Digitalized Tokenized Real Estate Part 2
Why Digitalize?
- Automatesdocument retrieval and data entry.
- Trusted Data improves asset values and liquidity.
- Deliver current pricing and performance data at greater speed, lower cost, and more frequency.
- Dramatically reduce cost and friction of asset valuations and due diligence time.
- Eliminate duplication of efforts to value and audit assets.
Data is stored in one trusted database automatically (as authorized) providing information to investors, lenders, service providers such as accountants, and third-party valuators who can provide updated opinions of value (optional).
Why Tokenize?
- Management – tokens are electronic versions of documents combined with smart contracts to define and automate an offering and associated workflow. The smart contract defines what happens upon the occurrence of an event. For example, the digitalization component reports share sales and distribution. The smart contract transfers ownership of the shares, calculates and makes the distribution, updates the capital table, and stores the information on an auditable, unalterable blockchain with all information available via a secure online portal.
- Flexibility – smart contracts allow for complex structures. Cash flows can be allocated in various configurations: to senior lenders, to mezzanine, to preferred equity, to general partners and limited partners – with automatic, instantaneous waterfall calculations and capital account adjustments. Actions dictated by the smart contracts embedded in the token could also be non-financial, for example management of timeshare units or club memberships.
- Liquidity – Currently real estate is an illiquid asset, localized, with high due diligence and transactional costs – especially on the trading of limited interests. Digitalization provides the necessary information and Tokenization opens the investment to the world as a tradeable instrument – in conformance with SEC and other legal regulation.
The sponsor could stop here with a cost and operationally efficient investor relations platform or continue to a listing on an Alternative Trading System to raise capital and allow the investors to actively trade a previously illiquid asset.
Benefits of Digitalization + Tokenization + Alternative Trading Systems:
- Fractionalization – smaller investment amounts accessing more investors.
- Globalization – cross-border real estate finance is complicated and requires significant investment in understanding local law and practices – security tokens regulation is handled by the issuer and the tokens can be listed on multiple markets or sold to investors outside of the listing market (subject to legal requirements) thus opening investments to any investor with internet access.
- Ease of Information – due diligence/investment information is available online.
- Ease of Investment – investors trade tokens similar to trading stocks & bonds.
- Institutional Trading – institutional trading desks accept lower yields/higher prices in return for easy access to reliable due diligence information and the ability to trade electronically on a regulated market.
Digitalized Tokenized Real Estate
From accountants creating country club partnerships to Master Limited Partnerships, Private REITs, Public REITs, TICs, DSTs, LLCs – the real estate industry has always pursued new, more efficient, more effective ways to raise funds and diversify risk. Digitalization and Tokenization are the next steps in increasing efficiency, expanding the potential small and institutional investor base, opening investment globally, and providing liquidity for what has historically been an illiquid asset.
Digitalization is the creation of a digitally recorded investment such as proof of ownership of or participation in an asset (for example a limited partnership interest in a property) which is recorded electronically on an unalterable blockchain instead of on paper in a filing cabinet. Digitalization can be expanded to include real or near real-time updates of investment performance, valuations, and other data items needed to enhance the liquidity of the asset.
Tokenization is the expression of the digital asset which can be administered electronically and automatically via smart contracts (short blocks of code) embedded in the token. The tokens can be traded privately (subject to SEC regulations) or be issued as a registered security and traded on an Alternative Trading System (ATS) providing access to individual and institutional investors on a global basis and secondary trading of previously illiquid investments.
The World Economic Forum estimates a potential $24 trillion in tokens by 2027. The Boston Consulting Group is more conservative at only $16 trillion by 2030.
What does this mean in plain English?
In brief, information on the property or other investment is onboarded and updated on a permissioned blockchain. This provides for the information to be memorialized so it can’t be changed, linked to the underlying source for validation, and feeds into smart contracts that can automatically perform pre-programmed functions. Capital tables, distributions, etc. are automated and viewable by investors online through a secure website portal. Audit trails are established and maintained.
The investors purchase tokens – basically think of them like shares – which they can trade on the ATS similar to trading stocks and bonds rather than the current reselling of real estate shares to specialist buyers with the typical limited market, discount price, extensive paperwork, and lengthy time for buyer’s underwriting and legal.
Investors log on to the ATS, review the documentation, decide to buy, click the button, transfer done – all with institutional grade legal, documentation, valuation, and implementation.
Issuers have the option to add components providing:
- ESG/Environmental reviews.
- Updated property performance information (potentially real-time).
- Property valuations on a periodic or as-needed basis.
In short: real-time online information, updated valuations, automated record keeping, transparency = reduced workload, enhanced investor relations, access to institutional investors, lower costs, and higher values.
Contact me if interested in additional information or in digitalizing real estate on a SEC registered broker/dealer.
Real Estate Markets – Not Even Close Enough to Haggle
Participated this morning in the monthly Columbia Business School RE Circle, the Paul Milstein Center for Real Estate International Real Estate Alumni Meeting: Updates on RE Markets Around the World.
Participants confirmed my opinions that:
Sellers are looking for 4-4.5 caps and buyers looking for 5-5.5 caps – indicating a 20% decline in value and too far apart to even haggle.
Funds that were lending at 8% and leveraging up with an A-piece from a bank can’t cause banks now charging 8%.
Lots of money sitting on the sidelines and more funds being raised with nowhere to go.
Equity funds raising money for debt funds to play lower down on the LTV.
Only asset class that’s optimistic is single family.
Values down 20% and market won’t start clearing for 6 months or so.
