GROUNDFLOOR Is Breaking New Ground With The World’s First Regulation A+ Deal

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I have been following GROUNDFLOOR, a real estate crowdfunding company for a couple of years now and what was most interesting to me was that they have always focused on the retail investor.  Previously, investing was only available under a special exemption in Georgia, but it was clear that they wanted to open access to everyone to invest in real estate crowdfunding and this week they made it official. I had a chance to catch up with Brian Dally, Co-Founder and CEO to learn more about this announcement and his company.

Going through SEC registration is an expensive and onerous process. Due to the immense interest from institutional capital, both new marketplace lenders and real estate crowdfunding platforms haven’t had to seek retail capital. Which has left investors like me with just two options: Lending Club and Prosper. It is nice to see another company focus on the retail investor.

When I asked Brian about the focus on retail capital he said that they believe that the performance of a capital market is really dependent on the source of capital in the market. They set out to build the largest breadth of product that would end up creating the fastest, cheapest and best source of capital. GROUNDFLOOR was purposely built to serve retail investors. Brian also noted that they had several opportunities to partner with institutional money, but turned them all down. At this stage they want to focus on the retail investor, where no one else is focused.

Not only are they the first real estate crowdfunding to achieve SEC qualification, but they have approached this in a completely different way to Lending Club and Prosper. They are doing an amended Tier 1 Regulation A offering, often referred to as Regulation A+. The process GROUNDFLOOR took is not the same as the one Lending Club and Prosper took, which was through an S-1 filing. The advantage of the S-1 is the ability to sell an unlimited amount of securities, but that comes at a very high legal and regulatory cost. The advantage of a Tier 1 Regulation A+ offering is a lower cost, lower reporting requirement method to reach non-accredited investors, but it is limited to an offering of up to $20 million.  GROUNDFLOOR is groundbreaking.  They are the first company that we are aware of to utilize Regulation A+ since it became operable through the JOBS Act on June 19, 2015.

To date, they have originated over $2 million on their platform across 42 projects. Loans are fractionalized, with the minimum investment being just $10. With this announcement, lending will open up in California, Illinois, Maryland, Massachusetts, Texas, Virginia, Washington, Georgia and the District of Columbia. GROUNDFLOOR uses a similar note structure to Lending Club and Prosper called a borrower payment dependent note. However, their loans are much shorter and they are secured by real estate.

A typical loan through GROUNDFLOOR is six months to one year in length, with a loan amount of $50,000 to $100,000 per loan. Loans are typically made to developers for fix and flips projects for single family residential projects.  Since these are relatively short loans, the end result is usually a sale of the home. Borrowers are charged an origination fee of 2.5% and servicing fees of 1.5% upon repayment. While investors do not pay any fees, they are subject to formation costs for the offering that can range from 2-5%+.  Average annualized yields for the investment is over 12%. 

When it comes to expansion, Brian mentioned that they are working on other states, but there is a regulatory burden of both compliance and disclosure. They set out to find the states that had the most exciting real estate markets and where they felt there was a big enough base. There were several other factors including size, nature of the real estate market and state laws. Just like Lending Club and Prosper, they have to comply with state and federal laws. The states chosen were ones they felt they could collaborate successfully with.

Brian had several interesting things to say about their growth. Since they were in a pilot, they didn’t emphasize growth and instead focused on the quality of the lending volume. However, that is not to say they haven’t been lending more. When they first started, they did 1 or 2 projects per month and late last year, this increased to between 5 and 7. This pilot was deliberate so they could go through a full cycle. Now they have had $800k repaid on the platform.

In November, they introduced GROUNDFLOOR 2.0, which lowered the minimum investment from $100 to $10. They introduced a grading algorithm and added other features as well. While some real estate crowdfunding companies have been focused on growth, GROUNDFLOOR has focused on product development. They want to understand the consumer and build the right experience before they scale.

