THE ULTIMATE GUIDE:REAL ESTATE

CROWDFUNDINGLawrence Lo | Founder & CEO | www.pyleloans.com

1. WHAT IS REAL ESTATE CROWDFUNDING?2. HOW DOES REAL ESTATE CROWDFUNDING WORK?3. INVESTMENT TYPES4. WHY IS THIS A GROWING INDUSTRY?5. RULES AND REGULATIONS6. PLAYERS7. PYLE

OUTLINE

1. WHAT IS REAL ESTATE CROWDFUNDING?

PROBLEM #1

Developers/Borrowers don’t have access to quick/adequate capital.

PROBLEM #2

Most people have little/no access to real estate investments.

SOLUTION

Real Estate Crowdfunding (“RECF”)

RECF connects developers and investors online.

Developer/BorrowerRECF platformInvestors

Through RECF platforms…

Developers/Borrowers get the funding they need…

…and the crowd gets to invest in real estate deals they normally wouldn’t have access to.

2. HOW DOES REAL ESTATE CROWDFUNDING WORK?

Meet John. John fixes & flips houses for a living.

John finds a new home to fix and flip. The purchase price is $5MM.

John puts up 10% of his own money.

The bank agrees to finance 60%.

Who will finance the remaining 30%?

ENTER RECF.

John is going to source the remaining 30% from “the crowd” via a RECF platform.

Through a RECF platform, John offers investors the opportunity to finance the remaining 30% ($1.5MM) of his project.*

*The picture above is taken from patchofland.com.

Who are these investors?

They’re people who want to make passive income but who did not previously have the opportunity to

participate in real estate deals.

(Minimum investments typically start at $5000.)

Through the RECF platform, these investors create online accounts and invest from the comfort of their homes.

After Day 1, investors collectively fund $800K of the $1.5MM.

0 $1.5MM

By Day 5, more investors have joined and $1.3MM of the $1.5MM is funded.

0 $1.5MM

By Day 9, even more investors have joined and the full $1.5MM is funded!

0 $1.5MM

John uses the proceeds to buy, fix, and flip the home.

The investors earn monthly interest.

1 year later, John sells the house, and repays the bank. Then he repays the RECF investors’ principal and accrued interest (if any).

Whatever’s left is John’s profit.

3. INVESTMENT TYPES

DEBT EQUITY

Invest in exchange for sharesInvest in exchange for fixed returns

INVESTMENTTYPE

RISK

POTENTIALRETURN

RETURNTYPE

DividendUpside when property sellsFixed interest income

Lending money to a borrower at a stated interest rate. The investor gets monthly (or quarterly) interest

payments and a return of principal at maturity.

DEBT CROWDFUNDING

Investing in exchange for a stake in the subject property. Investors share in the rental income that the property generates. Additionally, they share

in the upside if/when the property sells.

EQUITY CROWDFUNDING

CAPITAL STACK

Common Equity

Senior Debt

RiskLevel

H

L

Senior Debt - gets paid first. RECF debt deals usually occur here (1st liens).Mezzanine - gets paid second. Sometimes RECF debt deals occur here (2nd liens), positionally behind the bank.

Preferred Equity - gets paid third. RECF equity deals usually occur here (gets paid before the Developer).

Common Equity - gets paid fourth. Sometimes RECF deals occur here, but the risk is very high.

Mezzanine

Preferred Equity

The RECF platform funds a deal, then sells the investment on its website for the crowd to buy into.

PRE-FUNDING

PRE-FUNDING (CONT’D)

STEP 1 STEP 2

1. RECF platform pre-funds the Borrower $1MM.

2. RECF platform sells the $1MM loan to the crowd.

PRE-FUNDING (CONT’D)

STEP 3

3. The crowd invests $1MM into the deal, and the RECF platform

recoups its capital.

STEP 4

4. RECF platform pre-funds another Borrower, and the

process starts over.

Pre-funding allows Borrower to get capital immediately without having to wait for the crowd’s

investment.

PRE-FUNDING (CONT’D)

Pre-funding also allows Investor to feel safer because RECF company has “skin in the game.” If the investment isn’t fully fund by the crowd, the platform is stuck with the loan, forcing it underwrite well in the beginning.

PRE-FUNDING (CONT’D)

The RECF platform acts only a conduit to connect Borrower and Investor.

NON PRE-FUNDING

NON PRE-FUNDING (CONT’D)

STEP 1 STEP 2

1. Borrower asks for $1MM. RECF platform puts $1MM investment

opportunity on website.2. The crowd starts investing in

the deal.

