We know that savvy investors want to thoroughly understand the online investing process before jumping in with both feet or even just dipping a toe. Below are answers to frequently asked questions about real estate investing, due diligence and raising capital through Loquidity. If your question isn’t answered here, please feel free to contact us.
1) What is Loquidity?
Loquidity is an online real estate investment marketplace that brings exclusive returns to an inclusive investor base, focusing on quality investment opportunities in the Central and Midwestern U.S. The company was founded by executives within the real estate, technology and financial industries to disrupt the status quo in real estate investing by providing transparency and accessibility to what was once reserved for only a select few. Based in Grand Rapids, Michigan, Loquidity connects real estate sponsors with accredited investors who are passionate about supporting the revitalization of the Midwest. Loquidity provides both debt and equity opportunities, for accredited investors to build up communities and create wealth.
2) What is real estate crowdfunding? Is it safe for investors?
Crowdfunding is frequently associated with rewards- and donations-based crowdfunding types offered on sites like Kickstarter. Loquidity is an investment real estate crowdfunding platform, also known as a Regulation D crowdfunding platform. Technically, a company using the current rules and securities exemptions available–see “What is the JOBS Act” below–to raise funds via debt or equity securities is colloquially referred to as crowdfunding and generally is only available to accredited investors . However, retail crowdfunding to unaccredited/everyday investors as legalized by the JOBS Act has not gone into effect yet, as the SEC has yet to finalize rules.
Loquidity allows a group of investors (the “crowd”) to invest in a variety of prescreened equity and debt real estate assets. All of the site’s deals undergo a rigorous underwriting process, with a focus on quality, not quantity; Loquidity shares as much detail about each investment as possible. While there is always some risk inherent in investing in any asset class, Loquidity allows investors to create a balanced portfolio that includes real estate assets.
3) What is the JOBS Act?
The Jumpstart Our Business Startups (JOBS) Act was developed to encourage funding for our nation’s small businesses and startups and was signed into law by President Barack Obama on April 5, 2012. The legislation required the Securities & Exchange Commission to issue rules pertaining to crowdfunding pursuant to Title II and Title III of the Act. While designed initially for entrepreneurs seeking funding, the JOBS Act is having a profound effect on real estate investing through the emergence of investment platforms like Loquidity.
The SEC issued rules last fall for Title II crowdfunding, a.k.a. “accredited investor crowdfunding,” and general solicitation. Under the Title II rules, private securities can be advertised through legitimate crowdfunding platforms; however, funds can only be accepted from accredited investors (see “Investing through Loquidity” for more information on accredited investors). Investors must provide information confirming their accreditation status.
This new type of offering is typically referred to as a 506(c) offering, after the official rule designation by the SEC. Rule 506(c) falls under Regulation D, which prescribes certain exemptions for selling private securities.
4) What is general solicitation?
General solicitation allows for the advertisement of private securities through nearly any channel. Prior to the JOBS Act, general solicitation was banned for over 80 years as a result of unscrupulous stockbrokers that contributed to the crash of 1929.
The rise of information technology has exponentially increased the availability of education on any subject matter—including investing and real estate. Crowdfunding, by virtue of involving dozens if not hundreds of participants, allows for open collaboration and discussion not previously available, which can reduce the probability of fraud. Loquidity allows real estate syndicators to advertise their offerings on the site, but only after undergoing a rigorous screening process.
5) Is there a fee to join Loquidity?
No, anyone can join Loquidity at no cost.
6) What is intrastate crowdfunding?
Congress passed the JOBS Act in 2012, which enables all U.S. citizens to invest in private offerings. These laws have taken so much time to be enacted that many states have drafted their own legislation. State-level crowdfunding, a.k.a. “intrastate crowdfunding,” allows companies to raise capital from unaccredited investors living in the same state. Companies must be headquartered in the state they are raising capital in and can only raise capital from permanent residents of that state. Michigan passed legislation in March 2014, called the “Michigan Invests Locally Exemption (MILE).” The MILE legislation is the intrastate counterpart to the national-level Title III of the JOBS Act. Currently, Loquidity only uses the federal-level exemption under Title II of the JOBS Act but may look into intrastate opportunities as they arise.
7) Who founded Loquidity?
Loquidity was founded by a team of real estate and technology professionals born and raised in the Midwest. Jesse Clem, CEO, brings more than 15 years of experience as a senior leader at Fortune 500 corporations within the IT industry and also created a hard money lending capital company to provide debt financing for numerous projects in the West Michigan area. Joe Elias, COO, has more than 13 years of executive operations experience with Fortune 50 companies and 15 years’ experience in real estate development in the Midwest. For complete profiles of the team of experts, please visit the site’s About Us page.
INVESTING THROUGH LOQUIDITY
8) Who can invest in Loquidity’s deals?
