10 Federal: A Crowdfunding Case Study
When evaluating sources of capital for your self-storage investment, crowdfunding may be an option you are considering. (And if you aren’t, maybe you should!)
In the second installment of Sensei Katherine’s series, learn about how one of our industry’s pioneers uses this tool as part of his self-storage business plan.
A frequent speaker and forward-thinking industry resource, Brad Minsley generously shares his time and knowledge to help self-storage operators evolve their businesses. Brad and his brother Cliff are co-founders of 10 Federal, a commercial real estate company with nearly $300 million in project volume since its inception. 10 Federal focuses on multifamily and self-storage, and currently has over 8,000 units under management.
How did you raise money back in the days before crowdfunding?
We did a ton of multifamily deals through the broker-dealer network. It has been around for decades and includes companies like Edward Jones, A.G. Edwards and Lincoln Financial. If you have money to invest, you walk into your local Edward Jones office and you get a broker and they might say, "Hey, here is a great multifamily deal in Tampa, Florida you should invest in."
What were the disadvantages of raising capital this way?
The thing about the broker-dealer world is that you must go through a broker. That was a requirement under the securities and exchange laws and these brokers get paid commissions. And that is the only way I could get my investment product in front of an investor like a doctor. Literally hundreds of billions of new dollars are invested into the broker-dealer network every year.
It is expensive though, when you consider what you are paying for marketing and brokerage costs. Out of every dollar raised for equity, usually only 85 to 90 cents of that dollar actually make it into the investment.
How did you break into that world?
When I started, I could not get on the broker dealer network because I had not done anything. So, we partnered with a larger group that had an established track record and gave them a small piece of our deal to stand on their shoulders. And that is how we got in the game.
For all the nosy readers, how did you convince that larger group to partner with you?
I did not know them at all, it was just a group that I honestly just admired! And we simply picked up the phone and said, "I have got this deal. I think it is going to be a good deal. I would like to make you a partner in it. I need you. I need you or somebody like you as a partner because I do not have the track record. In return for nothing more than your expertise and partnership – and having your name and your brand associated with it, I am going to give you..." I forget what we gave them,"20% ownership" or something like that. And they agreed to it.
Where did 10 Federal go from there?
Unfortunately, I cannot just put up a billboard on the interstate and say, "Buy the Brad Self-Storage Fund." But as a result of the JOBS Act I can now advertise in ways that are directed to accredited investors.
This is where crowdfunding comes in as the evolution of the broker-dealer network.
Many marketplaces have sprung up and the one we use is called CrowdStreet. And the last time I checked; their Rolodex had tens of thousands of accredited investors signed up. After they review our offering and make sure we are a legitimate sponsor and do due diligence to make sure the deal looks good and would appeal to their investors, we pay them a marketing fee to put it on their platform.
This is our business model now. Where we used to have to spend 10 to 15% of every dollar raised on broker fees, generally I'm paying 2% or less to a group like CrowdStreet for marketing my security and then an annual fee for customer relations management tools.
What if my self-storage project doesn’t meet the qualifications of a crowdfunding platform?
You can do crowdfunding through people you know, as long as you knew them before you went to ask them for money. When you hear people say, "I got Country Club money," literally that means money from people they know. This is a smaller and simpler version of crowdfunding.
Read more about self-storage investing and self-storage business plans in the next installment of this series.