CrowdStreet Investors, Facing Total Wipeout, Question Platform's Role In Alleged Fraud

The investors who wanted to buy a piece of a trophy office building in Atlanta on the CrowdStreet platform come from all walks of life: real estate pros trying to make a little extra on the side, but also tech workers, physicians and a college professor.

The minimum investment in the deal was $25K, and the sponsor of that investment, New York-based Nightingale Properties, told investors it had a sterling track record and a rare opportunity to acquire trophy real estate at a bargain.  

But rather than all sharing a piece of the Atlanta Financial Center as they hoped, these investors are now bound together for a more ignominious reason: They are out tens or hundreds of thousands of dollars after Nightingale allegedly misappropriated their investments, moving more than $8M into other accounts and never closing on the deal, an independent fiduciary said.

“You’ve got to accept business risk and that things happen in the market. You’re looking for big returns on real estate deals, but this is a risk you never plan for or is inherent in a deal,” said Eli Johnson, an accredited investor out of Chicago who put $25K of equity into Nightingale’s failed bid to purchase the Atlanta Financial Center in Buckhead.

“I don’t think you ever go into an investment thinking they’re just going to wipe me out,” he said in a phone call this week. “It’s not like you’re trading bitcoin in Nigeria or something.”

Bisnow spoke to seven people from across the country who put their personal money into the Atlanta Financial Center campaign. They expressed a mix of shock, fury and regret. They questioned why CrowdStreet didn’t do more to protect their investment, and some said they didn’t realize the money they put up went straight to an account controlled by Nightingale, rather than in escrow.

“It’s pretty mind-boggling what’s coming out about it,” said Mike Huber, an independent investor from New Jersey who put $150K into the crowdfunding campaign. “It’s a relatively devastating loss if it’s a complete loss.”

Their experience served as evidence to skeptics of real estate crowdfunding — a concept just over a decade old — that the fast-growing investment type carries more risk than meets the eye.

CrowdStreet is at the vanguard of the movement. Founded in 2014, deals on its platform raised more than $2B by 2020. The pandemic turbocharged interest in the medium — in 2021 alone, CrowdStreet deals raised roughly $1.2B from retail investors, the company said last year, when it raised $43M in venture capital.

CrowdStreet CEO Tore Steen, in an interview with Bisnow this week, said he was shocked and angered by Nightingale’s behavior, but dismissed the notion that the platform made investors more susceptible to potential fraud.

“I don’t believe that this should be tied into a crowdfunding issue,” Steen said. “This was not a crowdfunding issue, this was simple illegal behavior by a real estate developer. There were investors outside of the CrowdStreet platform that were involved here. Whether it’s online or offline, fraud exists in this industry.” 

‘Wonderful Marketing Job’

Nightingale’s crowdfunding push to acquire the Atlanta Financial Center was the largest in CrowdStreet’s history. It said it reached a deal to buy Atlanta Financial Center for $182M, a price that would have represented a $78M loss for its owner, Sumitomo Corporation of America. Nightingale, at the time of the offering, pitched the deal to investors as a “rare opportunity to acquire a trophy office at a steep discount.”

Within days, investors piled $20M into an LLC managed by Nightingale CEO Elie Schwartz. Overall, it wound up raising $54M. 

“They did a wonderful marketing job, I guess,” said Zhiyong Yang, a marketing professor at Miami University of Ohio, who invested $50K into the offering. “That’s why we were thinking that was very promising from the description.”

Months later, Nightingale would return to the platform, this time looking to raise equity to renovate a Miami Beach office building it already owned. It raised $9M toward that effort.

By August 2022, red flags were being raised. That’s when The Wall Street Journal reported that Nightingale failed to disclose to CrowdStreet investors that the firm had two previous investments that ended up losing money. 

Ian Ippolito, an independent real estate investor who runs the blog The Real Estate Crowdfunding Review, told Bisnow that he explored Nightingale’s initial offer for the Atlanta project when it was first released on CrowdStreet, but backed off after he found stories about Nightingale’s previous losses in a Google search that weren’t mentioned in the investor prospectus.

“I actually was very interested when I saw it at first. The sponsor has like 30-plus deals and never lost money,” Ippolito said. “I barely got to do any of my due diligence on this, but this one right away, the first thing I look at is the losses. So I was like, ‘OK. Done. There’s something shady going on here. I’m not going near this deal.’”