NON PRE-FUNDING (CONT’D)STEP 3

4. RECF platform releases the $1MM to the Borrower.

0 $1MM

STEP 4

3. RECF platform waits for the $1MM investment to be fully

funded.

Since the RECF platform puts up no money, they bear no risk. Moreover, since there’s no pre-funding, the Borrower must wait until the investment is fully funded on the platform before obtaining the capital.

NON PRE-FUNDING (CONT’D)

RECF investments are illiquid. Once you’ve invested into a RECF deal, you typically can’t pull your money out until the stated term is up. Some RECF platforms

allow investors to redeem their capital, but at a penalty.

LIQUIDITY

4. WHY IS THIS A GROWING INDUSTRY?

1. The Jumpstart Our Business Startups Act

In 2012, Obama signed into law the Jumpstart Our Business Startups (JOBS) Act.

Part of the law essentially recognized investment crowdfunding as a legitimate vehicle to sell securities

to the general public.

2. Banking Inefficiencies

The banks are notoriously slow.

After the 2008 crash, they became even slower/more heavily regulated.

People who should have no problem raising capital suddenly found themselves left out in the cold.

RECF offers developers/borrowers speed and convenience at reasonable rates. From the date of application, a developer/

borrower can get the capital he needs in 7-14 days.

From the investor side, more and more people are second-guessing the necessity of banks beyond holding deposits—

all thanks to the internet.

<1% has become the new “norm” for investors.

RECF, on the other hand, offers investors 7 -16% annual percentage rate (APR).

Add up the JOBS Act and bank inefficiencies on both sides, and the result is this…

In 2016, over $3.5 billion was raised through RECF platforms. That number is only projected to increase year by year.

5. RULES AND REGULATIONS

When a RECF company offers a new security on its platform, it does so through one of 3 SEC rules:

A) Rule 506(c): Crowdfunding to accredited investorsB) RegA+: Crowdfunding up to $50MM per yearC) Title III: Crowdfunding to accredited and non-accredited investors

Allows a sponsor to offer debt or equity securities to accredited investors.

506(C)

• If single, $200K annual income• If married, $300K annual income (joint)

OR

• $1MM net worth excluding place of residence

ACCREDITED INVESTOR

Allows a sponsor to sell up to $50MM per year of a security to both accredited and non-accredited investors. Before the

change, the limit was $5MM.

The sponsor must first file a formal prospectus with the SEC and get approval before marketing takes place.

REG A+

Allows a sponsor to issue securities, up to $1MM per year, to both accredited and non-accredited investors.

Sponsor does not need to file a prospectus with the SEC, but must include certain disclosures about the company in its

offering memorandum.

TITLE III

6. PLAYERS

Some players in the industry right now…

RealtyShares concentrates on smaller investments, like single-family house flips, rather than on large apartment buildings

and commercial investments.

Realty Mogul recently introduced a REIT called MogulREIT I. No accreditation is needed and the investment minimum is lower ($2500) than that on other RECF platforms. The REIT has an annual fee of 3%.

Deals made on PeerStreet are all debt-based. The deals are put together by “originators” who represent the principal party in the transaction.

Sometimes they invest alongside the crowd, which can make the crowd feel safer knowing someone else has “skin in the game.”

Patch of Land’s pre-funds all deals before offering them to investors. This allows the Borrower (usually fix and flippers) to move ahead with rehab immediately. Moreover, investors feel confident knowing POL bears risk if

the investment isn’t fully funded by the crowd.

Fundrise offers eREITs only on its platform. The crowd is investing into a group of real estate projects—a mix of debt and equity offerings. Fundrise charges a 1% annual

asset management fee.

Realty Shares

Realty Mogul

Peer Street

Patch of Land Fundrise

PropertyType

Res & Com

Com & REIT Res Res Com & REIT

Investment Type

Debt & Equity

Debt & Equity Debt Debt &

Equity Debt & Equity

Investor Type Accredited Both Accredited Accredited Both

Minimum Investment $5000 $1000 $1000 $5000 $1000

Investor Fees

1-2% of annual investment

amount1-2% of annual

return0.25-1% spread per

investment; charged only when investor gets paid

1-2% of interest distributions

1% of annual investment amount

7. PYLE

Private Online Lender

PYLE PHASES

RECF platform

Where We Are Now

PHASE 1: PYLELOANS.COM

Our niche is short-term, interest-only, real estate-backed loans.

In Phase 1, we’re focusing on 2 things:

1) Attracting qualified borrowers/developers2) Transforming an inefficient lending system through a

streamlined application/common-sense underwriting approach

We’re now in the process of funding and closing a plethora of deals.

We plan to open our platform up to investors in the latter half of 2017.

www.pyleloans.com

VISIT US!