Loquidity Brings Crowdfunding to Midwestern Real Estate Markets
While U.S. investors and startups wait for the Securities and Exchange Commission to devise the rules regarding the crowdfunding piece of the JOBS Act, states are passing their own companion legislation to try to stimulate investing.
In December 2013, Gov. Rick Snyder signed the Michigan Invests Locally Exemption (MILE) Act, which allows a business incorporated or organized in Michigan to sell securities in its business to Michigan investors—those who have a principal residence or business organizations with a main office in Michigan—without having to register its securities.
The MILE Act has a few other provisions: A business can accept up to $10,000 from an individual unaccredited investor [or more than $10,000 if the investor is accredited. . A business can raise up to $1 million in 12 months without providing audited financial statements, or up to $2 million in 12 months if it provides a prospective investor with audited financial statements. Just this week, the Michigan Senate passed legislation to allow broker-dealers to sell Michigan securities on the secondary market. Having passed the House already, it heads back for a concurrence vote before going to the governor for signing, and it’s expected to open the crowdfunding market further by making investment options more flexible.
As potential crowdfunders grapple with the new state regulations, a Grand Rapids, MI-based startup called Loquidity (the name stands for “local liquidity”) is going full steam ahead by establishing a digital marketplace that injects money raised through crowdfunding into the booming commercial real estate market in West Michigan.
“We’re focused on community development through crowdfunding debt or equity deals,” says Loquidity co-founder and COO Joe Elias. “If someone is able to secure a real estate loan at 70 percent and needs 30 percent more, they could go to the crowd to close the deal. On the flip side, if they already own the building but need additional capital for improvements, we can issue debt like a mortgage with higher interest rates.”
On Sep. 30, Loquidity announced its first deal up for crowdfunding investment—an apartment complex in Allendale, MI, that is fully occupied and home to many college students. Loquidity is trying to raise $285,000 in crowdfunding by Oct. 15 to close the deal. As of today, it is 18 percent funded.
Elias says Loquidity gets some deal referrals from banks, which are still tight when it comes to lending capital as the country slowly recovers from recession. Loquidity’s deals are primarily focused on Midwest real estate markets—“from Michigan to Kansas to North Dakota”—and it makes its money through acquisition fees, management fees, and platform fees charged to each deal, so as of now, it’s free for investors. “We want to attract investors, and we don’t want to make it cost-prohibitive,” Elias says.
Loquidity works like this: A potential “sponsor” of a real estate deal contacts the company and says she’s interested in soliciting crowdfunding to close her deal. Loquidity vets the deal by checking out the sponsor’s background and does a market analysis, a business plan, and a financial analysis.
“We make sure the sponsor has a good track record and they aren’t fraudulent,” Elias says. “We need to uphold and maintain the trust of the Loquidity name.”
Elias says Loquidity is open to “100 percent of the public,” and while anyone can view Loquidity’s deals online, investments are currently only available to accredited and international investors who are required to invest a minimum of $5,000 per deal. Elias says there are about 150 people already signed up to be potential crowdfunders.
In return, investors own a piece of the property through an LLC, and Elias says they also get a “preferred rate of return” of six to eight percent quarterly or annually, or up to 20 percent if there’s an exit. “Even if Loquidity goes away, investors still own the property,” Elias adds.
As for what makes the perfect Loquidity investor, Elias says it all depends on the risk profile: “The person looking to buy their own house is not there yet—we’re not competing with banks. But if you have experience fixing and flipping houses, we might be able to do a short-term deal.”
Right now, Loquidity, which has a team of six employees, is self-funded, though Elias says the company may seek outside funding if it grows. The fact that it took three months from its June launch date to get the first deal up on the website is likely due in part to investors not understanding the intricacies of Michigan’s crowdfunding legislation.
“Lots of people in the Midwest don’t understand what crowdfunding is, so we’re doing a lot of dog and pony shows to educate them on it,” Elias adds. “Midwest investors are a bit more conservative with their money, but that’s good. We hope the dam opens up after we close this deal.”
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