SEC Amends Security Act of 1933
On November 2, 2020, the Securities and Exchange Commission approved increasing the maximum raise under Regulation Crowdfunding from $1.07 million to $5 million—a significant acknowledgment of the success of equity crowdfunding/syndication.
Here are some of the approved changes that will directly affect us as real estate investors.
Removal of Investment Limits for Accredited Investors
Until now, there have been limitations on the amount an accredited investor can invest in a Regulation Crowdfunding (Reg CF) offering. The SEC has eliminated those restrictions. This increases the ability of small real estate entrepreneurs to raise capital by allowing them to raise money using Reg CF without limiting the amounts they can raise from the wealthiest investor pool: accredited investors.
Improvement of Investment Limits for Non-Accredited Investors
The SEC has altered the way in which the limit non-accredited investors can put into any deal is calculated. This also increases the amount of money a sponsor can raise by allowing non-accredited investors to invest more than previously allowed.
Limits are now calculated using the greater of their annual income or net worth when calculating the investment limits.
Introduction of “Test the Waters” & “Demo Day”
This amendment permits issuers to determine which regulation they will ultimately use for a capital raise before formally filing with the SEC through a process known as "testing the waters." It allows sponsors to test market their deals to see if there is investor interest before incurring the time and expense of first filing with the SEC only to discover afterward that their deal is a dud.
Similar to testing the waters campaigns, the SEC has further liberalized “demo days.” These events are designed to allow sponsors to discuss deals with prospective investors prior to actively soliciting investment. These events are no longer considered “general solicitation,” which would require filing with the SEC. These opportunities to discuss deals openly with investors are typically used by (non-real estate) startups to discuss their products and services—but equally apply to real estate investors with new deals to finance!
That means your long lost desire to “generally solicit” has now been approved on a Reg D (506b) offering! You can tell people you don’t know about your deal to see if you can spark interest before officially filing SEC documents. This is a game changer!
Permission to Use Special Purpose Vehicles
Another new amendment allows the use of special purpose vehicles (SPVs) to invest in Regulation CF deals. This may open the door to feeder funds investing in Reg CF deals.
Increase in Limits for Regulation A+ Offerings
The maximum that can be raised under Regulation A+ has increased 50% from $50 million to $75 million (Tier 2). Regulation A+, open to non-accredited and accredited investors alike, are sometimes called “mini-IPOs.” While they do not incur the same time, cost, and disclosure requirements as a full IPO, they are more restrictive than Reg CF offerings, yet allow for general solicitation of investment from the general public.
When Regulation Crowdfunding was first being debated by Congress prior to the passing of the 2012 JOBS Act, the limit of $5 million was rejected out of concern that there would be fraud. Now, eight years later, with very few instances of fraud having been perpetrated and uncovered, the SEC has acknowledged the benefits crowdfunding can bring to the overall economy and has increased the maximum limit accordingly.
How Real Estate Investors Will Benefit
During these times of unprecedented economic and political uncertainty—and with the threat of more pandemic waves further hobbling the economy—the SEC has acknowledged through its actions the need for extra liquidity, particularly to small and medium-sized enterprises.
As with all JOBS Act-related changes, these modifications are primarily designed to benefit community businesses. However, as almost every new real estate project starts with the formation of a new company to manage that project, they also benefit from these changes. The SEC’s recent announcements are particularly important for real estate entrepreneurs, as they significantly increase the sources one can use to raise capital.
The amount of Reg CF investing has ballooned since the beginning of COVID and shows little sign of abating. According to Crowdfund Capital Advisors, the amount invested in Reg CF deals has more than doubled since the beginning of the year on a month-to-month basis. CCA also notes that the number of offerings has increased by 50% and that the average amount invested per investor has also increased in the same period.
This all bodes well for the real estate industry—an unintended effect of the original JOBS Act and of subsequent changes to the regulations. As investors remain locked down while they look for opportunities online, and as the regulations restricting what they can invest in continue to relax, the ability of forward-thinking real estate sponsors to finance their deals is becoming easier.
