Do You Know Who You’re Investing With?
Recently, a popular real estate crowdfunding company, CrowdStreet, has been ensnared in a fundraise for an investment that went bad. Really bad. Nightingale, a company with a large real estate portfolio primarily on the East Coast, raised $63 million via CrowdStreet for two deals and allegedly diverted $45 million to its CEO and other entities. This has resulted in bankruptcy proceedings, lawsuits, and the likely loss of most, if not all, of CrowdStreet investors’ capital. As part of the aftermath, even the CEO of CrowdStreet, Tore Steen, has been ousted for his company’s role in Nightingale’s alleged fraud.
While I’m personally shocked by the brazenness of Nightingale and find it unconscionable, it is not surprising that fraud was supposedly perpetrated on a third-party crowdfunding website. More interesting to me has been the investor reaction. Certainly, investors are angry at Nightingale, but not all investors have the same ire with CrowdStreet. But should they? Did CrowdStreet do enough to protect its investor base, who rely on CrowdStreet’s ability to vet and present investment opportunities?
Investing with Calvera Partners is not the same as investing in a deal on CrowdStreet. There is one big question that investors need to ask in order to understand the differences: Who are you investing with?
The line is blurry in a crowdfunding transaction regarding the question of who you are investing with. Are you investing with the crowdfunding site sponsor, the actual sponsor of the deal, or both? I’m sure many crowdfunding investors believe they’re investing in a combination of both even though a crowdfunding site will position itself as no different than Charles Schwab or E-Trade, but for real estate. For example, just because Tesla stock is purchased on the Schwab website doesn’t mean the Schwab team advocates for its purchase. Additionally, Schwab doesn’t go out of its way to host webinars on the value of Tesla stock, provide access to Elon Musk, or suggest they did some level of due diligence on Tesla’s viability as a company. No matter how much crowdfunding sites want you to believe they are providing a true arm’s length transaction, their implicit advocacy of a particular investment is loud and clear.
The deals on CrowdStreet that were subject to the alleged fraud appeared to be real potential investments. One was a large, distressed office building in Atlanta and the other was a project in Miami. Investors could have fully understood the properties they were attempting to invest in and could have made an educated investment decision. The issue again is the relationship between CrowdStreet and Nightingale.
Having previously worked for a large real estate private equity firm, my partners at Calvera and I provided equity capital for sizable projects alongside smaller operators. If we were to close on the purchase of a property or piece of land, we would have wired the funds to escrow to keep our money separate. There was no reason to hand it over to the operator and let them close on our behalf. Given the types of deals Nightingale was pitching, there was always going to be funds earmarked for capital expenditures, leasing commissions, tenant improvements, etc. that would’ve been up to Nightingale’s discretion to spend. However, the investor losses could have been limited to those amounts, which certainly would have been much smaller. Ultimately, the CrowdStreet investors did not invest in the properties they thought they were, nor did they know the true character of who they invested with.
For us, it’s pretty simple. You are investing in our current vehicle, the Calvera Income and Growth Fund. We are going to give you details about the Fund, provide you with access to myself and my partners to ask questions, provide you with access to our long term investors to give you additional character references, and we will give you our track record and professional history. There is nothing implicit about this – it’s very direct. This is on purpose because we want to be completely transparent with our investors. We want to make sure that you know you’re investing with a company that puts investors first and operates with investors’ best interests in mind. Our 200+ high net worth investors can advocate for our character in ways that an impersonal website cannot.
The Calvera Income and Growth Fund will provide you on a quarterly basis with the Net Asset Value (NAV) of your investment in the Fund and we annually audit the financials. Our auditors, CohnReznick, will tell you how the dollars moved and what they were spent on. As much as you may like and trust us, we have another respected company ensuring that our financials are transparent. We want you to practice what we preach…trust, but verify. You will be able to tour any property owned in the Fund and you will receive quarterly distributions of property cash flow. This Fund was created with investors in mind to minimize the tax liability, reduce state reporting, and maximize cash flow. With no legacy portfolio in the Calvera Income and Growth Fund, there is no worry about shoring up properties negatively impacted by the historically fast rise in interest rates. We welcome you to do your due diligence on us and get to know who you’re investing with.
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