kept running into regulations.

Mark Roderick:
Well, just to show you how much foresight I had, I mean, I was one of those wise people who said Kickstarter was never going to work. So yes. I mean, I have seen it grow. So back in the earliest days, just talking about real estate crowdfunding for a second. As you know in the earliest days, people were crowdfunding, raising money for a single family fix-and-flip. And they might raise $70,000 or $105,000, six figures. That wasn’t very long ago, six, five or six years ago. A couple months ago, one of my clients did a $14 million equity raise on a single project. So I have to say that once the light went off in my brain when I saw the JOBS Act, and I said, “This is just the internet.” It doesn’t surprise me. It hasn’t surprised me at all that we’re seeing this growth bigger and bigger and bigger and bigger, because that’s what the internet does.

Mark Roderick:
People would ask me in the beginning, I get interviewed, “Is this a fad? Do you think crowdfunding is a fad?” Normally, you’d get asked that question by middleman who’s hoping the answer is yes. But no, it’s not. Because it’s just the internet and it’s going to continue to grow and sort of knocked down obstacles because you have this irresistible force. You have these two magnets, the investor who has never before had access to these great deals, and you have the entrepreneur who really needs the capital. That is an irresistible market force that will continue. It’s not going to grow forever, but there’s a huge growth path ahead of it and that’s going to continue for quite some time.

Daniel Cocca:
So my first thought when the JOBS Act came out, Mark, was actually the opposite. Which was, “Okay, investors watch out. There’re going to be a lot of people out there that are going to be trying to get your money online. And all of these transactions are falling outside the scope of the regulatory bodies that are typically managing these types of investments, right?” It’s not that all real estate transactions were registered with the SEC, right? But the reality is that even unregistered deals are usually pretty closely following the SEC forms, right? And so now we’re in this kind of Wild, Wild West world where there just really aren’t the same level of regulations. And so when you kind of take a step back, what are the things that are kind of built into it whether it’s the JOBS Act? Kind of understand that not all line investments are regulated by the JOBS Act, there are some that kind of fall outside that scope. But what are the regulations that are in place that actually protect investors?

Mark Roderick:
That’s a great question. I’m going to answer that question if I can in two ways. If you’re old enough… You guys aren’t old enough. But if you remembered Monty Python on a show, on a serious Sunday morning talk show, he said, “I’m going to answer that question in two ways first and my regular voice and then in a high pitched squeal.” But that’s not what I’m going to do here. So the first answer is maybe the more surprising and that is, by and large in crowdfunding. Big picture question, the laws, there are no special laws to protect investors. Okay? And surprise, surprise, there are in general in buying securities, there are no special rules that protect investors from losing money. So you can buy into the Uber IPO or the [WeSpace 00:14:48] IPO and there’s absolutely no law that protects you from losing your money. There are laws that protect you from the sponsor lying to you. But the law itself is not what has made real estate crowdfunding successful.

Mark Roderick:
What seemed likely to me and has turned out to be the case when the JOBS Act was passed that it would be market forces that would protect investors. So that as a general rule, these offerings as both of you know extremely well, are generally not conducted by a one off sponsor. Sponsor puts up a website, “I’m trying to buy a house on the Canal in Venice, California, can you give me money?” That’s generally not how they’re done. They are done through portals, websites, portals just an unregulated website that picks and chooses the portal. Picks and chooses which real estate offerings to have on it’s site. And so that portal is the market force, it’s the result of market forces, investors needing a trusted middleman. So that’s where a very large portion of real estate crowdfunding happens at portals which play the role of picking and choosing and certainly weeding out fraud. So there’s been so far in crowdfunding fortunately almost zero fraud. Now, that’s one answer.

Mark Roderick:
The high pitched squealing answer is it depends on which flavor of crowdfunding we’re talking about. As you guys know, there are generally three flavors. One is for accredited investors only. And there’s no legal protection. Wild, Wild West is exactly what it is. Then there’s Regulation A and the protection is you have to get approved by the SEC. Then there’s Title III Crowdfunding, which has a zillion little regulatory rules that are supposed to protect investors. What that really means is making sure investors know how risky these investments are. So it’s really the market that protects investors. And so far you have to say the markets doing a pretty good job of that.