Mobile, AL Market Analysis
Real Estate:
Cameron Weavil, vice president of The Weavil Company, a local, family-owned firm, has sold the Victoria Ridge Apartments located at 108 McKeough St., near the intersection of Highway 43 in Saraland, to a local investor for $1.11 million. The 17-unit complex was built in 2017 and sits on a little over an acre of property. The site consists of five buildings housing 16 888-square-foot, two-bedroom/one-and-a-half-bath townhome units as well as a single one-bedroom/one-bath, 700-square-foot, ADA-compliant single-story apartment. Monthly rent for the spaces runs at $820 per month and the complex is reportedly 100 percent occupied. Roughly two acres of undeveloped land adjacent to a Regions Bank and located directly across the street from the site could support an additional 22 units for a Phase 2 buildout in the future.
Heron Lakes Country Club General Manager Carlos Serrano has notified members of the current board of investors is moving forward to complete a deal that will sell off two chunks of golf course property — totaling 15 acres — for over $2 million to develop an 80-unit, high-end condominium complex. Serrano stated in a phone interview the decision was made in direct response to the ongoing economic downturns felt within their wedding event planning, banquet and golf membership businesses from COVID-19 since March of this year. The pivot was presented this past July to the core board committee by Serrano and Russ Bloom of Bloom Golf Management, current majority owner and shareholder of Heron Lakes Country Club. Bloom bought Heron Lakes in 2017, effectively doubling his portfolio size after assuming ownership of a site reportedly struggling to stay afloat. According to a news release at the time, Heron Lakes had been losing members for years and was on the verge of declaring for bankruptcy protection prior to the purchase by the Pass Christian, Mississippi-based property management company. After a 30-plus member shareholder board vote was approved in late September, Tim Herrington with Herrington Realty Inc. was tapped as the local real estate agent to place the properties on the market for sale in early October. The deal involves two separate sections of land. One area covers a 7.3-acre rectangular footprint of land from the edge of the property east of the tennis courts, up to Government Boulevard, south to the edge of the golf course and west to 30 feet from the double doors that go from the entrance to the ballroom. It is listed on the market for $1.285 million. The second plot encompasses some 8.37 acres located near businesses along Government Boulevard from the country club property’s maintenance building, all the way east behind the number 14 golf green, to the end of the property. It is listed for sale at $800,000. “We will have new neighbors in the condo-style development,” Serrano said in the message pushed out this week. “During negotiations, we will set up a mandatory membership model for use of our amenities. For example, at 80 units, paying a social membership of $1,000 per year would lead to an increase in revenue of $80,000. “This plan has one main goal: We must downsize our country club space footprint. It is way too big and we cannot keep trying to duct tape and superglue this place together. By downsizing, it allows a huge shift in our budget to invest more into the golf course and membership growth and less on keeping the building upright. The 40,000-square-foot, 70-year-old clubhouse property will be downsized to a freshly remodeled 10,000 square foot building.” He went on to say the space is in dire need of upgrades and currently running up an estimated bill of $200,000 per year in payroll, utilities, insurance, repairs, maintenance and related expenditures. Some of the current spaces that will be sold off for repurposing or razing include the tennis courts, ballroom and office spaces. “When the buildings are 60 to 70 years old and need substantial repair, they become a huge burden,” Serrano said. “No level of membership or banquet business would justify us repairing or renovating the current spaces to the level that we need. After careful consideration, we are planning to reduce the building to less than half of the current size. The demolition of the building will include removing the current pool. Like the building, the $450,000 pool is a money pit that doesn’t provide a return to our business.” Upon completion of the new residential build-out, Heron Lakes will set up a mandatory membership model for use of amenities. Combined with a yearly savings of $200,000 from eliminated upkeep, a sizable net positive financial gain is anticipated from the deal when all work is done. With the additional projected revenue coming in, Serrano outlined how the cost savings would transfer over to clubhouse upgrades. Key amenities targeted for a new streamlined country club space, condensed by 75 percent, will include a new clubhouse, new golf shop, an updated restaurant with a new bar, an upgraded and expanded outdoor area, a new pool, a new gym and updated locker rooms. Renderings provided to members via email were not designed for size or scale, or the specifics of any area, but indicated the “big picture” vision of where everything will go and the flow of each space. Serrano emphasized the fact funds from the sale of the land will sidestep incurring additional debt, allowing all needed renovations, reduction of existing debt and upgrades in the golf course to be sourced from the new capital infusion. “In a very short and simple summary, we want to trade land for an updated clubhouse with amenities, generate new dues from paying neighbors and continue to operate with increased revenue and less expenses,” Serrano said. “Heron Lakes has been around for 70-plus years and just like 2020 has taught us, it is time for a change to lock in the next 70-plus years. When I took over this position while being a member, this was my vision for our future and now it is time to make this happen.” Expectations for the sale of the acreage for residential development is anticipated to be within the next six to 12 months, with a handful of investors already inquiring on the properties, according to feedback from Herrington Realty Inc. Condominium build-out and completion timelines, after completing the land sale, were unknown as of press time. Heron Lakes currently employs around 42 workers on-site and does not anticipate any layoffs of their current workforce to go along with the property downsizing.