Loquidity offers two general types of offerings, one utilizing federal-level rules and the other utilizing intrastate crowdfunding exemptions, defined by the SEC as individuals whose income has exceeded $200,000 annually for the past two years ($300,000 for a married couple) or whose net worth exceeds $1 million, excluding a primary residence. Loquidity uses the 506(c) exemption under Regulation D that requires investors to verify their accreditation status. Investors are able to verify their status seamlessly through Loquidity’s website; doing so will enable them to invest in any deal on the site for up to 12 months for income verification and 3 months for asset verification.
Loquidity also intends to take advantage of new state-level regulations provided by several Midwestern and Central U.S. states to date, including Michigan, Wisconsin, Idaho, Indiana, Kansas and Tennessee. While the details of each state’s rules vary, generally speaking, intrastate crowdfunding allows companies to raise a certain amount of funds from both unaccredited and accredited investors up to a certain amount, as long as both the company and the investors reside within that state. With these types of raises, meant to spur community involvement and development, Loquidity plans to offer substantially lower investment minimums to make the offering available to as many investors as possible. See more under “What is intrastate crowdfunding?” above.
9) What kind of information does Loquidity provide about each deal?
Loquidity only posts an investment opportunity online once it has undergone the company’s due diligence process. Members can view live deals and learn more about specific investments. Every curated opportunity includes detailed information such as the estimated annual return, projected length of the investment, property and location information, risk profile and market analysis, along with a profile of all primary parties involved in the investment. Loquidity will also moderate Q&A forums and provide regular email updates for each deal.
10) What kinds of investments does Loquidity offer? Is it a debt- or an equity-focused platform?
Loquidity offers debt and equity investment opportunities, with a special emphasis on investing in commercial and multifamily properties in the Midwestern U.S. The team of real estate experts believes that investors can balance their portfolio of real estate holdings with both debt and equity assets, with each providing their own distinct advantages.
With Loquidity’s presence in and emphasis on growing communities within the Midwest, its deal flow is sourced by experienced real estate sponsors and property managers local to the area of the investment. Having been involved in the real estate community in the region for years, Loquidity’s founders have built a strong network within major markets including Chicago, Detroit, Grand Rapids, Cincinnati, Cleveland, Twin Cities and other cities throughout the Midwest.
11) Can I see any deals before I become a Loquidity member?
Loquidity allows sponsors to advertise their offerings, as legalized by the JOBS Act, so that anyone can view current and past investments. However, in order to invest in Loquidity’s investment opportunities, you must register and certify your accreditation status, which can be done through Loquidity’s website.
12) Once I join Loquidity, when can I invest in deals?
According to SEC regulations, you can invest immediately, but you must verify your accreditation through the site’s verification service. You also have the option of uploading documentation signed by a certified professional verifying you are an accredited investor or tax returns verifying your income., such as a CPA or attorney.
13) Why does Loquidity focus on the Midwestern U.S.?
Loquidity’s motto is “stick with what you know best.” The founders and team members have decades of combined experience in real estate investing and technology, particularly in major Midwest markets like Detroit, Chicago and West Michigan. Studies show that the region’s real estate investment market is showing investor interest, financing availability and seller confidence. Grand Rapids, for example, has reached “critical mass” and is attracting new investors and new developers. These conditions, combined with a decreasing unemployment, make these markets attractive for investment, particularly commercial and multifamily assets.
Loquidity allows accredited investors to contribute as little as $5,000 per deal, with a focus on real estate investments in Michigan, Illinois, Ohio, Wisconsin, Iowa, Nebraska, Minnesota, Missouri, Kentucky, Pennsylvania, Virginia, Tennessee, Indiana and Kansas. To date, there is no other real estate crowdfunding platform that has the local and regional expertise of Loquidity or provides access to premier deals in this region.
14) What’s the difference between real estate crowdfunding and REITs?
With real estate crowdfunding, qualified investors can invest in specific real estate offerings for as little as $5,000 through Loquidity. This allows investors to build up a hand-picked, diversified portfolio of debt and equity real estate assets with varying risk profiles, geographic locations and more. Also, fees will be much less than for a typical managed public or private REIT. Publicly traded REITs, the most common kind, are freely tradeable unlike investments made on Loquidity, which are restricted securities; however, investors in REITs generally have limited information on the various investments that make up the fund/trust.
FOR REAL ESTATE SYNDICATORS & SPONSORS
15) How can syndicators raise money through Loquidity?
Real estate syndicators in the Midwest needing debt or equity capital investments for their projects are welcome to apply to be featured on the Loquidity platform. First, create an account at https://www.loquidity.com/en/users/sign_up. Second, provide information about your company that illustrates your real estate expertise. Third, provide information about the current real estate opportunity that you’re looking to raise capital for on Loquidity.
16) From whom can fundraisers/sponsors accept funds?