Investing in real estate crowdfunding is something that has been previously off-limits to retail investors and it is great to see that retail investors will now have direct access. As the company continues to grow, it will become easier to invest in hundreds of properties. More importantly, it will be easy to be diversified with a relatively small investment. It will be interesting to see if any other real estate crowdfunding sites follow suit.

If you’re interested in learning more about GROUNDFLOOR, you can view their company demo from LendIt USA 2015. Here is the GROUNDFLOOR press release.

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Fred93
Fred93
Sep. 4, 2015 11:17 pm

Thank you for introducing us to these folks.

They’re a startup who publishes no information at all about their financial condition. I found no financial information of any kind on their web site. Not the tiniest bit! Did I miss something?

Before I send money I need some clue that they’re a suitable organization. Need to believe there’s a chance they will still be around for awhile after I buy notes from them. How do I get that belief?

In the early days of Prosper and Lending Club, both listed the VCs who funded them. At least that told us they had some serious backing. Every other P2P guy at least does that. Later they filed detailed financial data with SEC.

Nick
Nick
Feb. 9, 2017 3:01 pm
Reply to  Fred93

My wife and I tried this, our first $250 loan matured December 7th, 2016. It is now February 9th, 2017 and we still haven’t received our return. Supposedly he’s paying up on the 26th this month, but honestly I doubt it. Not a sound investment compared to other proved methods. Sure there’s risk in investing, however…. From LRO agreement found on website: “Company may negotiate to extend payment dates and could agree to a modified payment plan that could result in the LRO holder receiving less than the Expected Return at the Extended Payment Date”

Fred93
Fred93
Sep. 4, 2015 11:30 pm

Perhaps they display some financial info to those who have been invited?

Brian Dally
Sep. 6, 2015 3:20 pm

Fred93, thanks for your interest. We agree. It is important that an issuer such as GROUNDFLOOR, LendingClub and Prosper publish full financial data and other background.

For the time being, we are purposefully in a limited release period following qualification of our offering by the SEC. We realize that the publicly available part of our website does not contain all of the information one might require to consider investing with us. As you posit in your follow-up comment, our website does make additional information available to those who have been invited to participate in lending during our limited release.

Anyone who is a regular reader of this blog and would like to participate during the limited release, please email me at brian at groundfloor dot us. We would be pleased to invite you and hear your feedback.

Our SEC filings contain full details about the company and our offering. They are freely available to the public via EDGAR at this link: https://1.usa.gov/1iqt9lv.

Brian Dally
Co-Founder & CEO
GROUNDFLOOR Finance Inc.

Fred93
Fred93
Sep. 6, 2015 9:04 pm

There is a registration wall (you have to create an account), and a beta test wall (you have to be invited), but with a little email exchange with the Groundfloor folks I got thru both, and now have access to all the documents. Now that I have access, the documents look very thorough.

It turns out that the same material is available on SEC EDGAR as well, although it is not easy to access there. I eventually found it. (To get the offering memorandum, you click on the most recent Form 1-A/A, and then click on “part II”.) If I had understood that the stuff was all on EDGAR I wouldn’t have bothered the Groundfloor guys, but this Reg A stuff is all new to me, so nothing about it was obvious.

These fellows have done a lot of work, and look to be set up in a more organized and thoughtful fashion than the other real estate P2P guys. At this point I’m impressed.

Tony Gutierrez
Tony Gutierrez
Sep. 9, 2015 9:41 pm

I’ve been investing with them for a while here in GA and have only positive reviews of the platform and the team.

Matt
Matt
Apr. 26, 2016 8:42 am
Reply to  Tony Gutierrez

Does anyone know of a similar model that pays the interest to lenders ons monthly basis?…. Groundfloor only pays at the end of the note.
Thx

Mike M
Mike M
Apr. 4, 2016 11:37 am

Hi Peter, Could you do a follow up on this company? I’ve tried getting more performance data from their site but it looks like a lot of their Loan Details links are broken. Also, it looks like the majority of the paid off loans are paid off long before their term.