The 50,000-square-foot, four-story, historic Seamen’s Club building, also known as City Hall North, located at 50 St. Joseph Street at the edge of the De Tonti Square Historic District, has officially been listed on the National Register of Historic Places, according to Stephen McNair of McNair Historic Preservation, who was heavily involved in the site’s registry. The Seamen’s Club building was designed by well-known Mobile architect John Platt Roberts, founder of Platt Roberts & Company, and was built by J.P. Ewin Inc. Construction began in 1948 and was completed in 1949. “The ground floor of the building was originally used as office spaces, lounge areas and a chapel. The three upper floors were for short-term residential use by those in the maritime industry,” McNair said. The site was renamed City Hall North after acquisition by the city of Mobile in 1982. By the turn of the millennium, however, a multitude of issues had arisen on the site, such as mold infestation and asbestos contamination. In 2003, city employees decamped and the space was again put on the market for nearly $1 million, where it promptly twisted in the wind for over a decade. In 2017, it was reported general contractor Michael Coumanis with Coumanis Allen LLC had drawn up plans to develop a 70-unit apartment complex consisting mainly of one-bedroom units. At the time, Seamen’s Hall LLC was in talks to acquire the long-blighted site for its appraised value of $548,000. Currently, it is unknown if the proposed residential complex is still in the works at the site — it may be delayed due to COVID-19 — but the historic tax credits will be part of the project’s package of incentives whenever development plans move forward again. “Anytime you can place a property on the National Register of Historic Places, you are sending a message that historic preservation matters, and that preservation and economic development can work together,” McNair said. Prattville-headquartered River Bank & Trust’s Coastal Region president, Doug Thomas, recently announced ground has been broken for its 1.4-acre permanent office to be developed inside a new strip mall located at 1301 U.S. Hwy. 98 in Daphne. The new, 6,919-square-foot footprint will serve as a replacement for the bank’s 1,795-square-foot temporary site found at 27900 North Main Street in Daphne. Construction is expected to wrap up within the next 12 to 18 months. Montgomery-based Marshall Design-Build is the general contractor on the project, but the majority of subcontractors hired for the buildout will reportedly be local.
Business:
Philadelphia-based confectionery Insomnia Cookies is anticipated to open up its first location in Mobile, Friday, at 5753 Old Shell Road, just west of University Boulevard. This will be the first site in the area and the fourth to open in the state of Alabama. At the Grand Opening, visitors will receive free cookies. Founded in 2003 in a campus dorm room at the University of Pennsylvania, and now with over 100 stores nationwide, the new late-night bakery concept will set up shop inside a 1,000-square-foot retail space near the intersection of Old Shell Road and Long Street and across from the University of South Alabama’s main campus. The new local employer currently has openings to hire bakers, delivery drivers and shift leads and will staff around 30 upon opening.
Home decor and retail furniture store Willow + Gray has now opened inside the Church Mouse property located at 14 S. Church Street in Fairhope. The Eastern Shore Chamber of Commerce helped organize a grand opening last week with a ribbon cutting. The showroom offers merchandise such as furniture, home decor and kitchen accessories with prices starting below $20. The retail shop’s footprint covers about 1,000 square feet and will employ around seven when fully staffed.
