New member from Chicago

[Jim Groves]

Hello BP!

I’ve had a 20+ year career in commercial real estate, primarily in lending. I’ve worn a number of hats—commercial mortgage originations, syndication, securitization, etc and was once a CFO for an affordable housing developer using low income housing tax credits.

I've seen the tail end of the early ‘90's downturn and was knee deep in the most recent one. I know there are pockets of excess in some areas and product types, but I don't believe we're in the end of this cycle. It feels a lot more like late 2004 than 2007. In both cycles, the downturn was precipitated by uncontrolled excess in the lending markets (construction lending in the late ‘80/'90's and CDO's/CLO's prior to the credit crisis). The most egregious error in the last credit cycle was the lack of a gatekeeper with meaningful influence, whether it's the rating agencies, bank regulators, or the CMBS B-Piece buyers. They were all compromised to some extent. I don't see that excess yet. In my view the debt markets are now more constrained due to bank regulation.

With that said, I’m now focusing my time on the newest product in the market—real estate crowdfunding. There is a lot of hype around this industry but it has the potential to address some market needs, namely an alternative to hard money lending and access to direct property investments at more modest exposure. Technology speeds up the process and brings efficiencies, but at its core this industry is just a 21st century version of the real estate syndicates of the late 80’s. It’s important to not repeat the mistakes of that era but unfortunately we are not addressing some key problems. Some of my concerns include:

• No third party oversight of the underwriting process—REITs have equity analysts, quarterly audits and SEC regulation. CMBS has rating agency surveillance, B-Piece investors and now Operating Advisors. Who watches over real estate crowdfunders? Right now they are relying on you, the crowd, to perform the due diligence that they miss. I realize there are "100 point checklists" and "proprietary algorithms" but honestly, what do they have that the CMBS lenders don't have? CMBS lenders have more third party vendors working for them, they have the same (or better) technology, and they have the same pre-funding risk. Yet despite that, investors still demand and receive better oversight and skin in the game.
• No liquidity—A few sites are building out secondary trading platforms, but I'm not optimistic that you will see a lot of trading of interests on them. REITs (and to a lesser extent CMBS) have more liquidity because they are more homogenous, do not require significant upfront (and costly) due diligence to trade, and carry more robust third party surveillance.
• Weak Interest Alignment—There are a few deals where there is significant sponsor equity at risk. There are a lot more that do not. And debt crowdfunding deals? Forget about it. If you’re considering an investment, think about who you want in charge when a deal goes bad. I would prefer a local experienced investor with significant (i.e. more) equity at risk than myself who will make the right decisions on behalf of the investor group. Outsourcing this work on a fee basis rarely goes well.

There are a lot of other issues, but these are the big three that I’m concerned about. Looking forward to contributing in the community where I can.