The real estate industry is just starting to leverage cryptocurrency and the blockchain through tokenized securities — and if any of those words sound like gobbledygook, you’re not alone. Digital technology is moving faster today than most people can keep up with the lingo. But, if you can get a grip on the basics of securities tokenization, you’ll see a world of opportunity open to real estate investors.
We recently got a primer in real estate tokenization, thanks to the PA/NJ/DE CCIM Chapter. The CCIM group offers networking and education for commercial and investment real estate experts, and Certified Abstract’s principal, Jen, is a member.
The group’s recent Breakfast Club event featured a presentation by Douglas Borthwick, Chief Business Officer of INX, one of the world’s premier trading platforms for cryptocurrencies and digital securities. Douglas walked us through how the blockchain and tokenized securities are providing new financial avenues for real estate owners and investors.
Read on for the highlights.
First, a quick primer on the blockchain
The blockchain is a digital record of transactions hosted across a vast, decentralized network of computers. It structures data into chunks (a.k.a. blocks) that are time-stamped and linked together with encryption. As new data comes in, it’s entered into a fresh block. Once that block fills with data, it gets chained onto the previous block, keeping the data in chronological order.
Information embedded on the blockchain can’t be altered, making it the most trusted system of data verification and storage on earth. This immutable record-keeping forms the bedrock for cryptocurrencies like Bitcoin, which use the blockchain to maintain a secure, transparent record of activity.
To be clear, while you’ll often hear these terms used together, the blockchain is not a form of cryptocurrency nor a cryptocurrency trading platform. It’s the technology that provides the infrastructure for cryptocurrencies, which are essentially different versions of a blockchain-based ledger system. And the blockchain provides functionality far beyond financial transactions.
In fact, many of the assets you hold today, like equities or real estate titles, may be on the blockchain in just a few years. Your driver’s license, passport, and other documents could even become non-fungible tokens (NFTs) that you hold in a digital wallet on your phone.
Now, what are tokenized securities?
Tokenization is a method of securitizing assets, which means fractionalizing the assets into “security tokens” that you can sell to investors. A security token is essentially a digital contract for a fraction of any asset that has value, like real estate. Ownership of these tokens is securely recorded on the blockchain and tradeable via crypto exchanges or Alternative Trading Systems (ATS), like the INX platform.
Douglas pointed out that tokenized securities enable people to trade fractionalized portions of assets that simply could not be traded before. This includes specific income streams, business lines, buildings, patents, currencies, and commodities…just about anything can be tokenized.
One of the most notable aspects of this new asset class is that it offers capabilities like 24/7 trading and instant peer-to-peer transfers with a real-time view of ownership. Which means that, in our fast-moving, technology-driven world, security tokens can be traded at the speed of modern life.
Another key point: tokenized securities introduce an additional fundraising option for businesses beyond debt and equity, opening the door to both institutional and retail investors. For instance, a real estate firm could raise capital by tokenizing their assets and offering fractional ownership to retail investors, instead of seeking out private equity firms.
As Douglas explained, tokenized securities can also help foster enthusiasm for your business. Take a hotel property: given that investors’ upside depends on the hotel’s success, they’re more likely to support and promote the business. You might even consider giving investors special perks and discounts, helping turn them into your business’s biggest evangelists.
Tokenized securities & commercial real estate
What might be one of the most attractive aspects of real estate tokenization is that it provides a form of liquidity that didn’t previously exist. Money no longer gets locked up in projects for years; with tokenization, building owners get money upfront and investors can cash out at any time.
Here’s an example of how that might work.
Owners can sell future cash flows…
Let’s say you own an office building with rental units. Your ROI from lease income might be around 8% per year. You could package that income and tokenize it, selling shares of future cash flows to investors. Your investors get an 8% return, and as the building owner, you get cash up front — plus, if the building appreciates each year, a return on the property itself.
The key is that you’re selling a portion of future profits, not a portion of ownership. You still own the building; your token holders have no lien on it. In addition, that cash infusion gives you the capital to buy another building, fill it with renters, and tokenize more income.
As an example, Douglas pointed to developers in San Francisco who provide affordable housing for the homeless, a longtime problem in the city. The developers can put up a building, contract with the local town to rent units at low cost, and then sell that rental income in tokenized form to investors. Investors get an ROI on future cash flows along with the satisfaction of helping people in need. And the developers get immediate cash to create additional affordable housing.
…and investors get access to assets
Buying commercial real estate has long been out of reach for a lot of people. Today, with tokenized securities, you don’t have to buy a whole building anymore; as an accredited or retail investor, you can now buy into private transactions in a secondary market.
Essentially, says Douglas, it’s about democratizing asset ownership. You don’t have to get in on the early stages of a property investment, and you’re not locked into anything. Tokenizing real estate cash flows means these private assets are easily tradable on secondary markets and available for just about anyone to invest in.
Another interesting point: the 24/7 nature of digital securities trading opens it up to a global community. In Japan, for instance, yields tend to be quite low, and investors are often looking for high-yield products. As a property owner in Philly, putting tokenized securities on the global market could draw investors from overseas who are thirsty for new opportunities.
Where cryptocurrency comes in
To purchase traditional stock, you have to pay with fiat currency (hard dollars). You give the dollars to your broker, and the broker buys the stock on your behalf. To buy digital assets like tokenized securities, you can pay directly using traditional cash, central bank digital currencies, or cryptocurrencies like Bitcoin and Ethereum. This reduces trading costs by cutting out the middleman — and the middleman’s fees.
Paying for digital assets with cryptocurrency also provides for instant settlements. Unlike with traditional stock, which takes two days to get delivered to your account, digital assets purchased with digital currency go immediately into your digital wallet.
While a two-day waiting period may not seem like a long time to the average investor, it can be a significant hindrance when you’re dealing with very large transactions.
A few words of caution
Here are a few parting thoughts from our crypto expert:
Put a floor on the property value
For tokenization, Douglas recommends a minimum property value of around $20 million. There are costs associated with creating digital securities, including the legal costs of regulatory filings with the SEC (likely $15-35,000). Then, you have to think about the expense of marketing your asset to potential investors.
Your offer needs some “sizzle.”
Real estate isn’t always easy to sell in a fractionalized format, especially when the property isn’t sexy. Iconic real estate, or buildings that hold tremendous emotional value, tend to generate the most excitement among investors. Barring those, you’ll likely need a competitive return or compelling perks to get people to invest in your asset.
How many investors can you handle?
If you go the route of a public offering, an unlimited number of people can buy and sell your digital securities. But, keep in mind that the more retail investors get involved, the greater the possibility of questions and concerns you may have to address.
For private offerings, SEC regulations limit the maximum number of investors to 2,000. And, you may want to limit the number even further with a minimum investment. Once your securities go to the secondary markets, you can further fractionalize your asset and offer tokens for a lower amount. But, per the regulations, only 2,000 people can ever hold that offering.
We hope this was helpful!
For more information:
INX
If you’re interested in learning more about how to leverage security tokens and cryptocurrency in commercial real estate, INX has knowledge libraries for cryptocurrency and digital securities trading, and you can always contact INX here.
CCIM
CCIM is part of a global commercial real estate network with over 9,000 members across North America and in more than 30 countries. CCIMs are recognized experts in the fields of commercial and investment real estate, and include appraisers, asset managers, brokers, developers, investors, lenders, and other allied professionals. For more info, contact our local PA/NJ/DE chapter here.
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