AdaPia d’Errico:
So I’m curious because you have a lot of clients in the space and you’ve been doing this for a long time and you were talking about portals and being selective. What’s the difference between a platform or a portal that functions more as a market place that is maybe licensing software to sponsors? Are they being as selective as a platform or company who is doing the due diligence themselves and not just offering a platform for a sponsor, but rather doing a lot of the work on behalf of an investor and showing up with an opportunity that they vetted for an investor?

Mark Roderick:
Yeah, perfect. Well, yeah, I mean, you just said it, there are two different kinds. Personally, I far prefer the latter than the former. So in the real world, real names, the two big very reputable real estate crowdfunding sites, CrowdStreet and RealCrowd. They both vet sponsors and they both vet deals. I think they do a terrific job doing it. And if I’m a first time investor, certainly that’s the only place… Not just those two but others like them. It’s the only place I’m going to invest my first crowdfunding dollars, at a site that is actually vetting deals. I’m not just going to utopia standalone site for her $4 million house in Venice, California, because who the heck knows? I don’t even know the house exists. I don’t know that [inaudible 00:19:09] exists. I don’t know that any of it is true. The other sites, so in the Title III crowdfunding world, unlike Wefunder and StartEngine, I know at least StartEngine began vetting deals but I don’t think they vet deals anymore or certainly not to a very large extent.

Mark Roderick:
So they do become… You use the word marketplace, I use the term Bulletin Board sites. Where sort of if you pay your entrance fee you get listed. That is certainly one business model I think from an investor’s point of view I’m very skeptical. I’m very skeptical of investing through Bulletin Board sites for the simple reason that, “Who the heck knows?” I mean, I have heard about, for example, I have this conversation with a whole lot of folks. There was a offering at least one for a perpetual motion machine. No Title III Crowdfunding, perpetual motion machine. So this thing really hadn’t been vetted. Yeah, if you’re an investor going on one of those sites, I think you’d have to be very skeptical. So I think it’s much better for the market, the sites that are doing vetting. That are doing serious vetting. I think that’s the way for the market to grow.

Mark Roderick:
Now, some of your listeners may be saying, “Mark, but you said the internet gets rid of middleman. Aren’t portals just middleman?” The answer’s, “Yes. You got me.” It is true portals do act as a trusted middlemen in crowdfunding transactions. It’s just that they’re the only ones. There’s only one middleman as opposed to a whole bunch. And I’ll just make this point again about middlemen in the financial world, which is what we’re talking about building wealth. The more middlemen there are taking a little piece out of every deal, the lower your total return, right? Wall Street is located in Manhattan. Well, all of Manhattan from the Hudson River to the East River, when you think about it, it’s just middlemen. So for most Americans, our wealth goes to Manhattan, I mean, going through mutual funds and ETFs and all that. And that’s where all the middlemen are. So there’s terrific opportunity that crowdfunding represents is to bypass the isle of Manhattan with all those middlemen taking little chunks out of our wealth so our wealth can grow and grow and grow.

Daniel Cocca:
So quick legal question for you, Mark. You chatted a little bit about the different types of eligible investors into these types of transactions. Now, let’s specifically talk about the accredited investor requirement. For those people who aren’t familiar, there are certain income or net worth requirements that investors need to meet in order to invest in certain types of transactions. What’s your thought generally about the accredited investor requirement? Meaning, do you think it actually accomplishes the goal of making sure sophisticated investors are investing into these types of projects?

Mark Roderick:
Well, I know Dan, you asked me a sort of leading question. The answer, so just for background for your listeners, this concept of accredited investors is baked into our securities laws and has been for a very long time. So US securities laws were developed by President Franklin Roosevelt after the Great Depression. One of the reasons for the Great Depression was that American capital markets absolutely stunk. They were not transparent. They were filled with fraud. They didn’t protect investors. And we live in a capitalist society and so for our economy to be healthy, we need healthy capital markets. So Roosevelt, and Congress got together and created all of our securities laws back in the 1930s that still exist. And I go into that brief history to say that the concept of wealthy investors versus non-wealthy investors has been baked into our system from the beginning. Sort of a foundational tenant is that wealthy people can protect themselves. They can hire expensive lawyers and accountants and advisors. I think there’s also always been kind of a concept, “Well, wealthy people are smarter than non-wealthy people.” Now, we all know that’s not true.

