Colorado Real Estate Journal -
Darrell Schmidt, principal of Greenwood Village-based Allante Capital Partners, recently began construction of the 68-unit, Class A apartment building at West 38th Avenue and Julian Street in the trendy West Highland neighborhood. One thing that sets the development apart from other infill developments is the innovative financing approach Schmidt explored to raise equity for the development, scheduled to open next September. Allante looked to raise $4 million in equity through what is known as a Regulation A offering under Securities and Exchange Commission regulations. “I like to deal with private investors and a good way to find them is by advertising,” Schmidt said. Banks, he noted, only will lend 70 percent to 80 percent of the amount needed to build a project. “That means you either have to write a check yourself for the other 20 percent or 30 percent, or you have to find investors,” he said. “The Regulation A offering allowed advertising, so we decided to test the waters,” he said. He said a lot of venture capitalists and entrepreneurs in the early stage of forming a company raise money through what is known as a Regulation D filing under SEC rules. “I don’t know of any other real estate developer who looked at using Reg A to raise money,” Schmidt said. “This was kind of out-of the-box thinking.” Regulation A allows public offerings not to exceed $5 million in any 12-month period, although the SEC is looking to raise the limit to $50 million. Financial statements are simpler for Regulation A than the more common Regulation D, and Regulation A issuers do not incur either Exchange Act reporting obligations or Sarbanes-Oxley Act obligations. Earlier in the year, Allante bought advertising in local publications regarding the potential method of raising equity However, it was not an offering of securities and only sought an “indication of interest” from prospective borrowers. The ad noted that if any money were sent to Allante, it would not be accepted. Ultimately, Schmidt didn’t raise money through a Reg A offering. Instead, he decided to raise the money through “accredited and sophisticated” investors who had invested with him in the past, instead of through the Reg A offering. While there are a lot of rules describing an accredited investor, in short an accredited investor needs to have $1 million in assets outside of a primary residence or an income of at least $200,000 per year. Schmidt recently had raised $3.5 million of the $4 million in equity. Although he didn’t use Reg A to raise money, the fundraising experiment was interesting, he said. “The response was overwhelming,” Schmidt said. “They were small investors with a minimum of $100,000 to invest,” he said. “They were kind of John Q. Public,” he said. “Some of them had money in 401(k)s or IRAs and wanted more diversification from just having their retirement investments in stocks. “They wanted an investment that would create cash flow” while providing a much better return than found with bonds, he said. The total return was predicted to be between 15 percent and 18 percent. While Schmidt chose to go with investors he knew for the majority of the equity, he is discussing with his advisers whether he can contact some of those people who responded to his ads to see if they want to invest in $500,000 of the equity. “The rules are kind of complex and you don’t want to run afoul of the SEC,” he said. “We have very good advisers to make sure we follow all of the rules properly.” He said he probably won’t attempt to raise money this way again because the laws have changed since he started the process.
“On Sept. 23, the SEC allowed advertising under Reg D for the first time in its history,” Schmidt said. “Given the change in rules, there may be no reason to contemplate using Reg A in the future, when you can now advertise under Reg D,” he said. However, other changes are being examined by the SEC that could open up opportunities for relatively small developers and investors such as Schmidt. One of the things the SEC is looking at is allowing investors to raise equity through crowdfunding. Crowdfunding is a means to raise money by attracting relatively small individual contributions from a large number of people. “This is all part of the Jumpstart Our Business Startups Act (or JOBS Act), which the Obama administration got passed in 2011 and was signed into law in 2012,” Schmidt said. “The whole idea was to make it easier for little guys like me to raise money and create jobs,” he said. “It gives us and will give us multiple ways to raise money,” he said. “Our little deal will probably create 100 direct and indirect jobs when you consider the six people in my company and all of the people hired, such as the architect, engineers, the subcontractors who build it and the people who will eventually work in the stores or restaurants at Highland Place.” Highland Place, being designed by Kephart, will have 11,435 square feet of main-floor retail, he said. Dougherty Funding, based in Minneapolis, is providing $14.4 million in construction financing for Highland Place. “They’ve been around for 40 years,” Schmidt said. “They’re a great company.”