Last year we featured GROUNDFLOOR who was the first p2p lending firm to leverage Regulation A+ in Title IV in the JOBS Act. Now about a year later there have been many companies who have taken the same path, but GROUNDFLOOR remains unique in their structure. Today, GROUNDFLOOR announced that they are opening lending to 12 more states. I had the chance to talk with Brian Dally, Co-Founder and CEO to learn more about the news and what the company has been up to.
GROUNDFLOOR previously only offered loans in Georgia, Alabama, Florida, Illinois, Maryland, New Jersey, North Carolina, South Carolina, Virginia, Tennessee, and Texas.
They have now added Rhode Island, Massachusetts, New Hampshire, Michigan, Missouri, Minnesota, Colorado, Arizona, Utah, Nevada, Oregon and Washington. The states chosen were ones that met their underwriting criteria and they also focused on states that were not too far away for a control group.
What’s important to understand about GROUNDFLOOR is that they are different from many of the real estate crowdfunding companies that exist. They are focused only on retail investors and the platform is open to both accredited and non-accredited investors. When I spoke to Brian he said that the best source of capital next to depositors are non-accredited retail investors.
Loans are fractionalized where investors purchase pieces of loans similar to that of buying a loan on Lending Club. This is structured differently than the REIT products that have been launched recently under Regulation A+. Investors from the following states can invest in projects, with a $10 minimum per deal: Georgia, California, Illinois, Maryland, Massachusetts, Texas, Virginia, Washington State and D.C.
Brian noted that they have carefully controlled growth as they learned about losses, default rates etc. Now that they feel confident, the next step was to expand to these 12 states. Currently just under 2,000 lenders have invested on average $6,000 for a total of $12.5 million across over 100 loans. Loans average $125,000 across loan terms of 6-12 months and 45 loans have now been repaid. The platform has experienced no defaults and zero loss of principal. Investors have earned a weighted average annual rate of return of 14% over the 9 month average term.
There are no fees for investing which also makes GROUNDFLOOR unique. The new REITs by competing real estate crowdfunding platforms usually pass some expenses (legal, administrative etc.) to the lenders and some platforms where accredited investors allocate directly have a flat expense rate.
Since many lenders also are concerned about platform risk, I asked Brian to elaborate on what they have setup to protect investors and this is what he had to say:
“As you know, Groundfloor remains in a limited release, and we’ve carefully controlled the growth of lending since achieving SEC qualification one year ago. A standard bankruptcy remote vehicle structure was not possible with our initial offering under Regulation A. We continue to work toward establishing an alternative structure that will provide lenders with equivalent protection.
In the meantime, the company holds significant collateral underlying its loan assets and carries a small debt burden relative to liabilities owed to its lenders. Unlike any other peer-to-peer lending platform in real estate, our financials are regularly audited and fully disclosed to investors. At this stage of our development, the combination of our collateral, few competing debt obligations, and regulatory disclosures offers substantial protection to investors concerned about platform risk. That said, we plan to expand those protections as we grow.”
Similar to Lending Club and Prosper, all GROUNDFLOOR’s financials are public as they are managed like a public company. Brian noted that to become profitable the platform has to achieve greater scale. At this point they want to achieve unit profitability.
After speaking with Brian it’s clear that their vision is to continue to be a peer to peer lender in its purest form. They are the only platform that allows directed investment in real estate projects from non-accredited retail investors. While other companies believe bringing on institutional capital is the key to growth Brian is a firm believer in retail capital and wants to prove that you don’t have to resort to a fund structure to scale. The company still has a long way to go in scaling, but doubling their footprint will certainly help and Brian said 2017 should a year of more aggressive growth for the company.