Mark Roderick:
But in any case, this has been baked into our system from the beginning. It was kind of put into technical terms as accredited investors, meaning wealthy people back in 1982. But it’s always been there. And the thing is, it’s kind of worked. It’s worked pretty well. Let’s put it that way. So while the definition of accredited investor is subject to criticism from both ends, meaning there’s lots of wealthy people who weren’t sophisticated or smart at all, there’s lots of non-wealthy people who are very, very sophisticated. So we’re always hoping that the definition can change and become more accommodating. The concept that people with more money can protect themselves seems to have worked pretty damn well. And the only thing I will add is, the current definition of what wealthy means, meaning what an accredited investor is dates back to 1982. Long time ago, almost 40 years ago. The definition hasn’t changed. It was $200,000 of income. Now it’s 200,000 of income then. I think I got those reversed.

Mark Roderick:
But the point is, of course, inflation has really bitten into those numbers. So $200,000 today is nothing close to what it was back in 1982 and yet the SEC hasn’t changed it. I think the reason it hasn’t is the market seemed to be working. There are not a lot of widows and orphans being cheated. The SEC has kind of let it be for the time being, they’re hoping for an updated, more modern, more accommodating definition of accredited investor. But as a general rule, the accredited definition concept like all of US securities laws have worked pretty damn well. We have both the most stringent and the most vibrant and healthiest and robust capital markets in the world.

Daniel Cocca:
Yeah. That’s really good, helpful background. I think it would also be interesting, and this is something that you and I, mark, maybe talk about it a bit more particularly because we kind of have conversations about what real estate’s syndicating and whatnot. But could you just give a real high level primer for someone who might not know about all this stuff? About what are the important regulations that kind of go into this space? Then what kind of changes do you see from a regulatory perspective that are potentially on the horizon?

Mark Roderick:
Well, yeah, this space if we define it as sort of online capital formation. As we mentioned briefly and as you guys know very well. There are three whole different sets of rules depending on the three flavors of crowdfunding. One is for accredited investors only. we sometimes call that Title II crowdfunding or Rule 506(c) and Charlie. Of course, I’m not going to go into all the detail, but actually, fortunately, there’s almost no detail about Rule 506(c), because there’s no rules. It’s Wild, Wild West. It’s for accredited investors only. As I said, in my little speech before the laws that accredited investors can protect themselves. So when you’re doing a syndication, you’re trying to raise money for your real estate deal, as long as you willing to accept checks, take money only from accredited investors, you can pretty much do anything you want from the SEC’s perspective. You can’t lie, you can’t cheat, you can’t withhold important information but other than that, Wild, Wild West. And not surprisingly, that is by far the most popular kind of crowdfunding.

Mark Roderick:
Another flavor Regulation A or Title IV, it’s like a sort of mini Initial Public offering, mini IPO. You have to put together a thick book, meaning you have to pay someone like me to put together a thick book and submit it to the SEC. They look at it and comment and you change it and revise it and you go back and forth. But if you do that and you get approval, it means you can raise money from both accredited and non-accredited. I don’t expect any significant changes to either Rule 506(c) or Regulation A, in the foreseeable future. Nothing significant. Around the edges, I don’t know what they’ll do, but nothing significant. The third flavor, we call Title II crowdfunding or Regulation crowdfunding or Regulation CF. This is kind of the new animal. There’s never been anything like it. In American securities laws, lots of rules. very small limits on how much a company can raise, very, very small limits on how much investors can invest. Then a ton of other regulatory requirements.

Mark Roderick:
It can only be done online. You can’t even use FedEx. Limits about advertising, all kinds of rules. And probably also not surprisingly, that is not a very healthy market. It’s not a very big market. Some good companies, a lot of bad companies. That flavor is more ripe for some kind of regulatory flexibility. Personally, I think the most important change would be to increase the amount investors are allowed to invest in those deals. Because the amounts they are allowed to invest today are so tiny that a company even raising say $300,000 or $400,000 has to find so many investors to make up that pool. It’s just very, very difficult. So I hope that rule will be changed. Although, don’t hold your breath. I don’t think anything is going to happen anytime soon. But there are these three kinds and they each do have their own set of rules.

AdaPia d’Errico:
So Mark, when you talked about Reg C, or the accredited investor and how it’s the Wild, Wild West, and they’re generally unprotected because of let’s call it a false paradigm that says, “If you make a certain amount of money, you can afford to lose it or you should know better.” Whatever this sort of thinking could possibly be behind that. How does an investor protect themselves? I mean, accredited or not. Because honestly, yeah, there are let’s say more regulations or laws or protections in place for a non-accredited investor. But at the end of the day, we as investors have to be self responsible about anything that we’re putting our money into. So how does an investor protect their money? How do they get informed? What kinds of tips or questions or insights could you give somebody who might be listening to this and going “Oh, my god. I’m protected. How do I protect myself?”

