All deals on the CrowdStreet platform go through an objective and rigorous multi-phase review process. These efforts help us to gain a deep understanding of each sponsor so we can confidently present qualified sponsors to our investors.
This process involves extensive scrutiny of both sponsors and deals conducted by experienced real estate professionals. CrowdStreet’s deal screening team is a group of FINRA-licensed, deeply experienced private equity real estate professionals who utilize a multi-layered process and extensive data to evaluate each deal.
The evaluation process consists of two main phases:
- Sponsor Examination
- Deal Examination
1. Sponsor Examination:
Background checks: We conduct thorough investigations into each sponsor’s background, assessing their financial stability, investor reporting, industry reputation, and executive leadership. We use tools such as Thomson Reuters CLEAR background checks, FINRA BrokerCheck, SEC Litigation searches, and Internet searches to gain visibility into any bankruptcies, judgments, and lawsuits, among other things.
In addition to conducting background checks on sponsor entities, we also investigate every officer and beneficial owner of the sponsor. All sponsors and their principal owners are subjected to AML (Anti-Money Laundering) and KYC (Know Your Customer) checks.
Track Record review: We complete a detailed review of the sponsor’s active and realized Track Record. This includes reviewing the Sponsor’s financial disclosures to understand their financial health and overall health of their active portfolio. We audit the sponsors’ realized deal data using Real Capital Analytics, and every sponsor certifies the accuracy of the information provided.
References: We conduct investor reference checks to uncover unethical business practices.
This comprehensive sponsor examination aims to offer investors an added level of confidence in the quality of the sponsors we bring to our platform.
2. Deal Examination
Assessing a commercial real estate opportunity requires deep analysis across a number of factors to ensure a complete understanding of both the upside potential and risks of the opportunity can answer a critical question: Does this deal merit consideration by CrowdStreet investors?
Business plan: Each deal is unique, which is why we meticulously analyze each unique business plan. Our assessment aims to identify key risks that could impact the deal’s performance for our investors. By thoroughly scrutinizing financial reports, rental forecasts, underwriting assumptions, and legal documentation, we are ensuring that underwriting assumptions factor in the significantly higher costs associated with acquiring debt, building new projects, and maintaining existing ones in the current market.
Moreover, we diligently vet each new opportunity in the context of today’s unique market conditions. For example, in an increasing interest rate environment, we intensify our focus on debt pricing for each opportunity and how it impacts the capitalization and the successful execution of a sponsor’s business plan.
Market Analysis: Real estate is intricately tied to local market conditions; what succeeds in one location might fail in another. Current market conditions, economic and demographic trends, demand drivers, and future growth projections influence the feasibility of every deal. By leveraging decades of experience, strong industry relationships, and reputable market research sources such as Green Street and CoStar, we can confidently accept or decline deals, ensuring our investors are presented with opportunities to invest in markets and submarkets that show promising potential.
Negotiation of Structure and Deal Terms: Our goal is to populate the CrowdStreet platform with quality deals that align with our investors’ interests. Deals often come to us with terms or investor protections that don’t meet our criteria for our investor base. Our team leverages their experience and deep market knowledge to push for changes in structure and terms on behalf of and to the benefit of our investors. For example, during times of market dislocation, we generally strive to take advantage of market trends such as low transaction volume and less available investment capital to negotiate more favorable fees and promote structures for investors.
Fraud Prevention: Checks and controls reduce risk and minimize opportunities for fraud, but they will not prevent bad actors from breaking the law and committing fraud. However, through the data and experience we have gained through hundreds of deals, the tools and processes we have implemented, and our continuous monitoring and improvement of those safeguards, we are stronger than ever, mitigating risk and improving investor protections.
By conducting such a thorough review, we gain a deep understanding of the potential rewards and risks associated with each deal. This allows us to clearly communicate this information to investors so they have visibility and clarity into the investment opportunities that we present on our platform.
Presentation of Offering Details
For the few investment opportunities that do make it through CrowdStreet’s rigorous review process – historically well below 10% – the next step is making the deal accessible to investors through the Offering Detail page.
