ArborCrowd Comprehensive Review and Ranking
#5 (out of 100+) Last year ranking: N/A
#1 for through due diligence documents, #1 for most sponsor (and affiliated-company) skin in the game.
What is ArborCrowd?
IMPORTANT COVID-19 UPDATE: this info was posted before anyone knew we would be facing a global pandemic in the spring of 2020. So it may be missing crucial information necessary to making an effective investment today. Some of the information in it may be dated, no longer accurate and/or irrelevant. For information on analyzing investments in this new era, see: "How will Covid-19 / Coronavirus Affect my Alternative Investment Portfolio?"
ArborCrowd is a newcomer to the rankings that specializes in multifamily (apartment) commercial real estate (CRE) deals. It offers both single property and multiple property funds, and to date has done all equity deals.
They have burst on the scene with a dazzling number of industry-leading features including: ultrahigh skin in the game (and 51% when looking at both the sponsor and the ArborCrowd affiliate), industry-leading due diligence documents and the only equity site that does pre-funding. The Arbor family of companies include Arbor Realty Trust, which is a New York Stock Exchange traded commercial mortgage REIT. (More on these in the "pros and cons" section below).
How does ArborCrowd work?
ArborCrowd sources deals from real-estate developers and dealmakers that typically have an established track record with their affiliated Arbor family of companies.
As a result, their fees are structured in a way that makes them look (at first glance) more expensive than the leading low-cost platforms (Crowdstreet and RealCrowd). But when you dig into it, the net cost to the investor is about the same. They charge an asset management fee (0.25%-0.5%), an acquisition fee (1-1.25%), a disposition fee (1%), and refinance fee (1%). The other sites don't charge this at the platform level, but then the investor pays at the sponsor level. So both end up being pretty equivalent.
When ArborCrowd finds a deal, it pre-funds it with its own money before offering it on the platform. If for some reason they can't get enough investors to fill the deal, they will end up owning some or all of the deal themselves. So this is an additional incentive for them to underwrite well, which is a good protection for investors. (Although pre-funding isn't a panacea. For example, if a platform fills all its deals really quickly, the incentive disappears). Prefunding is also preferred by many sponsors, because it gives them more reliability and certainty. It's common in the world of debt platforms, but Arborcrowd is currently the only equity site to do this.
Another plus is that ArborCrowd allows the investor to interact directly with sponsor, rather than putting itself in between all communication (like sites like Realty Shares). This lets the investor conduct due diligence directly, which is much faster (and also avoids potential misinterpretation by the middleman). And if something goes wrong, the investor can go direct to resolve it (and avoid finger-pointing delays between the middleman and the sponsor).
What are ArborCrowd Pros and Cons?
Advantages: Sponsor (and their affiliates) put a gigantic 51% skin in the game, top-notch due diligence documents, full bankruptcy protection.
Disadvantages: Not much volume. Minimums are high at $25,000 (versus $5000 industry average).
Accolades: #1 for thorough due diligence documents, #1 for most sponsor (and affiliated-company) skin in the game.
As a conservative investor, I like to see the sponsor put cash in the deal alongside me ("skin in the game"). Without it, a sponsors' promote compensation financially incentivizes them to push the risk envelope. But significant skin in the game does the opposite: it financially incentivizes them to avoid risk and act more conservatively. (An aggressive investor may prefer little or no skin in the game, for the opposite reason).
ArborCrowd takes skin-in-the-game to the next level with every sponsor required to bring significant skin in the game to the table. For example, in their current deal, the sponsor is putting in a hefty 15%. And together with ArborCrowd affiliates (who retain sponsor-like abilities in deals, like the option to sell the property when they want), it goes up to 51%. So when this high a level of investment is controlling the fund, it's nice to see for a conservative investor.
The due diligence documents on ArborCrowd are some of the best in the industry. If you look across the platforms there is a wide spectrum of quality. But even some of the top 5 sites are weak in this area (Real Crowd produced a deal early in the year that didn't even have a pro forma ... which is the sponsor estimate of how the deal will do and a basic document in any deal). And on virtually every platform, a conservative investor has to spend days or weeks just gathering the basic information necessary to fully evaluate a deal.
ArborCrowd, on the other hand, provides all of that upfront. For example, in a recent value-added multifamily deal, not only did they provide the high level pro forma, but also included plenty of notes on the assumptions it was based on (which is a crucial point in determining if a deal is conservative or not). This is rarely seen on most other sites, and normally takes a combination of pulling teeth and a lot of tedious research to pull together.