Mark Roderick:
Yeah. Well, the first answer is, again, if we’re talking about real estate in particular, go to a site that does the vetting. That’s the probably 85% of all the things that an investor can do to protect herself. I think you said himself, but I’m going to say herself because that’s what we should say.

AdaPia d’Errico:
Thank you for that.

Mark Roderick:
Okay. So that is about at least 85% of what an investor can do to protect herself. Is go to a site that vets deals. A second step which is similar to the first, if this is your first time investing, invest in a repeat issuer, a repeat sponsor. Notice none of the things I’m saying have any legal component its market forces that protect investors best. So you go to the site that vets deals, you find a sponsor that has done two other deals on that site that have been successful. So now you’re probably at about 95% of everything you can do. Then I just have to say, you should read the documents and you should understand the documents. You know what percentage of your listeners are going to follow that advice? Zero, but I have to say it. And I write the documents so they should read the documents, make sure they understand the documents. Then I guess the other thing I would say also not really a legal protection. See if there are other people investing alongside you that are experienced. I’ve always thought actually getting back to the accredited investor thing, that the way to get the best of both worlds for accredited and non-accredited investors is there should be some kind of rule that says, “Well, if a certain number of unrelated accredited investors participate in a certain deal, then non-accredited investors should be allowed to participate.”

Mark Roderick:
Because if the accredited investors are either sophisticated themselves, or have hired those expensive lawyers and accountants and consultants to advise them on good deals, that’s the market. That’s the crowds selecting a good deal and so non-accredited should be able to invest in it also. But anyway, so my fourth answer is see if you can invest alongside people whose judgment you trust. I could go into like, “Make sure the operating agreement says this and this.” But I think that’s all subsumed within the first things. The portals are looking at the operating agreement, your fellow investors are looking at the operating agreement. So if you follow those simple rules, I think that’s the way to do it. And keep in mind, the real estate market has been going up for more than 10 years. So real estate crowdfunding has a super good record so far, right? I mean, it’s hard to lose money in real estate for the last 10 years. Just bear in mind the macro economic observation that real estate markets go down at some point. Whether we’re there yet. Man if I knew that, I suppose I could be a wealthy person very, very quickly, but the real estate market is going to go down. Isn’t it Dan? I think you told me it was going to go down at some point.

Daniel Cocca:
Well, I think that’s a good segue into the next part of this conversation. So there is a former Supreme Court Justice, Justice Brandeis so I think is credited. He was saying that that sunlight is the best disinfectant, right? So a lot of people think we’re at or near the peak in real estate and a lot of asset classes, there’s potentially a recession looming. Now, what happens to some of these deals from a legal perspective when things do go bad, right? And now some of maybe the mishaps or what happened in the pattern, excuse me, from a pure disclosure perspective, whether there may be misrepresentations or what have you. Those get kind of pushed to light when things aren’t going well, whereas when things are going well no one really cares us as they’re checking their bank account, right? So yeah, what are your thoughts for the coming market? And what are your thoughts about how that impacts real estate crowdfunding in general?

Mark Roderick:
Well, as you know from our conversations, I’m being totally truthful when I say I don’t know what the market outlook is. It’s just that the markets been going up for a long, long time. But from a lawyer’s perspective, yes. When the market goes down, not if but when the market goes down, we are going to see a lot of things shake out as you’ve noted. It doesn’t matter what the legal documents say as long as everyone’s making money, the legal documents just go in a desk drawer. I’m dating myself, they go in a PDF file and get lost on your desktop somewhere. But when the deal goes sideways or south, then people start pulling those documents out and reading them. I think we will be surprised and in some cases shocked about what those documents say and don’t say. We’re going to find out they don’t say things that they should have and they say things they shouldn’t. I’m sure. And they’re going to be lawsuits. They’re going to be a lot of lawsuits. Because when people lose money, usually they’re not happy about it. And they know a lawyer and things just kind of happen. So we’re going to see a period of some turmoil, I think when the real estate market goes down.

