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Democratizing Commercial Real Estate Investing: the Impact of the JOBS Act and Crowdfunding on the Commercial Real Estate Market

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Democratizing Commercial Real Estate Investing: the Impact of the JOBS Act and Crowdfunding on the Commercial Real Estate Market Democratizing Commercial Real Estate Investing: the Impact of the JOBS Act and Crowdfunding on the Commercial Real Estate Market by Bonnie L. Burgett B.S., Finance, 2005 Boston College and John R. McDonald B.A., American Studies and Economics, 1982 Fairfield University Submitted to the Program in Real Estate Development in Conjunction with the Center for Real Estate in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate Development at the Massachusetts Institute of Technology September, 2013 ©2013 Bonnie L. Burgett and John R. McDonald All rights reserved The authors hereby grant to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Signature of Author_______________________________________________________ Bonnie L. Burgett Center for Real Estate July 30, 2013 Signature of Author_______________________________________________________ John R. McDonald Center for Real Estate July 30, 2013 Certified by______________________________________________________________ Walter Torous Senior Lecturer, Center for Real Estate Thesis Supervisor Accepted by_____________________________________________________________ David Geltner Chair, MSRED Committee, Interdepartmental Degree Program in Real Estate Development 1 2 Democratizing Commercial Real Estate Investing: the Impact of the JOBS Act and Crowdfunding on the Commercial Real Estate Market by Bonnie L. Burgett and John R. McDonald Submitted to the Program in Real Estate Development in Conjunction with the Center for Real Estate on July 30, 2013 in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate Development ABSTRACT This thesis systematically evaluates how rapid developments in the nascent crowdfunding industry, combined with recent regulatory changes, will impact the commercial real estate markets. The phenomenon of crowdfunding, defined as raising numerous small amounts of capital from a large number of people, or the crowd, has been accelerated by the recent passage of the Jumpstart Our Businesses Start-up Act (JOBS Act). The JOBS Act legalizes and facilitates the sale of securities used to crowdfund equity and debt investments, giving rise to a proliferation of new crowdfund entrants in various business sectors, including the commercial real estate arena. This thesis first gives a detailed analysis of the JOBS Act legislation and how it alters the current regulatory and business landscape. The focus then turns to the commercial real estate markets, tracing the evolution of commercial real estate as an institutional asset class and the influence large, institutional investors such as pension funds and real estate investment trusts exert on this market. The authors also examine the impact on the average investor and conclude that these large institutional investors have bifurcated the market, leaving the average investor unable to gain exposure to “hard” commercial real estate assets. The authors then link the research to crowdfunding, first with a chapter on the emerging and dynamic crowdfund industry in general, and then on specific commercial real estate crowdfunding sites, also discussing sites related to this sector. The authors strengthen this primary research with field investigations, conducting interviews with real estate developers, investors, and securities lawyers specializing in regulatory law. They concurrently surveyed 138 well-vetted real estate professionals (the MIT Center for Real Estate alumni). The thesis then projects the size of the potential dollar value of the commercial real estate crowdfund market based on existing value and turnover in the commercial real estate markets. The final chapter imagines what this market will look like in 2015; concluding that crowdfunding will have a profound effect on the commercial real estate market. Thesis Supervisor: Walter Torous Title: Senior Lecturer, Center for Real Estate 3 Acknowledgements: This thesis is written with love and gratitude for my parents, Rick and Becky Burgett, without whom none of this would be possible. I am lucky to have such amazing parents who have provided me with endless opportunities and love. I love you all. Thank you to my friends and family for their love and support during this year and thesis writing process. Thank you to the MIT CRE professors, faculty and staff for their continued encouragement and inspiration – this year has been formative and challenging but an experience I will cherish. Most importantly, I am thankful for the hard work John has put into this thesis. I am forever grateful for his support, advice, and friendship, and feel lucky to have had such a wonderful writing partner. - Bonnie This thesis represents the end of a wonderful and fascinating journey, one that I am very pleased and privileged to have taken. I would first like to express my gratitude to the entire MIT faculty, but in particular to David Geltner, for his kindness, guidance and endless enthusiasm. Some of the toughest days were changed for the better by his reminders that “MIT is all about fun.” I would also like to express equal gratitude to my classmates for all of their support and encouragement; I have seen few teams of their caliber and capability, it was truly an honor to be part of this one. I would like to thank my children, John and Kelly for their love, support and patience with a father who missed sending them off to their first year of college. I love you both so much. Thank you to my brother Jeff and his wife Lynn for their endless support, providing me with the joys of their wonderful family over countless dinners. I would also like to thank Jamil Baz, Bruce Lakefield, Leo O’Connor, and Nassim Taleb for their friendship and guidance, providing me with the inspiration and courage to reach this day. Finally, I would like to thank Bonnie. Her dedication, creativity, intelligence and work ethic are beyond compare. She made this project a pleasure, providing this journey with the perfect ending. - John Most importantly, thank you to our thesis advisor, Walt Torous, and the professionals that graciously took our survey or were interviewed for this thesis. Finally, we briefly reference in Chapter 8 the role the crowd played in catching the Boston Marathon bombing suspects. This tragic event occurred at the mid-point in our year here at MIT and will forever be etched in our memories. We hope that our reference to this event is representative of the notion that the crowd, in search of common good, works together to overcome a few bad apples. The conception of the phrase “Boston Strong,” that unified the crowd in the wake of this event demonstrates this unity in common good. Therefore, we respectfully dedicate this thesis to the memory of MIT Police Officer Sean Collier and the marathon bombing victims, and in thanksgiving for our brave law enforcement who worked tirelessly to bring the suspects to justice. 4 Table of Contents: Abstract ........................................................................................................................................................ 3 Acknowledgements ...................................................................................................................................... 4 Table of Contents ......................................................................................................................................... 5 Chapter I: Introduction ................................................................................................................................. 7 Thesis Objective ............................................................................................................................... 7 Research Methodology .................................................................................................................... 9 Thesis Structure ............................................................................................................................. 10 Chapter II: The JOBS Act in the Context of Historic Securities Regulation and Reform Measures ............. 12 The Securities Act of 1933 .............................................................................................................. 15 The Securities Act of 1934 .............................................................................................................. 24 The Jumpstart Our Business Startups Act (“JOBS Act”) ................................................................. 25 The JOBS Act and Fraud ................................................................................................................. 33 Chapter III: Commercial Real Estate: Current Landscape for Investing ...................................................... 38 Real Estate Portfolio Allocations .................................................................................................... 39 Current Options for Investing in Real Estate .................................................................................. 40 Defining the Institutional Asset Market ......................................................................................... 49 Lending and Capital for Sub-Institutional Markets ........................................................................ 58 Chapter IV: An Examination of the Influence of the Internet on Commerce and Existing Online Real Estate Sites ................................................................................................................................................
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