It's also important to understand what the value-added plan is, and how realistic it may or may not be. But most sites might just give a paragraph or two about it. Arborcrowd provided not only several paragraphs of description, but also the price per unit, a list of all the renovations that would be performed, before and after pictures of the finishes, and a detailed unit mix, explaining how much would be put into each unit type, what its current rent is, what competitors are getting, and what they are projecting. This is the kind of stuff that's crucial, yet notably missing virtually everywhere else.
And Arborcrowd doesn't stop there. Some of the most important things to verify in the deal are whether the price paid was too high or not, and whether the projected rent for the improvement is reasonable or not. This is impossible to figure out without rent comparables and sales comparables, yet very few platforms provide this on any deals at all, let alone all of them.
One of the biggest risks in any real estate deal is the pipeline of new supply. For example, a brand-new self storage facility built nearby can throw off even the most conservative pro forma. Standard in every Arborcrowd deal is a supply analysis of past construction completions and absorptions, and a forecast of the future. Much of this information comes from REIS, which can be expensive for individual investors to access. Arborcrowd provides it at no charge.
But my favorite feature is the sponsor track record. To a conservative investor like me, this is the number one thing to look at, and the first thing on which I will filter a deal. The vast majority of sites do not provide the complete record, and many provide only impressive sounding but actually useless information like, "together the people in this firm have over 30 years of real estate experience". Arborcrowd provides the complete track record right in the investment page, so there's no guessing. Some sites will sporadically show the deals that a sponsor has finished and sold, but not the ones that are being currently held. Since badly performing deals often have to be held longer than expected, this potentially hides crucial information in evaluating a sponsor. On most platforms you have to talk with the sponsor to try to piece the information together. On Arborcrowd, it's all there for you right in the deal page. In my opinion, they provide a strong example of what every other site should aspire to do in this area.
On the downside, the minimums are much higher than the industry average at $25,000 (versus $5000 industry average). But many investors who can afford the cost of entry will probably consider this a minor annoyance, in comparison to the other considerable strengths of the platform.
The biggest issue with the platform is that it doesn't have much volume. Had it not been for this issue, they would have been debuted in the top 3. But they are a young site, and I would be surprised if this doesn't change over time. For now, someone looking to diversify a large sum of money into many deals over a short period of time, can't do it at ArborCrowd alone.
For more raw data on the site (including investor and sponsor fees, legal structure etc.), or to easily compare it with the data of competitors, see the feature by feature comparison matrix.
Is Investing In ArborCrowd Legal?
ArborCrowd markets to investors under 506C, meaning that it's only available to accredited investors. Since it is not using 506B, new investors are able to view investments immediately and there's no 30-day waiting period. Since it is 506c, it also requires investors to prove their accredited status (and update it periodically).
The ArborCrowd bankruptcy protection is also fully featured. All deals are bankruptcy remote, so that if the platform goes bankrupt, the investors money isn't tied up in limbo for months or years in bankruptcy. And they specify a backup administrator in advance who will take over, so that a deal would not get abandoned and fall apart.
What does an ArborCrowd deal look like?
Here is my step-by-step due-diligence on a random ArborCrowd investment. So it may or may not be a typical investment. Also I'm a very conservative investor, so something that's way too risky for me might be the perfect fit for someone else who is more aggressive. Finally, I'm not a financial advisor, attorney or accountant. So this is just my personal opinion and always consult your own financial professionals before making any financial decisions.
The Cove West Hartford deal is a value-added multifamily strategy real estate investment in West Hartford Connecticut. It was acquired by Arborcrowd affiliates (pre-funding), and will be implemented by a company called CS Acquisition Group. The targeted holding time span is 3 to 5 years, the targeted equity multiple is 1.6x - 2X and the targeted IRAs 14%-17%.
The first step is to make sure that the asset class and strategy even make sense for my portfolio. (If you don't know how to do this, please see The Conservative Investor's Guide to Due Diligence).Let's assume that it does make sense for me, and dive in.
Sponsor experience: As a conservative investor who believes we are late in the cycle, I don't want a sponsor that's learning with my money. So I want as much experience as possible. In a mainstream strategy like this, I personally want to see at least full real estate cycle experience in that value-added multifamily, and with no investor losses. But this can be hard to find, so I pass on the vast majority of deals. CS Acquisition Group started in 2004, and purchased three multifamily value-added deals in that crucial pre-recession period (2005-2007). None of them lost investor money. This to me is a huge plus.
Skin in the game: Since I'm conservative, I want skin in the game to mitigate the fact that the promote compensation financially incentivizes a sponsor to push the risk envelope. I find 5 to 10% usually makes a comfortable amount (although I will go with less if the sponsor does not have much personal money, but is putting in enough that would be painful for them if they lost it). In this case, CS Acquisition Group is putting in 15%, which I consider to be excellent. In addition, the Arborcrowd Affiliate is putting in an additional 35% for total of the 51% stake between the two of them. In my opinion, this is great to see.