Mark Roderick:
You are also going to see, I think, a shakeout of high quality sponsors from less high quality sponsors. Because one of the things that makes high quality sponsors high quality is their ability to survive downturns just based on their industry knowledge, their flexibility, and so forth. There is light in every market, in every downturn, in every industry, I’d say. There’s always a return to quality when things get bad, those markets just have a way of shaking out lower quality deals, lower quality sponsors. Suddenly, everyone’s going to say, “Boy, we need higher quality stuff in these crowdfunding deals.” I can say that today from a legal perspective, Man, I wish the legal documents were better in all these deals and everyone’s, “Who wants to hear that?” The markets going up. People are investing money. We don’t want to hear anything about that. But once a downturn happens, there will be some reforms in the industry.

Mark Roderick:
For me, the real interesting question is and has been, what happens to the crowdfunding portals? So they make money doing deals. I personally don’t know how they will manage through a downturn period. I don’t know. I think right now… You tell me if I’m wrong, because both of you probably know as well as or better than I do. Right now they’re sort of single revenue source businesses. They make money from sponsors by doing deals. What is the revenue source if the deal flow dries up? I mean, you guys maybe have answers to that question. But it’s been a tough business. RealtyShares, which I might have mentioned is the third big successful real estate platform. Well, not for the fact that they went out of business six months ago, so they somehow managed not even to generate enough revenue in an up market. So I mean, what do you guys think about the real estate portals in our next down market?

Daniel Cocca:
Well, I think it’s a really good question. I think the first thing I would say is, I think we’re still in a vetting period when it comes to sponsors, platforms, etc. You need the downturn in order for the cream to rise to the top, so to speak. I think we’re probably approaching a period of time where there are less new entrants at the platform level, and maybe we start to see some consolidation. But at the same time I think we may see some new bigger players who are trying to kind of get out into the accredited investors space, expose their deals to a larger audience. So I guess it remains to be seen but I think the one thing that’s come away from all this is that, people want to be investing in real estate. People want to be investing in alternatives and now they have that option to do so. And they’ve shown in great numbers that it’s something they want to do. To answer your question, if you’re a group that makes money when people invest in real estate deals if real estate deals aren’t happening, you’re not going to make money. I think that’s the takeaway from the RealtyShares story, right?

Daniel Cocca:
Is make sure your company is internally capitalized in a way that doesn’t force you to do as many deals as you possibly can in order to break you, right? And I think one of the founding principles and Alpha as we’ve capitalized Our company has been, “Let’s back ourselves with real estate professionals who understand what we’re doing. Let’s keep our burn very, very low, and let’s grow at a sustainable pace. In a world where six months pass and we haven’t done a deal. It’s not the end of the world, right?” For example, at Alpha, we didn’t do a deal for the entire first quarter of 2019. It was a product by bunch of things and one is just deal flow is deal flow and it comes when it does and if it’s not there you can’t force it. Interest rates were at that point a little less predictable and just made financing these projects a bit more challenging. So we kind of took a step back and said, “Okay. Let’s make sure we’re capitalized for at least the next three years. Let’s assume we don’t do a deal for three years and make sure you’ve got that much money in the bank so at least we exist.” And we move forward to saying, “Let’s just be patient. Let’s pick deals that work.”

Daniel Cocca:
And that’s the challenge when you’re backed by a venture capitalist in that you’re often forced with that, “Hey. I need to grow at all costs mentality.” It doesn’t matter what’s happening in the multifamily asset class or the mobile manufactured home asset class, if that’s what I do. I need to raise money there because that’s what pays the bills. That’s what keeps the lights on. So for me, I think at the end of the day, as I think about it, the groups that will be around are going to be the groups that have best aligned their own company incentives with that of their investors. At the end of the day, all these people have flooded into crowdfunding and these kind of online private real estate syndications. At the end of the day, people still want the same thing and that’s investors to be around for the long run. The only way to do that, again, in my opinion, is to make sure [inaudible 00:44:23] a lot.

AdaPia d’Errico:
You were saying that they didn’t make enough revenue. It’s also because they had so many expenses because it’s a number’s game. So they were spending a lot of money on marketing to hit the numbers because the internet is a number’s game. You’re trying to get as many people as possible from wherever you can. Digital advertising and digital marketing has grown as the ‘easiest way’ to reach the biggest number of people. So you’re trying to get the biggest audience possible and then funnel them down in multiple, different ways. And now like a big difference between that model and a private equity model. So I’m curious to know from you, if you think there’s a difference or what you think about crowdfunding model versus private equity generally in your experience?

