The Urban Developer sat down with Estate Baron founder Moresh Kokane to better understand the business model behind crowdfunding in Australia for property development and its broader implications for the property sector.
Given the current lending environment, why should property developers consider crowdfunding?
Banks and other lenders are increasingly tightening lending criteria, leading to a funding gap for developers.
Real estate crowdfunding offers property developers the opportunity to raise equity or mezzanine capital from a wide pool of previously untapped property investors in a cost effective, fast and flexible manner.
There are many perceived risks associated with crowdfunding for property development in Australia. How does Estate Baron help developers raise equity or mezzanine funding?
Over several years, we have developed a service which comprises of three things:
Legal structures that provide offer documents that allow the investment offer to be promoted openly, without limit on the amount of capital raised and from an unlimited number of investors.
A 'white label' technology that can be fully branded for your developer's own needs that enables administration of investors, plus hosting and ongoing administration of the platform with continuous upgrades.
Access to our database of around 2,000 small and large property investors.
Developers must also be aware that crowdfunding is very different from borrowing funds from a lender, but rather more similar to an IPO which can be both under and oversubscribed which means the developers have to do their own promotions as well.
Access to a compliant legal structure makes promoting an investment offer possible. By using this service, developers can make investment offers to the public across Australia and raise equity and mezzanine funding on their own commercial terms.
Isn't issuing a prospectus or setting up a public company expensive in terms of money and documentation?
Yes, but we have managed to bring the costs substantially lower. Our model opts for a public unlisted company structure that does not require a fully fledged ASX listing. At this stage, we have developed a structure based on the following costs:
Incorporating a public company ($600)
ASIC prospectus lodgement fee ($2,350)
Audits costs ($2,500 a year)
Estate Baron also charge a one-off establishment fee ($15,000) that includes the technology and prospectus template for an unlimited number of projects. Beyond this, we charge a monthly fee of $1,000 for the ongoing support, hosting, administration and upgrades of the technology platform. There are no fundraising fees, administration fees or commissions beyond this simplified fee structure.
From a corporate structure perspective, investors are issued preference non-voting shares which allows control of the project to be maintained by the developer.
And finally, with respect to investor relations, the Estate Baron technology allows the developer to communicate regularly with investors on project progress and provides a share registry, administration dashboard and several other features.
What do property developers get in return for the Estate Baron fee? Are there any further project or administration fees?
The establishment fee ($15,000) is for the set-up of the technology (e.g. website) and the prospectus. Beyond this, there is no per project fee, so you can continue to use the same website as a platform for an unlimited number of projects. The same prospectus template can be used for an unlimited number of projects by updating the relevant information specific to the project.
Why has this been not done before and has this model been proven with ASIC? Have other developers embraced this model on real projects?
The current structure (e.g. public unlisted company plus prospectus) is actually quite common for various ventures across Australia. We are simply increasing its scale by wrapping it around technology to make it more accessible to property investors.
Whilst its still early days, we already have 5 developer clients across Victoria and New South Wales who have signed up to use the Estate Baron platform.
The first prospectus offer using our technology is for a small boutique apartment project in Sydney and is now almost fully funded. The second one which recently went live is for 40 apartments in Gosford, Central Coast.
Our biggest hurdle was compliance so now, by using this cost effective repeatable structure that follows all the regulatory requirements around disclosure, we have a model checks all the boxes in terms of compliance and has the potential to provide property developers with access to investors in property development projects.
What stage of the project can this be used? What style projects is this best suited for?
The Prospectus model is extremely flexible and can be used for any stage of the project including land acquisition. The key is disclosing all the details and risks. Also it is ideally suited for projects that have a marketing budget as that can also be used to attract investors apart from buyers.
Apart from funding property developments can this be used to buy and hold or other structures?
We have getting ready to launch a Build/Hold and Buy/Hold structure which will be even more attractive to developers as well as people who want to buy property in the form of a syndicate or fractional ownership style. Whilst this is something we will focus on in the future, the focus for now is on simple equity and mezzanine funding.
With other offerings in the market, why should developers be attracted to the Estate Baron model as opposed to issuing Information Memorandums (IM) or Product Disclosure Statements (PDS)?
There are limitations to both the IM and PDS options. An IM cannot be promoted openly to small investors, while the PDS option needs a retail license (AFSL), Managed Investment Scheme (MIS) and custodians which increase costs and time significantly.
We initially explored and used the PDS model but ended up switching to a prospectus structure due to the significantly lower cost structure.
Where can I find more details and how do I use this for raising funds for my next project?
For further information, head to the Estate Baron website.