At the time, a CrowdStreet spokesperson called the omissions “negligible,” and Nightingale executives told investors they didn’t impact their portfolio’s overall performance. Some investors felt that was the first sign that CrowdStreet wasn’t as concerned as it could have been over the security of the investments.

“It’s surprising that [CrowdStreet was] not taking a more guardian role when the Wall Street Journal article came out. We had to hear it from a major news outlet,” said one investor, an employee at a major West Coast technology company, who asked to remain anonymous.

Some investors requested refunds and continued to do so as the deal’s closing kept getting delayed. Nightingale started out processing refunds, and executives were still communicative with the investors into 2023. The company even sent out Christmas cards to those with equity in the deal.

“They gave us the option to withdraw the funds. That gave me comfort,” the West Coast investor said. “They do all of those things to make you feel that they are super-legit. I was entirely blindsided.”

Nightingale would process $9M in refunds overall, but it didn’t process them with consistency — Steen said the first moment CrowdStreet was concerned internally over the funding was in April.

The Austin, Texas-based platform requested bank statements and operating agreements for the Atlanta and Miami Beach entities. When Nightingale didn’t provide them and Schwartz started communicating through his lawyers, that’s when Steen said the company took every action it could, including recommending appointing an independent manager.

That manager, Anna Phillips, a former Cousins Properties executive with a background in forensic accounting, was approved by the funds’ shareholders last month and went to work investigating the accounts. She told investors in a call on July 14 that she couldn’t verify what Nightingale had done with the equity it raised.

She said nearly $12M was almost immediately transferred to entities Schwartz controlled, in direct violation of CrowdStreet’s policies. A CrowdStreet spokesperson told Bisnow in an email that the funds were intended to be held in a separate account managed by Nightingale and were to be used solely for project costs, according to the platform’s operating agreement. 

The operating agreement on the deals, which sponsors and investors both signed, outlined that investor money is placed directly into an LLC managed by the sponsor, not in escrow. Nevertheless, multiple investors told Bisnow they assumed their funds were placed in escrow, not into a bank account Schwartz had access to.

“It sounds a little bit fishy if it’s not going in escrow until that deal had been inked,” said Chris Honcik, a homemaker in Idaho, who invested $50K in the Atlanta Financial Center offering. “I probably would have looked for a different deal.”

Phillips placed both the Atlanta and Miami Beach entities in Chapter 11 bankruptcy in Delaware on Friday. She said the bankruptcy will allow her more options to find out what Nightingale did with money. 

‘One Of The Worst Investment Strategies’

Crowdfunding for commercial real estate has only been around since 2012, when Congress passed the 2012 Jumpstart Our Business Startups Act, which contained a provision allowing nonaccredited investors to buy into commercial real estate deals. 

After crowdfunding apps like Kickstarter and Indiegogo gained popularity in the previous decade, several proptech entrepreneurs launched crowdfunding platforms targeting real estate, which struggled to gain traction for years but found some success in the pre-pandemic market peak before taking off during the low-interest-rate environment that produced an investment frenzy in 2021.

But even during that boom, there were public failures. Prodigy Network filed for Chapter 7 bankruptcy in March 2021 after more than $690M of investment was raised through its platform. Many of the properties were sold for losses or turned over to lenders, and even before Prodigy’s founder died in May 2020, several investors reported being effectively ghosted, The Real Deal reported at the time.

“One question that any investor on a crowdfunding platform should keep in mind is: Is the platform presenting this deal opportunity simply as a platform to make opportunities available? Or are they effectively giving their stamp of approval on deals?” said Sam Chandan, director of New York University’s Chen Institute for Global Real Estate Finance. “Are they saying, ‘If a deal is on this platform, that means we stand behind a property as a good investment?’ And you do see some differences there across platforms.”

In addition to being a funding platform, CrowdStreet also manages pools of investor capital for which it acts as a fiduciary. It put more than $1M of that funding into Nightingale’s deals, Phillips told investors. That money also hasn’t been recovered.

Chandan said crowdfunding in real estate is vulnerable to situations like the office market is in today, when assets of all types have lost billions in collective value and owners are under pressure to contribute additional capital to hold onto their buildings. 

“The capacity simply isn’t there to provide rescue capital for, say, Class-C office buildings in secondary markets,” Chandan said. “For alternative financing sources like crowdfunding, we want gaps, but not gaps that are so large they might overwhelm us.”