The Offering Detail page is where all the prior steps come together to enable us to provide most of the information we believe our investors need to make an informed investment decision. Our Offering Detail page has evolved over the years, guided by investor feedback on new features, page structure, and desired information.
Historically, CrowdStreet has included targeted returns on each Offering Detail page. These metrics have traditionally been used within the real estate industry as a shorthand view of the sponsor’s financial projections for the project as applied through the distribution waterfall to generate hypothetical investor returns. However, the shorthand nature of these metrics is inherently imprecise and frequently leads to misinterpretation and inaccurate expectations.
As of August 15, 2023, target return metrics including target IRR, equity multiple, and average cash yield will no longer be available on the Offering Detail page and other CrowdStreet material. Removing these metrics is required as a broker/dealer per FINRA Rule 2210(d)(1)(F).
To ensure investors can readily evaluate the information key to an investment decision, we’ve added new tools and context including CrowdStreet’s perspective, for each offering, including CrowdStreet’s View, Business Plan Ratings, Risks, and insight into the vetting that the CrowdStreet Capital investment team has completed on the sponsor and the deal.
Moreover, we are introducing expanded investor services leveraging our licensed Investor Relations team.
These tools, combined with additional support from our IR team, helps ensure that investors have the information they need to approach every deal on our platform with confidence.
Post-Fundraise Support
After the fundraising process is complete, our Portfolio team stays connected with sponsors throughout the life of the deal, monitoring project performance, and delivery of regular reporting, timely annual tax documents, updates on distributions, and responses to investor questions.
Our newest standard sponsor agreement for deals brokered by CrowdStreet Capital LLC specifies that sponsors may face monetary penalties for delayed reporting or tax document delivery and prohibits sponsors from passing such penalties on to investors directly or indirectly.
We know how important it is for our investors to have visibility into their investments and receive critical information and timely updates. That is why we will continue to advocate for our investors and encourage our sponsors to be responsive and investor-focused.
Safeguarding Investor Funds
Previously, CrowdStreet did not take custody of investors’ funds. All offerings were completed on a best-efforts non-contingent basis, and our role has been to facilitate direct investments by our investors. CrowdStreet has historically required:
- Sponsors and issuers contractually bind themselves to establishing a separate and dedicated bank account for each deal.
- Investors fund that account directly.
- Funds from that account only be used for project costs.
As of June 5, 2023, however, all self-directed CrowdStreet deals are funded through third-party escrow accounts, and our CrowdStreet Capital team determines whether to release funds to the issuer. This funding process provides greater oversight into the movement and release of funds.
Assets in these escrow accounts will not be released until the Sponsor is set to close on the transaction and provides specific, transaction-relevant documentation, such as final loan, capital table, and closing documents.
We value the trust that our investors have placed in us and do everything we can to ensure that their funds are utilized as they were meant to be.
We are proud of the track record that has resulted from our rigorous process. As of July 7, 2023, 777 deals have successfully raised capital through the CrowdStreet Platform. Of those, 616 continue to operate against their business plans, and 161 deals have been fully realized.
Eighty-eight percent of realized deals have been profitable for investors. Including all losses and using the most conservative calculation, our overall average Internal Rate of Return is 18.1%*. For more details on our track record, please visit our Marketplace Performance webpage.
CrowdStreet’s multi-year effort to transition to a broker-dealer model will be complete soon. This required many operational, technology, staffing, and compliance initiatives necessary
Notably, FINRA has reviewed and provided feedback on hundreds of pages of content, including our website pages, marketing materials, and investor communications. Importantly, we have implemented the organizational modifications and licensing requirements necessary to mitigate or eliminate actual or perceived conflicts of interest.
While CrowdStreet’s mission has not changed, we will now serve as a FINRA-licensed broker and comply with FINRA rules and regulations.
Our rigorous process has generated positive outcomes for our investors, and we are proud of the results that our efforts have yielded. We remain committed to helping our investors achieve their investment objectives, and the inclusion of our broker/dealer further underscores this commitment.
Because of our relentless drive for excellence, we are constantly seeking ways to enhance our offerings, our operational performance, and our investor experience. We believe every day offers an opportunity to learn, to improve, and to wow our investors.
* Past performance does not guarantee future results or success.
