DiversyFund is another entrant into the the market proven out by other Reg A+ REIT platforms. Their founders are experienced commercial real estate investors and operators (though acknowledge they have minimal experience running a REIT), and they’ve made some admirable updates to their website and investor documentation since we first reviewed them back in 2017, as well as opened up investment to non-accredited investors under Reg A+. Originally they were only offering investment directly in various real estate projects (though offered under Reg D so only available to accredited investors), but appear to have changed course a bit and are now offering only investments through their REIT.
Like the other major platforms offering Reg A+ REITs, DiversyFund features low minimums, and an easy way for non-accredited investors in particular to get some exposure to commercial real estate, with the potential for tax-advantaged long-term appreciation.
DiversyFund is attempting to differentiate themselves as a “vertically integrated” platform (since they are the developer/sponsor on every deal, as well as the REIT manager and the platform marketing the REIT), though the result in practice is a thick tangle of interrelated affiliates that can make it challenging for prospective investors to work out exactly who’s getting paid (and how much) at each stage of the investment.'
Types of investments DiversyFund offers
DiversyFund acquires or develops multi-family properties in major metro area central business districts or nearby suburbs. According to their offering circular:
Initially, the Company intends to target multi-family properties in a “value-add” strategy. That means a strategy where the Company would buy an existing multi-family property and undertake renovations with a view toward adding significant value. For example, the Company might renovate individual units, add landscaping, and/or add exercise facilities or other amenities, all with a view toward increasing the net income from (and therefore the value of) the property.
Additionally, DiversyFund is also seeking Series A venture investment to fund their continued growth.
What do you get when investing with DiversyFund?
Investors in the Growth REIT receive Class A Shares in a Delaware Limited Liability Company (LLC). The LLC is in turn managed by another LLC (DF Manager LLC), which is an affiliate of DiversyFund Inc. The Class A Shares are currently priced at $10/share, with a minumum purchase of 50 shares ($500).
Prospective investors should review the offering circular and supplements to be sure they understand what they are receiving as well as the relationship among the various entities involved (for example, the LLC manager reserves the right to create new classes of shares in the future that may have “superior” rights to Class A shareholders). Multiple layers of relationships among related parties is common in real estate, but since many Reg A+ REIT investors are new to real estate investing, the offering docs deserve a thorough read before investing.
How does DiversyFund make money?
DiversyFund touts having no fees for investors (including temporarily waiving a 2% annual management fee – that exemption was set to expire in March 2019 but is still advertised on the website so presumably is still in effect). It’s true that they don’t charge any sales commissions to investors, but that doesn’t mean that they don’t make money in other ways. Indeed, perhaps the best way to understand how DiversyFund makes money is to review the presentation they’ve posted for prospective investors in their Series A, where they describe how their model offers the potential for “up to 100X revenue per dollar raised compared with other real estate platforms”. Ostensibly they can do that while also delivering an acceptable return to investors, but it’s worth taking the time to understand how DiversyFund makes money before you invest (in either the REIT or the company).
For example, in the project described in this supplemental SEC filing, DiversyFund expects to invest a total of $225,000 as equity in the project, but as the developer will also collect an estimated $1.2M in developer fees (in addition to their share of the investment return and their management fee if and when they reinstate that).
Potential returns and cashflow
Unlike similar Reg A+ REITs, DiversyFund does not currently pay any regular cash dividend. Investors receive a 7% preferred return, which is reinvested back into the REIT, and any operating cash flow for the REIT above that is also then reinvested back into the REIT based on a formula spelled out in the offering circular, so investors should understand they’re not likely to see any liquidity on their investment for at least 5 years (or more). DiversyFund reports a 17.6% average annualized return, though that’s not based the REIT performance, it’s based on the overall returns from the individual projects they previously offered before starting the REIT.
Investors should also be sure to understand that their 7% preferred return typically comes after fees paid to the Sponsor/Developer (6-8% in one recent project, though DiversyFund says 4-5% is typical) – and recall that the Sponsor/Developer in the REIT investments is also DiversyFund.
All REITs are required to distribute 90% of their taxable income annually to retain the favorable tax treatment REITs receive from the IRS (in short, they don’t pay income taxes as long as they distribute at least 90% of their annual income back out to shareholders). Notably DiversyFund’s distributions are primarily done as dividend reinvestments in the REIT itself rather than as cash.
Regulatory framework and due diligence expectations
DiversyFund is offering shares in a REIT under Tier 2 of SEC Reg A+, which carries with it several mandatory disclosure and reporting requirements. Prospective investors can review the full SEC offering circular here.
REITs like the one from DiversyFund are “blind pool” investments, so investors are not able to opt-out of particular properties, and are relying entirely on DiversyFund’s judgment about which properties to acquire and all the terms of the purchase, any renovation, etc. Prospective investors should also note that as is the case with a number of other real estate investment crowdfunding platforms, there is a complex network of affiliated companies involved, and the specific fees and compensation paid out among them can be challenging to decipher, and may create conflicting incentives.