Crowdfunded real estate deals plummet as investor funds disappear

(Bloomberg) — Hundreds of repeat investors who together invested $63 million to buy commercial real estate in Atlanta and Miami reportedly saw their funds disappear.

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Two deals orchestrated by CrowdStreet Inc., a real estate investment firm that raises money from relatively wealthy people, fell apart as investors’ money disappeared from bank accounts meant to buy shares in buildings, according to bankruptcy court documents.

An independent manager investigating how the deals went wrong discovered that millions of dollars of the crowdfunded money ended up in accounts controlled by Nightingale Properties, a company CrowdStreet partnered with for the deals, as well as Nightingale’s CEO, according to court documents.

“When we became suspicious of potential financial misconduct, we alerted regulators and negotiated the appointment of an independent official,” a CrowdStreet representative said in an emailed statement Monday. “Financial fraud is a risk we take seriously and we remain committed to providing investors with the best real estate investing experience online.”

New York-based Nightingale and CEO Elie Schwartz did not respond to requests for comment.

In order to investigate the accounts – and possibly recover funds – the independent manager filed for bankruptcy last Friday the two legal entities intended to buy shares in the buildings in Atlanta and Miami. Bankruptcy will allow businesses to offer a repayment plan to creditors.

A lawyer for Schwartz said he would cooperate with the investigation, according to court documents.

Hijacked accounts

CrowdStreet raised funds from accredited investors through its online platform and placed the money in two shell companies, which Nightingale was supposed to use to purchase the properties: a sprawling office complex in Atlanta’s affluent Buckhead neighborhood and a mixed-use building in Miami Beach.

Read more: The world’s empty office buildings become a debt ticking time bomb

The minimum investment for accredited investors was $25,000, according to a filing by Eric Lee, director of entity restructuring. But while investor interest in the Atlanta Financial Center complex exceeded expectations – raising 238% more funding than it had set a target – funding for the construction deal to Miami has been insufficient.

After withdrawing more money from other investors and investing his own equity, Nightingale was supposed to facilitate the transactions, according to court documents. In the meantime, the company was to leave CrowdStreet investors’ money in two different entities – ONH AFC CS Investors and ONH 1601 CS Investors – untouched.

Eventually, transactions languished, encountered delays, and some investors demanded refunds. While some of those refunds have been made, many remain unpaid, according to Lee.

In June, Anna Phillips, the entities’ new independent manager, launched an internal investigation to track down the funds. She soon discovered that the entities’ bank accounts had been emptied. The accounts had only $125,000 and $1,600 left, according to court documents.

The bankruptcy filing will allow Phillips and Lee to investigate where the money went, according to court documents.

“Debtors will be greatly assisted in this investigation by the ability to use the powers of the Bankruptcy Code to investigate these pre-petition activities,” Lee wrote in a bankruptcy filing on Friday.

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