Debt: I personally like to see conservative 65% LTV debt, to minimize the chance of a default (which causes the investment to blow up and lose all investor money). This deal is at 74%, which is too high for me and is a red flag. However, an investor who is more aggressive may not have any issues with this.
Debt term: In the great recession, some deals blew up because financing dried up. So at this stage of the cycle, I only want deals with long-term (7 to 10 year) debt. The loan on this deal is 3-5 years with extensions. So this is medium-term debt, and for me would be a "no go". But an investor who does not believe the downturn is imminent, or who is not as concerned with refinance risk may not have the same issues with it.
And I also want my debt to be at a fixed rate, since rising interest rates can kill the profitability of the deal with the floating rate. This deal has a floating-rate loan, so that for me is a nonstarter. But again, another investor with a different outlook could feel differently.
Fees/promote: the asset management fee 0.5% which is low for multifamily (average is 1%) so this is great to see. The acquisition fee (1.25%), disposition fee (1%) and refinance fee (1%) are also on the low end of average which is a positive for the deal.
However, where it is not average is on some of the waterfall for the promote. After an 8% preferred return and return of capital, investors get 80% and the sponsor gets 20% up to 14% IRR. This part is average for most multifamily deals (investor gets anywhere from 75 to 85% typically), so nothing out of line here. But then there is an additional, more expensive second tier up to 20% IRR where the split becomes 65% investor/35% sponsor.
This is so far away from being competitive, that I would really have to love the deal to overlook it. And then on top of that is an additional, third tier where the split is 55% investor/45% sponsor. It's hard for me to imagine loving any sponsor enough that I would agree to this.
The other problem with such a slanted promote structure, is that it heavily incentivizes the sponsor to push the risk envelope to make those very high and aggressive numbers. Again, an aggressive investor looking for an aggressive investment might find this a positive, and would like this. For me, all of this is too much and is a red flag.
If the investment passed all my initial checks, I would have dived in further to check do a "proforma popping," "Death by Google" background check, PPM review, etc. To learn how I do those things, check out The Conservative Investors Guide to Due Diligence.
Where can I discuss other ArborCrowd deals?
You can do this with thousands of other investors in the private investor club. While the club is free, membership is restricted to investors who have no business connections to sponsors or platforms. Also, all members must agree to keep all club info confidential by signing a nondisclosure agreement. Click here to join or get more info.
Who are ArborCrowd Competitors?
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Code of Ethics: To maintain objectivity, I do not accept any money from any sponsor or platform for anything (including affiliate ads, advertising etc.). See code of ethics for more.
Personal opinion only: All info is my personal opinion only as an investor. I am not a registered financial advisor, attorney or accountant. Always do your own due diligence and consult with your own licensed professionals before making any investment decision. Information is believed to be correct but may have errors, so use at your own risk. If you find an error, please let me know.
Rankings/rating are general: In my opinion, every investor comes from a different risk tolerance and financial situation, so there's no such thing as a single investment or platform that's great for everyone. There are many deals that aggressive investors love, which I won't touch, and vice versa. And every investor has their own way of doing due diligence. I believe there's no one right way to do it.
So, the site rankings/ratings are based on criteria which I feel are important to the broadest range of investors (transparency, volume, bankruptcy protection, etc). And even though I have my own personal, conservative, due diligence method (and talk about how the site's deals measure up in the "deep dive section"), I don't use my personal criteria as a factor in the rankings. So for example, a high ranking/rating doesn't mean that I would personally invest in a site (and vice versa). Click here to see what's in my own portfolio.
About Ian Ippolito
Ian Ippolito is an investor and serial entrepreneur. He has been interviewed by the Wall Street Journal, Business Week, Forbes, TIME, Fast Company, TechCrunch, CBS News, FOX News, USA Today, Bloomberg News, Realtor.com, CoStar News, Curbed and more.
Ian was impressed by the potential of real estate crowdfunding, but frustrated by the lack of quality site reviews and investment analysis. He created The Real Estate Crowdfunding Review to fill that gap.
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This site has been ranked and reviewed as part of our in-depth, 100+ site industry review. All data is believed to be correct, but may have mistakes. Please contact us if you notice one. All non-data (including rankings, investor comment summaries, etc.) are my opinion only. I'm just an investor and not an attorney, accountant, or certified financial advisor. To maintain neutrality: I do not own a portion of any of the companies reviewed.