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“Why choose alternative financing?
Because a lot of great deals may never
get done without it.”
Alternative financing in the form of crowd- funding may be a trending topic, but it’s hardly new. Mozart used the idea in the 1780s to finance the composition of one
of his early piano concertos, offering prospective
backers copies of his manuscript in exchange for their
The first online crowdfunding event happened in
1997, when fans of British rock band Marillion raised
$60,000 for the group’s U.S. tour. And music fans continued to drive the growth of online crowdfunding
with the advent of ArtistShare, Indiegogo, Kickstarter
Why choose alternative financing? Because a lot of
great deals may never get done without it. Many banks
and other traditional lenders won’t finance transactions valued under $50 million because there’s simply
not enough profit in it for them. And, because of the
late stage of the current real estate cycle, many other
lenders are feeling skittish or are simply tapped out.
That leaves a big gap in the financing market — and
a big opportunity for nontraditional sources of capital.
More than crowdfunding
All too often, marketplace-based alternative financing
sources are lumped together with donation-based ser-
vices under the catch-all of “crowdfunding.” This phrase
is overly broad, often misunderstood and significantly
understates the impact these innovations are having
on the procurement of debt and equity capital for com-
mercial real estate investments.
Debt-based crowdfunding was a logical evolution
of Mozart’s model. With the arrival of this innovation,
crowd-aggregated funds became more than just a
donation being exchanged for perks. They could
actually be an investment. Also known as crowdlending,
peer-to-peer lending and marketplace lending, debt-based crowdfunding began in earnest in the early 2000s.
In such a congested field, it can be difficult to tell the
players apart. Some platforms accept funds only from
accredited investors, but others take money from just
about anyone. Some companies carefully underwrite
each investment opportunity and others simply act as
a matchmaker. To help commercial mortgage brokers
and borrowers cut through the noise, here’s a brief taxonomy of alternative financing as it relates to online
Crowdfunding. Broadly defined, crowdfunding refers
to the pooling of small amounts of investor- and do-nor-based capital to support a project. It includes
everything from lending and equity investing to charitable donations via internet platforms. Need to raise
money for Junior’s cross-country bike-a-thon? You’ve
come to the right place.
Peer-to-peer (P2P) lending. P2P lending is similar to
crowdfunding, except the lender is repaid. P2P refers to
the pooling of capital from individual investors (retail
or accredited) who essentially provide small personal
loans via internet platforms. This type of financing is
perfect if you are trying to procure business capital to
start an online jewelry business or recapitalize a child
Marketplace lending. It is similar to P2P, but loan
sizes are larger and more institutional in character.
The term was coined to describe internet platforms
through which accredited or institutional investors
provide business loans, including mortgage debt, to
sponsors. If P2P is your aunt’s investment club, then
marketplace lending is your cousin’s commercial real
estate business that is renovating a multifamily apartment complex in Akron, Ohio.
Curators and matchmakers. Within marketplace
lending, there is an important distinction between
platforms that list all investment opportunities and
those that curate. Some curators even assume a more
direct approach by carefully underwriting transactions,
structuring the capital stack and mentoring operators
through the investment’s life cycle. If matchmakers are
like flea markets, then curators are like art galleries,
with each company bearing unique sensibilities and
reputations when evaluating a project.