Mark Roderick:
Well, that’s a good question. They’re both part of the same ecosystem. They are in some ways the crowdfunding portals are a threat to the private equity business model just as they’re a threat to the angel investor business model. Because both those groups are middlemen. Angel investors are our middleman and I have some of my best friends are angel investors? So I don’t mean to be taking anything away from them. But they’re mediating, right? They’re mediating between entrepreneurs and investors. And private equity firms do the same thing. They raise money for investors, they go out and look for deals, they are mediating. They are middlemen. And that’s what crowdfunding does too. It’s just that crowdfunding because it’s the internet cast such a much wider net in terms of both investors and deal flow that crowdfunding is a real threat. In some markets, crowdfunding will win. So because of the so much greater efficiencies that the internet brings to transact transactions, the socio economic battle which is one of the reasons I’m so evangelical about crowdfunding. So in that deal, I told you, I may have mentioned a few times, my client raises $14 million. Well, that’s great for the entrepreneur.

Mark Roderick:
The three of us we always see through the entrepreneur end of the telescope, because that’s where we work. We work for the entrepreneurs. But in that same deal on the other end of the telescope, there were 281 investors. 281 ordinary American investors being able to participate in a deal that they wouldn’t have been able to participate in 10 years ago. Because that would have been funded by the private equity guys who are funded by super wealthy families. So it is a socio economic clash. Crowdfunding hopefully the great American middle been able to reassert itself economically over the .01% and maybe if we’re lucky make a little bit of a dent in this very unhealthy income and wealth inequality that we have in our system right now. So they’re interesting economic questions, but they’re also big. They’re big questions. Social economic, is it crowdfunding? Is it private equity? It’s Luke Skywalker versus Darth Vader here. So I’m rooting for Luke personally.

AdaPia d’Errico:
Yeah. It’s complex, right? It’s like every time there’s a new technology or a new opportunity, especially if you’re on the entrepreneur side, everybody gets really excited and thinks, “Oh, it’s going to disrupt it and it’s going to change it and the incumbents are going to disappear. We’re going to take our laser sword or whatever those things are called, and we’re going to cut them up to pieces.” And what really seems to happen is that it co-exists. It doesn’t really take it away. I remember in the early days of real estate crowdfunding when I was a Patch of Land that the sort of theme around the industry was that the crowdfunding platforms would make it so that it would be the only way to raise capital and it would actually make all of the people looking, all the sponsors come under essentially one roof. Because it was so fragmented that, “Oh, here we are. We’re going to corral everybody.” And that’s not how it worked. It was just another fragmentation of the same fragmentation. It just had a slightly different flavor because it used some technology and it used the JOBS Act. I feel like anybody can use the JOBS Act and anybody can build a back end, so to speak, right? Now, that’s super generalized, but just everything co-exists. It’s not like one thing comes in and actually completely takes it over and what previously existed is fully swallowed up.

Mark Roderick:
Yeah. In general, that is true. Now, in some cases in for example, Amazon, Amazon just came in and became the 800 pound gorilla of American retailing starting from zero. That is generally not how markets change. It’s like when universes collide you think of, “Oh, there’s going to be this big collision, boom, boom, boom.” But in reality, the stars in the universe are so far apart that they kind of just pass through each other. They influence one another with their gravitational fields, but there’s not a big collision. So one way to look at it if we’re talking about economics is the market, the capital formation market. It’s not a monolith. It’s got a lot of stratification. And what the internet does is it adds efficiencies. There are some pieces of big pieces of our capital markets that are extremely efficient. If you’re building an office building, an office tower in Manhattan, or San Francisco and you’re looking for a first mortgage loan, that is an extremely efficient market. Everyone asks access to the same information. Legally, the documents you’re going to get from all 10 big banks that bid on the deal are going to be identical. It’s extremely efficient.

Mark Roderick:
Crowdfunding, the internet has nothing to add to that market, right? We’re not going to have crowdfunding for first mortgage loans on $600 million office towers. At the other end of the spectrum, that kinds of loans you guys did at Patch of Land, extremely inefficient, right? Very, very inefficient. No one has access information. It’s fragmented. The internet has a lot to add to that market to make it much more efficient. And as you go up the scale, the markets become more and more efficient in the internet and therefore crowdfunding has less and less to add. What happens, the way industries often get disrupted, is there’s a big player and it owns the whole market. Someone comes along, some disrupter and says, “I can take a little piece of your market. I can add more value to that piece.” Right?

