Online Real Estate Marketplaces: Direct vs. SPV platforms

Online Real Estate Marketplaces: Direct vs. SPV platformsReal estate crowdfunding has experienced explosive growth in the past three years with dozens of platforms emerging to offer investment opportunities to investors. In a sector that has become increasingly crowded, it is all the more important for both investors and sponsors to understand the key differences that exist between the leading business models that can have a big impact on “the three Rs” – returns, risk and relationships.

Firms operating in the online real estate marketplace typically use either a direct platform or a newly formed special purpose vehicle (SPV) entity such as a LLC. CrowdStreet was one of the first real estate crowdfunding firms to adopt the direct investing model, which works much as its name suggests. The crowdfunding firm serves as a technology intermediary that facilitates online capital raising between real estate sponsors and investors. Accredited investors invest directly with the individual real estate firm or sponsor and not with the crowdfunding firm.

Investors who choose a crowdfunding firm that uses an indirect investing model (ex: RealtyShares or RealtyMogul) participate via a newly formed special purpose vehicle entity – typically an LLC that is created and managed by the crowdfunding platform. For example, if a crowdfunding platform commits to providing $100,000 in debt or equity to a sponsor, they write a check to the sponsor and then create a LLC specifically for that investment property. Essentially, the crowdfunding firm is making a gamble that they can fill that commitment, and then they go to work raising capital by bringing investors into an entity created specifically for that deal.


The first important difference between the direct and SPV models is the fee structure, which can affect costs for the sponsor and returns for individual investors. Generally, crowdfunding firms that utilize the direct model charge no fees to investors. CrowdStreet, for example, charges fees to the sponsor for hosting an offering, including marketing and management services. CrowdStreet does not charge fees to investors to join its network or invest via the CrowdStreet Marketplace.

Companies that operate a SPV model assess fees differently. Some firms charge fees to both sponsors and investors and may charge fees in up to three different areas – placement fees or front-end fees, ongoing asset-management fees and a percentage participation that the crowdfunding firm collects at the exit as a back-end fee. For investors in particular, it is important to be aware of where those fees occur and how much they could detract from the overall return on investment. Fundamentally speaking, since SPV platforms are forming and managing an entity that is then invested into a sponsor’s entity, an additional layer of investment structure now exists that brings fees and costs with it. This may result in net-to-investor returns that are lower than if the investor had invested directly into the sponsor’s entity.


Investing in commercial real estate, much like any other investment in stocks or commodities, entails risk. When participating in a direct real estate investment via an online platform, there are three primary levels of risk to consider:

  • Property-level risk
  • Sponsor risk
  • Platform risk

Under the direct investing model, the investor accepts the first two levels of risk. In the SPV model, the investor accepts all three levels of risk. Here’s why:

Under the direct investing model, investors are exposed to property-level risks (e.g. tenant performance, catastrophe and market cyclicality) and risks associated with the sponsor’s ability to deliver upon the business plan, but it stops there. Because the platform, in this model, is providing the technological infrastructure as well as services to facilitate the transaction and is not an investment manager, investors assume no risks associated with the long-term viability of the crowdfunding platform itself.

In contrast, under the SPV model, investors are investing with the crowdfunding platform and not the sponsor – hence the crowdfunding platform is your investment manager in the same fashion as Fidelity or Morgan Stanley. The crowdfunding platform, in turn, invests your dollars with the sponsor or, in essence, has the same type of relationship (see below) with the sponsor that the investor would have under the direct investing model. As a result, the investor, in addition to relying upon the sponsor, is also reliant upon the crowdfunding platform. Since cash distributions and returns are paid to the investor by the crowdfunding platform, there is an extra link of funds transfer which inherently adds risk for investors. If that crowdfunding firm should have financial difficulties or go out of business, investor’s capital may be lost or returns diminished – even if the underlying real estate asset and sponsor continues to perform well.


One of the big advantages in the direct investing model is the ability to build relationships. Sponsors not only gain access to capital, but they also establish a direct connection to new investors and can use the platform to expand their investor base. The crowdfunding firm plays the role of matchmaker to connect sponsors and investors. The crowdfunding platform also can help to manage those investor by streamlining communications and reporting through integrated investor relationship management capabilities. Yet sponsors have full access to investor information, and they have the ability to forge direct relationships. In addition, investors in the direct model are often co-investing in real estate opportunities right alongside the sponsor. In private equity commercial real estate, operators have historically lived by the axiom of “know your investor”. This applies to investors as well. It is valuable to “know your sponsor” and the only way to do that is to become a direct investor.

In the case of the SPV, it is the crowdfunding firm behind the SPV that reaps the benefits of forging relationships with the sponsors and investors. The crowdfunding firm is the gatekeeper or proverbial Chinese wall in an opaque system of raising capital. The sponsor gets paid in a single installment, but the actual source of those dollars is not shared with the sponsor. If an investor takes a particular liking to a certain sponsor and ends up investing repeatedly, that investor should accrue benefits (e.g. early access or exclusive access to future deals) with the sponsor. Sponsors also love to incentivize loyalty through preferential treatment of their best investors so this concept seems like a no brainer.  However, under the SPV model this won’t occur because the sponsor has no idea that the investor has repeatedly invested or even invested with them at all for that matter.

Despite the technology that has made direct real estate investing more accessible to investors, commercial real estate is still an industry where relationships matter. It is important for investors to know and trust that sponsor, and likewise, it is beneficial for sponsors to know their investors to help cultivate and reward long-term investor relationships.

One of the guiding principles of CrowdStreet is to democratize private real estate investing and to bring greater transparency to the process for both investors and sponsors. CrowdStreet is unique in that it only lists institutional-quality commercial real estate investment opportunities and never charges fees for investors to join or invest.

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