Ryan Lichtenwald
Ryan Lichtenwald
Apr. 6, 2016 8:53 am
Reply to  Mike M

Hi Mike, it may be some time before we get around to this. I’d suggest reaching out directly or seeing if anyone on the Lend Academy forum has any first-hand experience with them.

Tony Gutierrez
Tony Gutierrez
Apr. 6, 2016 9:02 am
Reply to  Mike M

I can tell you about my experience as a long time user.

Their website does sometime suffer from glitches, but I chalk this up to their small core team size during their initial trial entrance to the business. They just secured 5mil series A so I would expect a more refined website in the future.

A lot of loans do repay before the full term, but its easy enough to reinvest in another and keep the annual interest earnings up.

The loans sell out rather quickly lately as interest has increased.

Joseph
Joseph
Apr. 24, 2016 10:32 pm

Took a look at their site and i feel it is missing some really important data. There is no data on their loan performance. How many are paid off late, or early?! How do they determine credit worthiness of individuals or businesses.

Tony
Tony
Apr. 25, 2016 8:58 am
Reply to  Joseph

So far all have been paid back (no defaults). I agree there could be more data about when they are paid. I know there is a lot of info on the site about their loan grading system, but not sure about credit worthiness of the borrowers themselves. No matter how you cut it, its more secured than something like Lending Club.

Brian Dally
Apr. 25, 2016 8:21 pm
Reply to  Joseph

Joseph, thanks for spending time to have a look at Groundfloor. We’re still the only issuer qualified by the SEC for non-accredited investors to participate in direct/p2p real estate lending. Everything you’re seeking (and much more) is therefore available in our public filings. We are developing systems to allow for more efficient and easy to use disclosure via our website for the data you’re seeking. For now, we have to point you to the filings.

Our public filings are available here for ease of reference (also via the SEC’s EDGAR database):
https://www.groundfloor.us/amendments

Loan performance data is disclosed in our Supplemental Filings, the most recent of which is Supplement No.4 (see pages 3-5):
https://www.sec.gov/Archives/edgar/data/1588504/000114420416095831/v437713_253g2.htm
.
The full details on how we grade loans, including the creditworthiness of our borrowers, are available in our Offering Circular, the most recent of which is No.3 (see pages 36-57):
https://www.sec.gov/Archives/edgar/data/1588504/000114420415069912/v426459_partiiandiii.htm

As detailed in the Offering Circular, every loan includes a full breakdown of the grading factors as applied to it specifically.

I hope this information is helpful. Feel free to reach me directly by emailing brian at groundfloor dot us. We’d be pleased to have your feedback, as we’ve found that readers of this blog offer helpful perspective and ideas as to how we can continue to improve as we grow.

Brian Dally
Co-Founder & CEO
GROUNDFLOOR

Harley
Harley
Aug. 10, 2017 5:15 pm

I wanted to share my experience with GF. I started in January of 2017 and I have invested a small sum in every offering they had. This is the ONLY platform that will let you do that. I have invested about less than 6 K in about 56 properties. Right now I have

– 1 in default (but the term is not up yet and it is possible it will be sold)
– 1 refunded with interest
-15 repaid in full (obviously most early) — I just reinvested the money.
– 40 Performing

Of the 40 performing I have about 20 that are under contract / pending or contingently pending. Confirmed via Redfin and Zillow. I think the way to go is to put a small amount in each investment. As I gain confidence with GF and the investments I will add more.

Brian Dally
Aug. 11, 2017 4:42 am
Reply to  Harley

For those interested, Groundfloor recently published an analysis of over 2,400 investor portfolios with at least one repaid loan. It includes a scatter plot of net returns realized based on the number of loans in each portfolio.

https://blog.groundfloor.us/groundfloorblog/diversification