CrowdStreet Comments on Critical WSJ Report: Represents an “Incomplete View of Deal Performance”

Last week, CrowdStreet endured several difficult days as a report in was highly critical of the real estate investment platform, claiming that $63 million of investor funds had “gone missing.” The claim was due to a securities offering on CrowdStreet by an issuer that eventually went bust – Nightingale. Crowdstreet told the publication that they had not committed any fraud. Crowdstreet said there is an investigation into any possible misappropriation of funds by Nightingale being conducted by an independent manager.

In the ensuing days, CrowdStreet CEO and co-founder Tore Steen exited his role as CEO of the firm. Steen continues to hold a seat on CrowdStreet’s Board of Directors.

CI reached out to CrowdStreet for additional feedback on the aforementioned article, and a spokesperson for the real estate investment platform said that they believe the Wall Street Journal article mischaracterized CrowdStreet, their investors, and their sponsor partners and missed important context about the commercial real estate market.

CrowdStreet stated:

“Commercial real estate private equity is a complex asset class, and for that reason, CrowdStreet marketplace is accessible only to accredited investors. The investments offered are illiquid, with significant risks. These risks are clearly disclosed to investors both when they sign up on the CrowdStreet platform, when they complete a new account agreement, and when they make an offer and fund a specific investment. Targeted returns currently are included on the detail page for each offering, but are clearly labeled as such, and disclaimers note that returns are not guaranteed. Accredited investors are assumed to understand these risks and to consider their individual factors when deciding if an investment is appropriate.”

CrowdStreet said the article presented an incomplete view of deal performance on the marketplace and that stating that “more than half” of realized returns for 104 completed deals that allegedly failed to meet the targeted returns implies these deals were failures – but this is not the case. Many of these deals did generate positive returns for their investors. CrowdStreet pointed to one example where a deal generated a 1.45X multiple that had an indicated target of a 1.5X equity multiple would be, in the article’s estimation, an underperformance. This, even if it met investors’ expectations.

“Importantly, CrowdStreet has consistently followed a detailed due diligence process and does with all deals and sponsors, including Nightingale. Our review included Thomson Reuters CLEAR background reports, reference checks, track record review, and other measures. Nightingale provided references from notable institutions, including KKR, Citibank, Wafra Capital Partners, ICER Properties, and DRA Advisors. Our review and vetting process did not give us cause for concern with Elie Schwartz, Nightingale, or these deals, which went through their own due diligence process,” stated CrowdStreet.

The spokesperson said the article addresses a number of capital calls without providing and market context. And these capital calls are not unique to CrowdStreet deals. “They are a common occurrence in the commercial real estate world for institutional and retail investors alike,” said the company. CrowdStreet noted that the rapid rise in inflation and the accompanying rise in interest rates has had an impact on sponsors both on CrowdStreet as well as off the platform.

The higher costs driven by the unprecedented rise in rates and the higher cost of debt and the need for higher reserves have been the main reason behind the capital calls.

“Sponsors are facing unexpected financial challenges, and reaching out to investors for more funds becomes necessary to meet the project’s financial requirements to ensure the completion of projects.”

CrowdStreet said they are committed to their investor community, and in the coming weeks, they will be launching their first offering utilizing CrowdStreet Capital LLC, a FINRA-registered broker-dealer.

The news of the broker-dealer offerings was reported at the same time it was announced that Steen was stepping down from his leadership role.

CrowdStreet reiterated that they are releasing several enhancements that will be beneficial to investors, including escrow accounts that are in place for all deals coming to the marketplace, with sponsor funding taking place only after strict criteria are met. At the same time, CrowdStreet is making operational changes that should help boost investor protections and improve the service by “providing additional review, vetting, and approval processes for sponsors and deals.”

CrowdStreet also noted that the interim CEO, Jack Chandler was formerly Managing Director, Global Head, and Chairman of Real Estate at BlackRock after a 25-year career with LaSalle Investment Management.

“CrowdStreet’s evolution from an online marketplace to a financial institution would not have been possible without CEO Tore Steen, who will continue to serve on CrowdStreet’s Board of Directors. Tore and the Board recognized that a leader with a more traditional institutional investing background was needed and that Jack, given his extensive experience and affiliation with CrowdStreet, is the right person to take on the role at this time. We thank Tore for his vision, commitment, and leadership. He has helped make this transformation a realization.”

The rapid rise in interest rates has impacted many platforms and offerings. Perhaps most glaringly, the recent bank crisis that saw several large banks fail. Some observers believe rate hikes are now over, with some predicting rate cuts later this year.

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