Investments on Loquidity’s site are restricted to accredited investors, as they are the only type of investor allowed to invest in 506(c) offerings as legalized by the JOBS Act, unless it is explicitly an intrastate crowfunding offering, which allows for unaccredited investors. Federal-level 506(c) offerings allow for general solicitation of private securities offerings, like the investment opportunities featured on Loquidity’s platform. Loquidity facilitates confirmation of investors’ accreditation status by implementing an investor verification API that allows members to go through the accreditation process automatically before being able to pledge funds.
17) How are funds transferred once a deal is complete?
Investors that invest in Loquidity’s opportunities deposit their funds into a BancBox escrow account, which is released to the sponsor/property holding entity once the target funding amount is reached. Loquidity is not a broker-dealer, and does not custody funds. When the funds are released, the securities are issued to investors in digital or paper format and investors can track their investments and receive any distributions therefrom.
18) How much does it cost to raise funds for real estate deals through Loquidity?
Loquidity has a unique fee structure that is not based on the amount of the funds raised through the platform. Since Loquidity’s team members are not affiliated with a registered broker-dealer, it is likely that fees are significantly less than they would be otherwise. For more information, send an email on Loquidity’s Contact Us page.
GLOSSARY OF COMMON TERMS
- Accredited investor – An individual with a net worth of at least $1 million (including spouse and not including the primary residence) or who earned at least $200,000 each year ($300,000 with spouse) in the last two years with the reasonable expectation of earning greater than $200,000 ($300,000 with spouse) in the current year
- Amortization – The repayment of the principal amount of debt over a specific period of time with a fixed repayment schedule
- Assessed value – The dollar value assigned to a property to measure applicable taxes
- Average annual effective rate – The interest rate changed from the nominal interest rate to include annual compound interest payable; used to compare the annual interest between loans with different compounding terms
- Average annual effective rent – The actual cost of renting an apartment after all specials and discounts
- Breakeven point – The amount required to cover total costs and not lose money
- Capital appreciation – A rise in an asset’s value based on a rise in market price
- Capital stack – The capital invested in a project, including debt and equity; each component of capital has different levels of risk , for example, secured debt has less risk than equity which is entitled to the residual interest in the property.
- Capitalization (cap) rate – A rate of return on a real estate investment property based on the estimated income the property will generate from operations and capital appreciation in relation to the amount of the investment
- Crowdfunding – An emerging alternative financing option that involves the collection of finance from backers using and online medium—the “crowd”—to fund a company, product or project
- Debt-coverage ratio (DCR) – A ratio that determines a company’s ability to generate enough income to cover the expense of a debt (interest and amortization payments or “debt service”) (net operating income divided by debt service)
- Depreciation – The decrease in an asset’s value due to unfavorable market conditions [is this what you want to say or do you want to describe the accounting convention for tax purposes?]
- Due diligence – Steps taken to investigate the condition of the property and ensure the accuracy and veracity of the representations and warranties provided by the seller/borrower
- Equity lease – A contract between an owner and user, where the user occupies a space, pays rent as a tenant and receives a share of ownership the interest in the property
- Fixed lease – A lease with a set start and end that lasts for some fixed period of time
- General solicitation – The act of publicly marketing/advertising a private capital raise; was banned since 1933, and ban lifted on September 23, 2013
- Internal Rate of Return (IRR) – The discount rate in capital budgeting that makes the net present value of a project’s cash flow equal to zero
- JOBS Act – A law signed by President Barack Obama on April 5, 2012, to stimulate funding of small businesses in the U.S. by easing various securities regulations
- Mezzanine debt – The middle layer of capital (between secured senior debt and equity), lent strictly based on a company’s ability to repay the debt from free cash flow, senior to equtyholders
- Multifamily property – A housing type where multiple residential units are contained within one complex
- Net operating income – A property’s annual income, including money collected from operations (rents) and excluding expenses incurred from operations
- Preferred equity – A class of equity senior to common stock that has rights and preferences common stock does not have
- Real estate crowdfunding – A form of crowdfunding that connects investors to professionally managed real estate opportunities
- Regulation D – A rule detailing actions to be taken to take advantage of exemptions from registration, which allows companies to offer and sell securities without having to register with the SEC; eases small businesses’ access to capital
- REIT – A trust that owns real estate assets (mortgage loans, real property, securitizations) and issues securities to investors, often those securities are publicly traded like stock on the major exchanges
- Sponsor or Syndicator – Corporations, limited liability companies or partners who establish, sell, buy and operate real estate investments
- Unaccredited investor – An investor with a net worth of less than $1 million (including spouse) and who earned less than $200,000 annually ($300,000 with spouse) in the last two years; is not an accredited investor under the Securities & Exchange Commission’s Regulation D
- Vacancy rate – A percentage of all vacant units in a property (the opposite of the occupancy rate)
- Weighted average cost of capital (WACC) – A company’s overall required return; used to determine the economic feasibility of expansions