Mark Roderick:
And the big company says, “We don’t care. It’s just a small piece.” And then either that disrupter or another one comes along and says, “Well, we can take another piece of your market.” And so what once looked like a monolithic market gets sliced up into different markets. And over time, the overall effect is a major disruption. Personally, I think that’s what will happen with crowdfunding. It will disrupt little pieces of markets. But those markets are so big. I mean, the real estate finance market is so gigantically big that if crowdfunding comes in and disrupts 10% or 15% of it, that’s just an enormous market.

AdaPia d’Errico:
Right. Yeah, it’s a huge opportunity overall. And like you’re saying, it’s a big market. There’s a lot going on as you were talking about, and Dan was saying too. I mean, right now we’ve seen 10 years of growth, but as we all know, in real estate there’s always opportunities to make money in up markets and down markets. And just to wrap up, I think one of the most important tenants, which we spoke about is an investor even if information is presented, even if they trust whomever they’re working with, it’s still important for them to use the transparency and the efficiencies that have been brought by technology and the internet and the JOBS Act and crowdfunding, to apply a lot of their own diligence and time and vetting so that even for themselves they’re making the best possible decision. Because the opportunities are going to keep coming. Even in spite of this volatility that we’re in right now there’s always going to be opportunities. You know what you were saying like, “Read the documents, if you can.” We always make it a point that if somebody needs to know something, because we know they’re not necessarily going to read the documents, that we speak to them a lot. We spend a lot of time with our investors speaking to them to help them through that because it took me a really long time to figure all that documentation out and I’m in finance.

AdaPia d’Errico:
So there’s all these different mechanisms. There’s like these components of you still have to do your due diligence. You still have to put in the time because you’re investing your hard earned money regardless of if it’s efficient and online, or if it’s in private equity. Behind the curtain there’s still a fundamental premise of knowing who you’re working with, who you’re investing with. To the degree possible read those legal documents.

Mark Roderick:
Now, here’s a thought and you guys can be at my advocates for this. So we all know what we mean by read the documents because they’re super important. We also know that when we say that to an investor, if the investor is looking at 10 different deals, they’re going to see 10 different sets of documents, right? All different, maybe they’re saying the same things, maybe they’re not. One small thing that our industry needs, is they need standardized legal documents. There is no reason in the world at all why if I go on to a RealCrowd or CrowdStreet and look at four deals, why those documents should be different. That’s vestigial tail. It’s just a holdover from the old days when there was no internet.

Mark Roderick:
So your job is to advocate for everyone, every sponsor and every portal using Mark Roderick’s legal documents. So they’re all the same. So investors having read one set of documents, they’ve read them all. Now they can compare rather than trying to figure out, “Well, where does this document say this?” They can compare apples to apples and focus on the important thing, which is economics. Of course, I’m seeing this from a lawyer’s perspective, but that is one small thing that makes no sense from the investors end of the telescope. That they have to read 14 different versions of the same document. Everyone should use the same. And of course, because mine are the best, they should use mine. But they really should be standardized. Okay, can you pledge to that? Advocate for that in the industry?

Daniel Cocca:
Absolutely. And fortunately for us, you already drafted our legal documents. So that’s all we wanted.

Mark Roderick:
Well, you have the best documents already. You’re far ahead of other people.

Daniel Cocca:
Well, listen, Mark, we really appreciate you taking the time today just sharing all your insight and years of knowledge with our investor base. I think people really like to hear stories and insight from folks like you that have been around for a while in this space. And so thank you again for taking the time. We really, really appreciate it.

Mark Roderick:
Thank you very much for having me. It’s always a pleasure to talk to you, folks.

AdaPia d’Errico:
Thanks, Mark.

Daniel Cocca:
Bye, Mark. Take care.

AdaPia d’Errico:
Thanks for tuning in to Real Wealth Real Heath. We hope that you’ve enjoyed today’s episode and found it both informative and insightful. We welcome all your questions and your feedback about today’s episode. Especially, we welcome your questions about specific topics that you would like us to cover. So shoot us an email at [email protected] And if you have a moment, we really appreciate ratings and reviews as it helps us grow our online community and our interactions with you. We’ll also be linking to a number of relevant articles on topics that we might have touched on during our conversations. Some of them are broad, some of them are technical, but we’re always aiming to provide information that helps you better understand the mechanics of building this healthy financial foundation especially if you’re looking to do this with real estate.