In a climate of ever-changing interest rates, and after a period of savings and reduced investment such as the pandemic and the years that followed, collective real estate investment, either through real estate crowdfunding or by tokenising real estate, is booming.
In recent years, the number of companies specialising in this type of investment has multiplied, both in a regulated manner through Participatory Financing Platforms, and the traditional purchase-renovate-sell system, but with partial contributions from several investors to buy and renovate the property. Luis Miguel Larriba, partner in Garrido‘s tax department, explains the main aspects of this real estate investment opportunity.
What is real estate crowdfunding?
Real estate crowdfunding is, in short, acquiring a property among several investors to obtain a return.
There are several ways to invest: financing the purchase of an old property to ‘fix it up’ and sell it, purchasing premises to renovate and convert them into housing and market them, or buying the land together with further financing (through the same system or with a developer loan), to promote construction and sell new builds.
Additionally, within these options, different variants can be included, such as moving from the traditional process of renovation and immediate sale to an intermediate leasing period, where the asset is revalued and you receive rental income or even the property can be rented per room to achieve a higher profitability.
What formats are available and what advantages do they have?
Real estate crowdfunding is legally structured differently depending on the company managing or leading the process, as well as the project type being developed.
One of the most traditional systems is the loan system, in which the investor lends the promoter/manager a certain amount in exchange for an interest rate or return.
In this modality, a traditional loan is possible, with a fixed interest rate that remains constant throughout the loan (except in the case of arrears, where there will be default interest), but it is also common to use participation loans, whereby the loan is remunerated according to the business outcome for which the loan is intended, transferring all or part of the risk to the investor.
With traditional loans or participation loans, the ownership of the assets is vested in the management company, and investors are traditionally provided with some kind of guarantee of compliance with the loan obligations, such as a mortgage guarantee, collateral or similar. The manager who receives the money is obliged to repay it regardless of the project’s outcome and must meet their obligations with all their assets and/or those they provided as collateral for the loan.
Another commonly used system is joint venture contracts. In this legal figure, there is a manager who is responsible for all the business operations, and some participants, who deliver an amount of money (or goods) in exchange for participating in the performance, positive or otherwise, of a given business. Through this figure, investors will deliver a certain amount of money that will give them a percentage of ownership in the real estate business, once it has been completed and after deducting the management commission or fees that the manager will receive.
In this model of joint venture accounts, as in the case of loans, the ownership of the assets is vested in the manager, with the participating account holders having a stake in the business, but not participating in any other asset or the manager’s business beyond the project in question in which they have invested and assuming that, if the project has an unfavourable outcome (and it is not the manager’s fault), the manager will not have to respond with any other assets than the project itself.
Another form of collective real estate investment is for investors to participate in the capital of the company developing or managing the project, i.e. to become partners in developing the real estate project.
In this system, commonly referred to as ‘capital gain’ or ‘equity’ projects, each investor will own a percentage of the share capital of the entity owning the real estate asset in proportion to its share of the total investment required to undertake the project.
Although this figure may appear to be the most secure for the investor, as it holds the ownership of the company that owns the property, it is usually one of the most complex to manage. The reason for this complexity is that a company with dozens or hundreds of shareholders can be unmanageable in terms of decision-making (which is usually delegated to the developer through a shareholders’ agreement and/or investment contract) or carrying out formal procedures such as the purchase and sale agreements for the asset or the risk analyses carried out by banks to grant a developer’s loan.
In addition, it should be considered that, in this case, the investor, as a shareholder of the entity, will be the last to receive payment when the project is settled, which, although it may provide higher profits when the project is successful because there is more money to be distributed, investors may not fully recover their investment if the costs exceed the income obtained from the project, resulting in a negative return or loss of the investment.
Finally, and as a growing trend given the evolution of this field’s legalisation, there are more and more companies involved in real estate asset tokenisation.
By issuing tokens, the ownership of a real estate asset is subdivided into various financial shares, or tokens, which indirectly represent a percentage interest in the property.
It should be noted that these tokens can be tokens in the case of financial securities issued under the specific regulation of such assets, or they can simply be a way of expressing the traditional ‘tickets’ into which an asset is subdivided. While the two may sound the same, they are not. In the case of official tokens, they are subject to the Securities Markets and Investment Services Act and are supervised by the Spanish Securities Market Commission (CNMV), while the ticket system is only about the co-ownership of a real estate asset, and can lead to a community of property ownership of the asset.
