Interview with ArborCrowd cofounder Adam Kaufman

Posted: 22 July 2020 3:08 pm
News

A COO sheds light on how an investing newcomer is handling COVID-19.

Investments writer Shannon Terrell talked with Adam Kaufman, cofounder and COO of the real estate investing platform ArborCrowd, about new features in the works and how the platform is handling market volatility amid the coronavirus.

This interview is edited for length and clarity.

Thank you so much for taking the time to chat today. To introduce myself, my name is Shannon Terrell. I’m a staff writer with Finder and excited to learn more about ArborCrowd.

Cool. Thanks for having me. I’m excited to talk a little bit about what we do.

To start out, we’d love to hear your elevator pitch: What makes ArborCrowd different from the other real estate investing platforms?

First and foremost, ArborCrowd was conceived as part of the Arbor family of companies. We are not an affiliate, technically. We share the same leadership, and we’re among the brand of companies that shares leadership from the publicly traded REITs, to our wave of private equity shops and houses, to the crowdfunding platform and more.

Essentially what we do is, we saw a lot of opportunity for a new class of investors that came about with the passage of the JOBS Act to invest in commercial real estate opportunities that were previously held for people in the know and institutional investors. So looking at the deals that we see come across our desk on a regular basis, we decided to open that up to this new class of investors to participate in the transactions, all via the Internet and the platform.

And are there any new ArborCrowd features currently in the works that might be released in the near future?

Sure. Something that we do that’s a little bit different from a lot of our platforms and I’ll take a step back to say that we focus on multifamily assets across the United States, workforce housing in particular, and as we can all know, that’s an asset class that traditionally performed very well in downturns and has performed better even with this COVID crisis in place and comparatively to other asset classes. With that said, we are able to provide the capital for transactions prior to syndicating them out to the crowd. So an affiliate literally invests into the transactions.

If one of those transactions doesn’t sell, we still have that money in the deal. But otherwise, we take down the deal — we put our money where our mouth is, so that we can be there at closing and we can actually present the greatest amount of transparency, communication and information to our investors, because the transaction has closed and is working. And what that has done on a product level is given us the ability to warehouse deals.

In a time like this, deals that we were going to put on the platform originally, we basically pushed back, pushed off and took the time to see where and when the dust will settle and how. And with that, we will come back online with those products, with those deals, when we feel it is the right time to use it.

As I understand it right now, ArborCrowd investments are limited to investors that have a minimum of $25,000 on hand. Do you see this minimum changing in the future?

On a deal-by-deal basis, which is another way in which we operate, I do foresee that the minimum could change. A lot of the regulation that’s in place right now, unfortunately, is outdated. And when I say outdated, it means it wasn’t updated when the JOBS Act was created to allow for more opportunity.

So there are limitations on how many investments you can have in certain types of transactions that are completely arbitrary. Something that I’ve been working closely with is to approach Congress and work with them to expand the definitions and decrease those limitations. With those in place, we have to adjust our minimums to reflect those arbitrary numbers and allow for us to raise as much capital as possible.

Building on that question, right now ArborCrowd is only open to accredited investors. Do you see the platform opening up at any time to nonaccredited investors?

I don’t. We feel that the accredited investor class is one that is pretty active and knowledgeable in investments in general.

I think there’s a tremendous amount of risk when you start bringing in investors, and right now the only way you can bring in nonaccredited investors is just through the Regulation A+ [of the JOBS Act]. And I see a lot of potential risk there, in that you’re selling to people as low as $1,000 or $5,000 minimum — who previously have very little experience in investing in commercial real estate at all — and you’re asking them to invest in a fund structure that hasn’t identified the deal.

It’s basically a tear sheet that has some sort of general strategy laid out that potentially somebody got through by clicking on a Google advertisement, or display ad, or something of the like. You’re asking them to invest, even if they have no prior experience.

These are complicated opportunities, so the more transparency and the more information you can provide, the better.

One thing that I have noticed about ArborCrowd that differentiates it from other platforms is that it offers only one deal at a time. Can you elaborate on the thought process behind this decision?

