Real estate fund managers Michael Episcope and David Scherer had Georgia on their minds—specifically, Atlanta. The city, part of the third-largest-gaining metro area in the U.S. last year, according to Census Bureau data, was only getting hotter. So when the co-founders of real estate investment company Origin Investments spotted an opportunity last year to purchase a 125-unit apartment complex, they jumped on it. The property’s location, in Virginia-Highland, an affluent Atlanta neighborhood that’s home to organic shops, cocktail bars, and an indie film theater, was great. Yet Episcope and Scherer had a problem. They reckoned it would take about $19 million in equity to buy the building and an adjacent undeveloped lot, but they wanted to invest only $12 million. Their solution was somewhat novel: Instead of bringing in a partner, Origin brought in dozens of them.
Origin emailed hundreds of investors with an offer to invest in the complex. Twenty-four hours later, the Chicago-based company had raised an additional $6.6 million from 39 investors and had 23 more takers on the waiting list.
“It was spoken for very quickly,” Episcope says. “We came in the next day and had to send out an email and say, ‘We’re filled up because the number of inquiries is more than we could satisfy.’ ”
Episcope and Scherer founded Origin in 2007 to invest their own money in office buildings and apartment developments in secondary U.S. cities, areas other than inflated markets such as New York and San Francisco. By the time the partners closed a $151 million fund raised from 450 investors last June, they’d transformed the company into something different: a real estate private equity fund that uses crowdfunding-like tactics to raise money from family offices and high-net-worth individuals.
That business model relies on U.S. Securities and Exchange Commission regulations, updated in 2013, that govern the way investment firms can raise money online. A rule known as 506(c), introduced following the JOBS Act, lifted the ban on “general solicitation.” Investment firms became free to market offerings to accredited investors, who are typically worth more than $1 million, through advertisements or blast emails. Real estate fund managers have used the go-ahead to solicit a wide array of these investors for funding hotels and warehouses from Florida to Wisconsin.
The model sounds a little like crowdfunding, though that term has become more associated with adventurous young entrepreneurs pooling relatively small amounts of money from average Joes over the internet. The JOBS Act let startups and investment firms sell equity stakes to nonaccredited investors. That’s not what’s happening here. What these real estate fund managers have been doing might be called crowdfunding for the wealthy.
As Episcope puts it, the rule changes have made raising funds a lot easier. In the early days of Origin, he says, “it was my partner and I, knocking on doors and meeting with people and stretching our network as far as we could.” Their reach has now significantly increased. “If you have a great product and you put it in front of millions of people, they’re going to buy it.”
Companies such as Origin see a fertile market in the world of family offices, which on average allocate 16.2 percent of their portfolios to direct real estate investments, according to a 2017 report by UBS Group AG and researcher Campden Wealth Ltd. While the biggest family offices can afford to buy properties on their own, Episcope says his model has the potential to bring higher-quality deals to smaller investors.
“Origin has always been designed around providing the individual investor with the same opportunities, service, and fee structure that the multibillion-dollar investors enjoy,” he says. “We believe there is still a large gap.”
Origin has followed a two-pronged plan. It has hired experienced professionals to buy and manage undervalued real estate, targeting net returns of about 15 percent, similar to a large private equity fund focused on real estate but with lower fees than what noninstitutional investors normally pay. At the same time, Origin built a technology platform that gives investors real-time information on how their investments are faring and doubles as a tool for marketing to new investors.