Q&A With Patch Of Land CEO: The Evolution Of Crowdfunding

The SEC released new crowdfunding rules last month, opening the door for more avenues of alternative financing. Bisnow sat down with Patch of Land CEO and former Oaktree Capital Management banker Paul Deitch, for his take on the changing financing industry.

Bisnow: What are the implications of the SEC’s new crowdfunding rules on your business?

Paul Deitch: Today, Title III of the JOBS Act is not a consideration for Patch of Land. It is not impactful as we continue to work under Title II Regulation D 506(c), strictly with accredited investors.

While Title III of the JOBS Act is a positive move forward for financing small businesses, Title III does not give Patch of Land sufficient flexibility to raise capital for our projects and our borrowers.

Under Title III, a company soliciting investors is limited to raising $1M in a 12-month period, which, given our model, we would exceed in a very short time. Limitations in Title III are not conducive to our current business structure and as such we will not be adopting the new policies.

Bisnow: Millennials that aren't afraid to dump their banks are now being met with traditional bankers no longer afraid to face the music. Are traditional banks being traded up by the alternative lending space players?

Paul Deitch: Consumer buying patterns and the adoption of technology are having an impact on every single industry. While banks do not currently play in the alternative lending space, we do not see their role—in the traditional sense—devolving. I believe that they will be pushed to innovate, evolve and exist alongside alternative financing options in a complementary fashion. In the current market, we are excited about Patch of Land’s position as an attractive alternative investment opportunity in real estate.

Bisnow: What are some of the different types of alternative financing out there, and where does Patch of Land fit in?

Paul Deitch: At its highest levels, alternative finance is a very broad industry and includes online payments, asset management and lending. Patch of Land fits into two of the three segments—lending for the real estate entrepreneur, as well as asset management for individuals and institutions looking for investment opportunities with the downside protection of a first lien position in real estate.

Bisnow: How big is this going to get?

Paul Deitch: While it is difficult to predict, based on the 200% growth in 2015 of marketplace lending, I think it’s safe to say we have only scratched the surface. At $36B in size, alternative lending is a fraction of the $15 trillion banking industry, leading us to believe a substantial opportunity for growth exists in the very near future.

Bisnow: New capital requirements and tighter lending standards could be coming for commercial real estate lending and CMBS loans—how will that affect the alt-fi space?

Paul Deitch: As with many emerging industries, we believe the alt-fi space too will become more regulated over time. With growth, additional formalization of policies and institutionalization will inevitably occur. When and to what degree this will occur is hard to predict, but at this time it is not impacting the trajectory of our current business.

Bisnow: How do investors know which lending process is right for them?

Paul Deitch: While I cannot give investment advice, what I like about Patch of Land’s model is that we offer an investment option that is easy to understand, has the downside protection of a real asset, and allows one to easily diversify their portfolio on a national basis.

Bisnow: What's your science behind the sourcing; how do you find the properties to invest in?

Paul Deitch: We leave sourcing of properties up to the real estate professionals we lend to. When a borrower comes to Patch of Land, they have already identified the property that they need to finance, whether that’s for a value-add rehabilitation, a purchase, refinance or rental. We work with borrowers across the nation to understand the underlying property value, the market and the inherent risks associated with the loan request, including the borrower’s ability to execute and exit the loan.

Bisnow: I know that institutional players are getting involved in crowdfunding. Will they potentially crowd out the “crowd” from crowdfunding?

Paul Deitch: I believe that the crowd is proving to be more important than ever, and Patch of Land has maintained its commitment to the crowd since its first transaction in October of 2013. To date, over 90% of our $140M-plus in loans has been funded by our crowd. As for institutions, if properly managed, we believe they can be part of an effective investment ecosystem alongside the crowd.