That is correct. We have a deal-by-deal model that we chose to go out with. And we feel that in operating one deal at a time, we can provide the greatest amount of transparency and information, like I was saying earlier, into those deals.

By closing on those deals and putting together the offering overviews and prospectuses, which we think are some of the most communicative and transparent in the market, we feel that people can get hands-on experience and an understanding of the investment that they’re going into. And in doing so, we also focus on what we do best, and that is underwriting these transactions, leveraging our connections through the brand and our experience through the brand to focus on the product first.

We’re not an aggregator platform. We’re not a technology company. We are a real estate company that focuses on the product in the transaction and funding the capital before we syndicate out.

Speaking of leveraging the brand, can you tell us a little bit more about the ArborCrowd proprietary real estate network that’s offered through the Arbor family?

Sure. Arbor Realty Trust is a publicly traded real estate investment trust [REIT]. It has been around for a while now, and they’ve been successful. They’ve survived and thrived in the past market cycle and continue to do so today, even due to the unfortunate circumstances that exist.

So we identified with our platform that there were a lot of borrowers that came to our REIT looking for debt, and they often needed to close the equity gap in their transactions in the $2 million to $6 million range. They could either go to family and friends or a high-net-worth investor or a family office, and oftentimes they struggled to do so.

We created the platform to solve for that gap in the capital stack. And in doing so, we’re dealing with sophisticated borrowers that Arbor Realty Trust has had relationships with for many, many years. And we’re able to cherry-pick those deals that come through to us, underwrite them to our standards, see if they pass our tests and go through our models to meet the threshold for an affiliate of ours to literally form the capital.

The coronavirus outbreak has definitely impacted the real estate market. I’ve noticed that some platforms have actually begun limiting investor withdrawal requests. How is ArborCrowd faring during this time — and what measures are you taking to protect your investors’ interests right now?

One of the things about how we are so selective with our deals, and built into our model of one deal at a time, is that we perform rigorous underwriting. Based on experience, we only present what we feel are the best opportunities on our platform. And we have time and patience — we are not under the same duress of showing growth that other companies have to show to their venture capital firms behind them or their partners behind them. So that affords us the ability to be incredibly selective.

We were coming before COVID in a market where there was the longest subcycle in history, and competition was very intense. And when you have people who are looking to compete on deals tooth and nail, and pay above sticker a tremendous amount, ultimately you decrease value. So with our model, we were slow and steady and patient, and stuck to our core of finding what deals we think fundamentally will perform, and will perform in an impending downturn. Obviously, no one could have predicted one like this could come.

With that said, the fundamentals of our deals, we feel, are very strong and are performing today. One of the things that we did in the COVID pandemic was negotiate an exit from one of our deals just a year into it. As asset managers in our deals, we’re not just an aggregator platform. We are investing, we are asset managing on behalf of the crowd.

Based on our experience, we were able to go to the table with our general partners and say, “Hey, this deal, this climate, this business plan, pivot — it no longer makes sense, and we’d like to see if there’s an opportunity for us to negotiate an exit.” And we did so in just 12 months of entering the transaction. It’s something we pride ourselves on being able to do. And that points to a lot of our experience.

So our deals are performing. Obviously, nobody can say what will happen and how long this can last. But today, we feel confident with the fundamentals of our deals, how we chose them and how they’re doing today. We pivot when we need to. We act when we need to.

And your question, as it relates to what other people are doing in terms of redemption, points to what I was saying earlier. People market a lot of different things and they bring people in especially a nonaccredited or a true retail investor who have no prior experience investing in commercial real estate. They followed an advertisement to the platform and think that they have the ability to redeem their capital when they need it. And liquidity is important to everybody right now.

When you no longer offer those redemptions, or basically make it so that it’s impossible, or there’s such a steep price point, that’s false advertising. That’s dishonest. And a lot of platforms are doing that. Investors are not able to take out their capital, when they were offered the ability to do so. And it just shows you when the times get tough, it’s just not really there. And that’s unfortunate.

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