New Orleans-based PJ’s Coffee has opened its first Alabama location in Spanish Fort with father-and-son franchisees Harry and Dalton Dodich. The 1,200-square-foot space is located at 6510 Spanish Fort Blvd., fronting Piggly Wiggly and Eastern Shore Ace Hardware. Founded in 1978 and currently covering 10 states, mainly in the Southeast, the brand serves a variety of hot, iced and frozen coffee beverages, organic tea and breakfast pastries.
Boston-headquartered senior home care company Prospero Health has made its first expansion into the state, serving Baldwin and Mobile counties with a virtual office established in Spanish Fort. The company focuses on serving elderly patients with existing health issues, working as an intermediary between the patient and the hospital. Prospero currently employs six in the area with plans to expand as demand dictates.
Fairhope-headquartered, service-disabled-veteran-owned engineering firm BES Incorporated has completed the design and buildout for a new hanger at “H.L. Sonny” Fairhope Municipal Airport. The Goldberg Hangar has a ballpark footprint of 4,200 square feet with a 16-foot clearance for aircraft with a 22-foot wing edge height.
Local owner-operated franchise Good Morning Mattress has recently opened, leasing 8,640 square feet of floor space inside Jubilee Plaza located at 6845 U.S. Hwy. 90 in Daphne. This will be the company’s third site to open, with current stores operating at 121 S. McKenzie St. in Foley and 1760 N. Davis Hwy. in Pensacola.
A nearly three-acre parcel of land, located on Hwy. 43 in Mt. Vernon, was acquired by a Columbus, Mississippi-based contractor for $128,000 to build a local office. The core industrial maintenance facility will provide services to manufacturing plants and plans to hire 25 workers when opening in December.
P.S. Taco Co. recently announced expanding into West Mobile with its third location. The Foley-founded, fast-casual taco eatery franchise is leasing a 2,812-square-foot food space in the former Loda Bier Garten location at 7899 Cottage Hill Road, with plans to open in Spring 2021.
Medical:
USA Health held a groundbreaking ceremony last week on the future site of a new $14 million freestanding emergency department to be located at 171 Hillcrest Road, near the intersection of Hillcrest and Old Shell and adjacent to USA’s main campus. Construction is anticipated to start immediately, with wrap-up expected by the end of next year. “This facility reflects the value that the USA academic health system brings to our communities,” Dr. Tony Waldrop, USA president, said at the event. “This facility also will support our mission to train next-generation health care providers.”
Chicago-based Metro Infusion Center has leased some 1,300 square feet of medical space located at 6345 Airport Boulevard inside the Piccadilly Square Shopping Center in West Mobile. The former hair salon will be repurposed to house one medical exam and four treatment rooms, as well as employing five specialists when open this fall. The practice treats patients with chronic conditions such as asthma, arthritis and related ailments.
Port:
Mobile-headquartered Austal USA announced last week that the future USS Mobile (LCS 26) successfully completed acceptance trials in the Gulf of Mexico in September. LCS 26 is the third Austal-built ship to roll off the assembly line this year to complete this highlight for the U.S. Navy. “I am proud of how the Austal team has come together again, in the middle of this pandemic, only a week after a Cat 2 hurricane made landfall in our backyard, completing another major milestone for one of our Navy ships,” Austal USA President Craig Perciavalle said. Acceptance trials involve the execution of comprehensive tests by the Austal USA-led industry team while underway in the Gulf, which demonstrate to the Navy the successful operation of the ship’s major systems and equipment. This is the last significant milestone before delivery of the ship. Currently, the littoral combat ship program is at full-rate production at the Austal USA shipyard with four additional LCS vessels under various stages of construction, not counting the Port City’s namesake. The future USS Savannah (LCS 28) has launched and is preparing for trials. Final assembly is underway on the future USS Canberra (LCS 30) and USS Santa Barbara (LCS 32). Modules for the future USS Augusta (LCS 34) are also under construction in the module manufacturing facility.
Summary
That’s everything I’ve got for you guys this month! Amidst the election chaos, I know there will be prominent & lucrative opportunities ahead for real estate investors. New SEC guidelines as well as continued growth throughout the United States will continue to propel real estate to the front of the economy as a solid investment. Now go out there and create wealth for you and your families!