‘Democratizing the investment process’

Mainstreet is developing this 66,197-square-foot NextGeneration care and rehabilitation facility in Bloomington, Ind. The facility will include 100 recovery suites. Seventy beds will be licensed for skilled nursing, while 30 beds will be left unlicensed to use in an assisted living format.. Mainstreet is developing this 66,197-square-foot NextGeneration care and rehabilitation facility in Bloomington, Ind. The facility will include 100 recovery suites. Seventy beds will be licensed for skilled nursing, while 30 beds will be left unlicensed to use in an assisted living format..

Mainstreet's crowdfunding initiative proves to be a big success.

Think differently and innovate. That’s one of the core tenets of Mainstreet, the largest developer of seniors housing and post-acute facilities in the United States. The Carmel, Ind.-based company put that credo into action this past summer when it completed a crowdfunding initiative to fund a new senior care development project in Bloomington, Ind. 

In total, the effort raised over $1.6 million from U.S. accredited investors within a four-week period. Investments ranged from $10,000 to more than $250,000 and investors from all across the country participated in this project. 

Helping spur this effort was Portland, Ore.-based CrowdStreet, an online crowdfunding marketplace that connects accredited investors with institutional-quality real estate investments. (Crowdfunding is defined as
the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.)

The $1.6 million raised and the fast timeframe represent U.S. records for crowdfunding only from accredited investors in healthcare real estate, senior living and ground-up development properties, according to Mainstreet. The company has developed more than $200 million in senior living and care facilities and has a significant pipeline for future development.

“Changes in the JOBS Act have allowed us to democratize the investment process, bringing these opportunities directly to the investors. We’re energized by this initial response and are excited to offer more of these opportunities in the future,” said Mainstreet CEO Zeke Turner in a July press release announcing the results. 

The JOBS Act enacted into law in April 2012 removed the “general solicitation” ban that had prevented entrepreneurs from advertising sales of equity in their small, private companies to wealthy individuals, known as accredited investors, according to The Wall Street Journal.

“What Title II of the JOBS Act said was that if you have a private offering, you can now for the first time in 80 years advertise that you are raising money for that private offering. You can generally solicit,” Darren Powderly, CCIM, and co-founder of CrowdStreet, told Seniors Housing Business. “But if you do that, all the investors need to be accredited and they have to go through a much more stringent process to prove that they are accredited.”

The U.S. Securities and Exchange Commission defines an accredited investor in a few different ways. The investor must have an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of purchase, excluding the value of the investor’s primary residence. 

Alternatively, an accredited investor is defined as someone with an annual income exceeding $200,000 in each of the two last years, or has joint income with a spouse exceeding $300,000 for those years, and has a reasonable expectation of the same income level in the current year. Approximately 7 percent of the U.S. population, or 9 million Americans, are accredited or wealthy, according to Powderly.

The CrowdStreet marketplace is designed to simplify transactions between U.S. accredited investors and real estate operators like Mainstreet. Powderly says there are some parallels between what businessman Charles Schwab achieved in the late 1990s for stock and bond investing to what CrowdStreet is trying to accomplish today. 

“He completely made it more efficient, which dropped the cost of investing so the returns were better. He gave individual investors the power to choose,” explains Powderly. “And that’s what we’re giving individual investors — the power to browse a variety of pre-vetted investment opportunities nationwide. We make it very easy for the investors to do their underwriting and make an educated investment decision.”

Attractive investment opportunity

Mainstreet Medical Resort-Bloomington, a 66,197-square-foot, NextGeneration care and rehabilitation facility, will feature 100 recovery suites. Seventy beds will be licensed for skilled nursing, while 30 beds will be left unlicensed to use in an assisted living format. Meyer Najem began construction on the facility in June 2014, and the project is scheduled for completion in May 2015.

Accredited U.S. investors with a stake in the property are projected to earn a targeted 14 percent annualized yield (10 percent paid quarterly with a 4 percent special distribution at the end of the project). 

For example, an investor that committed $10,000 to this crowdfunding initiative would receive 10 percent cash on an annualized basis, or $1,000 per year, paid in quarterly installments of $250. Once the development is complete and the asset is sold — and assuming the return profile hasn’t changed — the investor will receive a 4 percent kicker, says Scott White, chief operating officer at Mainstreet. 

The attractiveness of the return is evident by the fact that the direct investment initiative raised $1.6 million within a four-week period. “There aren’t a whole lot of 14 percent opportunities with 10 percent cash pay,” emphasizes White.

To promote the investment opportunity, Mainstreet advertised in newspapers and on billboards, aired a commercial, issued a press release and established a website (buildmainstreet.com). Mainstreet’s objective was to open up the process to all accredited investors. 

“Democratize it and let the world know. First come, first serve,” says White.

Mainstreet set a fundraising target of $1.5 million, and hit its goal within three weeks. “We upsized it and we exceeded $1.6 million the following week and we cut it off there,” says White.

The cost to build the state-of-the-art NextGeneration facility in Bloomington is about $13.4 million. Mainstreet obtained a bank loan for $10 million, or 75 percent loan to cost. In addition, Mainstreet contributed $1.8 million in equity. The $1.6 million raised via crowdfunding represented the mezzanine tranche.

As successful as this direct investment initiative was for Mainstreet, Scott says that he’s not sure he would do it again in the same format because the deal was relatively small. 

“To do this one project at a time is not efficient, but what we may consider in the not-too-distant future is bundling a bunch of projects together and offering an opportunity to invest in that.”

Development juggernaut

Mainstreet is growing rapidly. In 2013, the company developed seven NextGeneration properties. This year the company will develop 17 properties and has plans to develop at least 35 more in 2015. 

In mid-August, Toledo, Ohio-based Health Care REIT (NYSE: HCN) agreed to acquire 17 NextGeneration properties currently under construction and enter into a development partnership with Mainstreet for 45 future projects at a combined value of approximately $1.4 billion. 

In addition, Health Care REIT agreed to acquire HealthLease Properties REIT (TSX:HLP.UN), the capital development arm of Mainstreet, for $950 million. HealthLease is based in Toronto. 

 “We build very different facilities. That’s the hallmark of what we do,” says White, referring to the NextGeneration brand. 

“What we have created is a very different product in terms of the skilled nursing/assisted living space. Most skilled nursing facilities in America today are two strangers living in a room, common bathing down the hall and cafeteria-style dining. Our NextGeneration facilities are 95 percent private rooms, private bathrooms, two to three onsite restaurants, eight to 10 common amenities, a hair salon, pub, library, billiards room, music room and a theater,” says White.

Most of the patients at NextGeneration facilities are in transitional care. They’ve been discharged from the hospital but aren’t ready to go home. The typical stay is 15 to 20 days, but some patients stay longer. “It’s not a pure rehab hospital. It’s not a long-term care facility,” says Scott, adding that it is a Medicare-eligible facility.

Mainstreet Medical Resort-Bloomington will bring an estimated 350 new jobs to the local community, according to buildmainstreet.com

A former Wall Street investment banker, Scott is convinced that crowdfunding helps level the playing field for outside investors. 

“Right now, in order to get access to opportunities like this, it is our belief that you need to be connected. You are generally working the Wall Street circuit, the country club circuit.”