A New York real estate firm discovered that crowdfunding doesn’t always work.
Nightingale Properties’ efforts to raise funds for its Buckhead Atlanta financial center acquisition have hit a major hurdle as investors demand their money back, Atlanta Business Chronicle reports.
Last summer, Nightingale agreed to buy a 1 million-square-foot office building at 5531 Roswell Road for $182 million. To fund the acquisition, Nightingale raised $53.6 million from 772 independent investors through online platform CrowdStreet, the publication reported.
However, nearly a year later, the deal is still pending, prompting numerous investors to demand their refunds. In an email to investors, CrowdStreet said it could not guarantee the availability of all funds. The platform advised Nightingale to terminate the deal and refund investors. While Nightingale agreed to comply, numerous refund requests remained pending, and the company did not process them in a timely or consistent manner.
CrowdStreet raised concerns about Nightingale’s lack of cooperation in providing documentation proving the availability of investors’ funds.
The platform also said it could not verify Nightingale’s funding availability. In response, CrowdStreet proposed a refund plan that would require Nightingale to replace its current manager with an independent manager who would act as trustee on behalf of investors. Nightingale acceded to the request, and investors voted to approve Anna Phillips as the new manager.
The delay was due to changes in debt markets, including multiple rate hikes by the Federal Reserve. Rising interest rates have made it more expensive to finance commercial real estate projects, and lenders have become more cautious, especially in the office sector, which has been hit by a surge in vacancies due to remote work.
Nightingale had been seeking a price cut from the seller, Sumitomo Corporation, due to increased financing costs. The email from CrowdStreet did not specify whether Sumitomo accepted the changes, and Sumitomo did not respond to a request for comment, the outlet reported.
The media said that investors’ concerns about the Nightingale deal were not unfounded. The company has faced problems before, including undisclosed profit losses on previous deals and defaults on loans secured by retail properties in Tennessee. Nightingale has previously used crowdfunding to raise funds, and earlier this year successfully closed a deal for a Chicago office building.
As of June, the Atlanta Financial Center’s vacancy rate was 21 percent, with the largest tenants planning to move out in the next few years. This situation further complicated the acquisition, posing challenges for Nightingale and her investors.
While online crowdfunding for commercial real estate is not new, it is still considered an unconventional method of financing such transactions and is met with a lot of skepticism.
“Real Estate Crowdfunding Is a Disaster About to Happen,” Henry RobbReal estate firm Lorber & Associates told the media.
Founded in 2013, CrowdStreet is one of the leading commercial real estate crowdfunding platforms, having raised more than $4 billion for 752 projects across the country.
Earlier this month, crowdfunded real estate startup FundRebel announced plans to spend $67 million on a Hollywood multifamily project as its first deal.
FundRebel Chief Executive Mark Drachman said in an emailed statement that the New York-based company has entered into a contract to buy Hollywood Nine, a 12-story apartment building with 204 units and 7,000 square feet of ground floor retail space. The project at 1809 Jackson Street is currently under construction and is expected to be completed later this year.
— Ted Glazer