For Carlton Group Chief, Another Frontier
Founder Howard Michaels enters the risky field of real-estate crowdfunding
By PETER GRANT
July 12, 2015
Crowdfunding has become a hot trend in commercial-real-estate finance, so it’s no surprise that Howard Michaels is expanding the Carlton Group into that business.
In his 35-year career in real estate, the New York-based real-estate finance broker and
investor has been involved in most major financing trends, often at an early stage. His first job in real estate was as a representative selling real-estate limited partnerships, before that industry flamed out in the late 1980s with a change in U.S. tax laws.
In the 1990s, Mr. Michaels was among the first to securitize debt as the commercial-mortgage-backed-securities market emerged. These days, Carlton is finding Asian investors to take equity stakes in projects by name developers.
Carlton has its eyes on online fundraising because it allows the firm to advertise online and sell stakes in real-estate deals to investors without the red tape that syndications require. “We’re going to be ramping up that business big time,” Mr. Michaels said.
Carlton rolled out its first crowdfunding site last year, taking advantage of the reduced restrictions on raising money via Internet in the Jumpstart Our Business Startups Act of 2012. Mr. Michaels said the site will soon be relaunched to allow people to make investments as small as $50,000, down from a $1 million lower limit.
Mr. Michaels said he hopes to use crowdfunding to acquire $500 million worth of property in the next year. “It gives us a broader base of investors to go after,” he said.
Of course, Mr. Michaels isn’t the only one to recognize the Internet’s impact on real-estate finance. Scores of firms and startups have rolled out sites, and some, like Realty Mogul Co. and Fundrise, have gotten out of the gate faster than Carlton.
Industry participants predict that many current players won’t survive. “There are hundreds o
f these companies now, but most of them have funded $3 million to $10 million or have done one deal with offline capital, but they’re saying it’s online capital,” said Jilliene Helman, chief executive of Realty Mogul.
Still, Mr. Michaels, 59, has a history as a survivor. He started in sales working for the Long Island carpet store his father managed. After graduating from American University he sold copy machines and insurance, and in 1980 started selling limited partnerships for a firm named Island Planning.
When the commercial-real-estate industry collapsed in the early 1990s, Mr. Michaels developed expertise in auctioning distressed property for a firm named Carlton Property Auctions. After buying out his partners, he moved the firm to Manhattan and renamed it the Carlton Group.
Initially, the Carlton Group focused on providing debt financing as mortgage securitization boomed. But in 1998, Mr. Michaels switched to helping developers raise equity.
“I realized the last thing the world needed was another mortgage broker, because
debt had become a commodity,” he said. “What we saw was that developers were much more eager and willing to pay a lot more money if we could bring them equity partnerships instead of debt.”
Carlton, which has a staff of about 45, has done $125 billion in deals throughout its history, Mr. Michaels said. Like the rest of the industry, it faced some lean years during the downturn.
But business is strong as New York’s real-estate market booms. In the past 18 months, Carlton has brokered $6 billion of development deals, including the $125 million investment an Asian insurer made in Steve Witkoff’s planned condo at 111 Murray St. and the land loan for HFZ Capital’s purchase of an $870 million site near the High Line.
Mr. Michaels also has started taking stakes in deals himself. Carlton owns and manages about 3 million square feet of commercial real estate, and has a minority stake in more than $1 billion worth of buildings, frequently co-investing with clients.
“Every broker wants to be a principal,” Mr. Michaels said. “They see how much developers make.”
Crowdfunding will come in handy when Carlton is doing the buying. In a hypothetical $50 million acquisition, Mr. Michaels said, maybe $35 million would be borrowed, $5 million would come from Carlton and $10 million from crowdfunding investors. “It’s another way for us to capitalize the deal,” Mr. Michaels said.