Crowdfunding in real estate is undergoing its first real stress test, having been launched during the longest economic expansion in modern history, so deals closed on those platforms before the pandemic are worth closely monitoring to see if they struggle to match the overall market’s average returns, Chandan said.

In the past year or so, as transaction volume dried up, platforms have been in the difficult position of needing to position themselves as reliable judges of investments while depending on transaction volume for their business. The collapse in deal flow has already claimed one crowdfunding platform: Mortgage-focused PeerStreet filed for Chapter 11 bankruptcy in late June, citing not enough deals to fund its obligations.

The Nightingale scandal is dramatic, but investors in the deals won’t be the only ones on the platform who will see big losses in office buildings go up in smoke over the next year or two, said real estate receivership and troubled asset manager Henry Lorber, principal of Henry Lorber & Associates.

“Go downtown wherever you are, the evidence is all right there in your city,” Lorber said.

Several of Nightingale’s non-crowdfunded investments in recent years have also gone sour — lenders at three office buildings it owns have filed foreclosure suits against it in the last eight months. But its actions on the Atlanta and Miami deal may be a significant blow to investor confidence in CrowdStreet when it can least afford it.

“It is probably one of the single worst investment strategies I have ever heard of,” Lorber said. “Crowdfunding for real estate, it’s nuts! It’s great in a market that’s moving up, maybe. But if it’s moving down, it’s a catastrophe.” 

Proponents of crowdfunding, including those who participated in the Atlanta Financial Center deal, said that CrowdStreet’s offerings allow them to diversify their investments outside of stocks and bonds and buy property in geographically disperse areas on deals that they likely would never have been able to do on their own. 

“I could never buy a $200M project,” Huber said. “But I can be part of one through this.” 

'An Accident Waiting To Happen’

CrowdStreet executives said the Nightingale deals were the first of 770 equity raises on the platform that an independent manager had to step in because of concerns of fraud.

The fact that funding hadn’t been put in escrow hadn’t been an issue previously, according to CrowdStreet. Starting last month, CrowdStreet is now placing all fundraised equity into an escrow account, which can only be accessed by the sponsor after a deal closes, a spokesperson said.

The move was one the company had been planning to make in August after spending much of the past year getting licensed as an official broker-dealer and getting Financial Industry Regulatory Authority approval to act as such.

“To better serve our investors, CrowdStreet applied for a broker-dealer license in 2021 and was approved by FINRA in 2022. CrowdStreet decided to obtain a license to allow us to introduce new capabilities and services that will directly benefit our investors,” Steen said in a statement through a spokesperson. 

“Establishing an escrow process was one of many components of our transition to the broker model and something we have been working on for many months, bringing in the proper personnel and banking partners, and developing the technology, controls, and procedures necessary to manage tens of thousands of transactions and millions of dollars of investor funds. We had been targeting a launch in August but, understanding the immediate value it would provide, we introduced escrow in June after completing the technology upgrades and staff licensing requirements at a faster pace than expected.”

CrowdStreet said in Nightingale’s case, as with all of the other deals on its marketplace, it subjected the sponsor to a Thomson Reuters CLEAR background report and had references from institutions like KKR, Citibank, Wafra Capital Partners, ICER Properties and DRA Advisors. KKR declined to comment to Bisnow, while the other firms didn’t respond to a request for comment.

Johnson, the Chicago investor, said he trusted that CrowdStreet had vetted Nightingale’s claims better before the offering was put on the platform, since it doesn’t make sense for each individual to physically visit the properties or spend time and money to dig deeper into sponsors’ backgrounds.

“The smallest investment is still a large sum of money on their platform. You have to rely on them and rely on their due diligence,” he said. “How well did they vet them? Obviously, we’ll find out coming up.”

Ippolito said crowdfunding investors need to take more time to research sponsors, because some crowdfunding deals could be “an accident waiting to happen.”

“I’m not calling [CrowdStreet or Nightingale a] used car salesman, but you wouldn’t go to the salesman and say, ‘Tell me everything about this car,’ and trust what they say,” Ippolito said. “For individual investors, it’s spray and pray, basically. Put my money in and hope everything is OK.”

Honcik said a total loss still wouldn’t dissuade him from investing in other CrowdStreet offerings moving forward.

“I’m a little bit angry at CrowdStreet at not having vetted this a little bit better. I don’t think I should be the person vetting Nightingale,” he said. “But in the end, it all comes down to me. It’s kind of my fault."