When the firm I co-founded, IntelliStay Hospitality, commenced crowdfunding to raise equity capital to fund hotel properties, one of the fundamental principles was transparency. We focus on crowdfunding equity into individual assets without a bunch of moving parts or surprises post investment.
Our philosophy is that in order to make a valid investment decision, investors should be able to evaluate a transaction based on its merits including:
historical financial performance
development/speculative risks (if any)
Once the crowdfunding capital raise has been completed, there should be continued transparency on a regular basis so investors can follow along as much as desired.
For example, IntelliStay provides the following to investors on a monthly basis:
Profit & Loss (including a comparison to budget)
Forecasted Profit & Loss (updated for monthly actual performance and remaining monthly budgeted amounts)
Monthly STR report (hotel industry reporting showing comparis on to competition in the market)
In addition, IntelliStay provides more detailed annual financial statements as well as holds quarterly conference calls with investors that allows for Q & A.
With a single identified asset, an established capital structure and fixed sponsorship compensation terms combined with the ability to track performance in real time, investors can fully benefit as owners of a property in the way they would if they owned the property outright (which may be beyond their reach) and without the day-to-day management issues. In my opinion, this level of reporting and transparency should become the normal operating procedure and what investors should expect from a sponsor.
Equity crowdfunding is no longer the newest kid on the alternative finance block. It is emerging as a legitimate and significant source of capital. Part of this ‘growing up’ necessitates being open and transparent about performance. Of course, it is inevitable that there will be transactions that perform poorly. Transparent reporting will allow investors to truly understand what is happening; unfortunately for all of us, of course, it does not eliminate the risk inherent in real estate investing.
For investors and sponsors to thrive, there should be a high bar for integrity and openness in the form of real time financial reporting.
Undoubtedly, there will be bad actors who sponsor crowdfunded deals. These firms are less likely to provide real transparency. Making transparency a key due diligence item will help you as the investor better understand the type of sponsor seeking to raise capital and may also provide early clues to serious potential problems.
As attractive as the notion of crowdfunding is, it is important that the industry establish proper protocols so that members of the crowd are really a valuable part of the team and not viewed as captive to an investment or sponsor. Sponsors of real estate equity crowdfunding transactions are typically looking to grow assets under management. In order to do so effectively, sponsors must earn and keep the trust of their members. As with many things in life, proper communication can be a key to successful endeavors.
Crowdfunding is one exciting example of the broad trend towards disintermediation. A key element of disintermediation is breaking down barriers through information availability. Real estate crowdfunding is no different and will be enhanced through everyone’s continued effort in making transparency a top priority.
David H. Lesser is the co-founder and CEO of IntelliStay Hospitality Management LLC which is sponsoring crowdfunding offerings allowing investors the opportunity to participate in the direct ownership of individual hotel properties.