Banks/Special Servicers will cooperate to avoid a panic.
Mezz/Pref Equity that’s really Equity + Hope Note is the future.
White Knight Pref Equity To The Rescue
What is White Knight Pref Equity?
White Knight Pref Equity is the investment of new funds into a capital stack by a friendly investor to solve a refinance or other shortfall. It is the opposite of bottom-fishing or vulture investing or loan-to-own.
How does it work?
Say for example you have a property where changes in cap rates and LTVs leaves your refinancing short by $10 million, the White Knight Pref Equity funds the gap.
Why be a White Knight?
For example, a pension fund real estate investor that I work with had a problem. They buy or JV on existing and to-be-built low/mid-rise residential rental properties and BTR projects. The market for that product is extreme competitive and even paying market rates, they kept losing deals to other buyers – even at the same price. Last to play golf with the broker got the deal.
Their solution – offer favorable terms for White Knight Pref Equity in return for a Right of First Refusal. The property owner receives favorable, even below market funding, The lender receives an acceptable rate of return and is first at the table in the event of a sale.
A win-win.
Languages Lost to Climate Change
One of the lesser-known impacts of Climate Change is the loss of already threatened indigenous languages.”
Since 1950, the number of unique languages spoken throughout our world has steadily declined. Today, the voices of more than 7,000 languages resound across our planet every moment, but about 2,900 or 41% are endangered. At current rates, about 90% of all languages will become extinct in the next 100 years.
According to The Language Conservancy.
And potentially the most affected by climate change are the languages of Asia and the Pacific Islands with few surviving speakers.
Disasters, the majority of them weather related, accounted for 23.7m internal displacements in 2021, up from 18.8m in 2018. Over the past 10 years, Asia and the Pacific were the regions most affected by displacement worldwide, with the Pacific island states the worst by population size.
According to The Guardian.
Drawing attention to the issue, the UN declared Year of Indigenous Languages.
The Language Conservancy provides additional information on the danger and attempts to save endangered languages.
Declining Real Estate Values
Bloomberg published an article – Global Real Estate is Sitting on a $175 Billion Debt Time Bomb – Bloomberg – regarding the rise in distressed real estate debt and decline in values.
The $175B in distressed real estate debt is quite striking – exceeding the combined total distressed debt of the next 9 largest distressed debt by asset types.
US real estate has declined 9% in value while UK real estate is down 20%. MSCI opines in its 2023 Trends to Watch in Real Assets – MSCI that London offices will need to decline by another 9% to be of interest to investors. But the US is lagging, not avoiding.
Of course. both distressed debt and declining values are intimately interconnected and amplified by the low cap rates and interest rates of the past.
For example, a property with $1 million net income valued at a 4.5 cap rate is $22.2 million and an 80% LTV loan would be $17.8 million. The same property at a 5.5 cap rate is valued at $18.2 million – an 18% decline in value. The loan LTV is now 98%. In short, the sponsor’s 5-10% equity and most, if not all, of the LP equity is wiped out.
Although the property could still be servicing the low interest rate debt, the minimum loan required LTV is out of balance – to which the regulators could turn a blind eye allowing the lenders to kick the can down the road – but the real distress will eventually come with the refinancing when the loan must be paid-down or deed handed over.
So, we’re entering the stage in the cycle of white knights and loan-to-own and bets on if we’re buying at a discount or catching the knife on the way down.
ESG – Environment/Social/Governance: What & Why?
ESG is the application of socially aware and responsible standards centered on the environment, society, and internal governance.
ESG investment refers to an investment strategy which seeks equivalent or higher returns while simultaneously making a positive impact in three areas: environmental, social and governance
According to the U.S. SEC:
- The environmental factor might focus on a company’s impact on the environment, or the risks and opportunities associated with the impacts of climate change on the company, its business and its industry.
- The social factor might focus on the company’s relationship with people and society, or whether the company invests in its community.
- The governance factor might focus on issues such as how the company is run and executive compensation.
Investors, especially institutional investors, have increasingly focused on the ESG aspects of their investments from a mixture of concern, profit, and regulatory pressure. This emphasis has in turn put pressure on investment recipients to conform with ESG standards in a reportable manner.
More specifically:
Environment – too often viewed solely as energy consumption/emissions addressable by decarbonizing. Environment refers to the entirety of the environment including air/water/sound pollution, energy consumption, ecological features, and aesthetics.
Social – refers to the human factors such as labor standards, workplace health & safety, local community involvement/benefits/impacts. It can be as simple as providing nutritional advice to tenants to economic development for the local community.
Governance – referring to the entity’s internal governance practices – is ESG a recognized standard, are there internal rules for ESG measurements and compliance, what is the level of commitment – an analysist or the C-Suite.
_____________________________
Why ESG / Sustainability
The simplest answer is that sustainability is necessary to the survival of civilization and perhaps humanity. Pretentious sounding but the UN estimates that humanity is consuming the equivalent of 1.6 planets. In other words, in the seven months from January 2022 to July 2022 humanity consumed all the biological resources that the Earth regenerates over the entire year. And as a purely financial matter, it’s also good business reducing costs and increasing profits to be explained in future posts.
One Photo Challenge 2020: Competition Winners Announced!
“The women’s brick making cooperative in Kayonza, the Eastern Province of Rwanda, sit and take pride in their work. They hand made the bricks that give shape to this classroom space, and produced all of the approximately half a million bricks that comprise the “Women’s Opportunity Center” by Sharon Davis Design for the NGO Women for Women International.
Non-Student Winner: “Women Gather” by Bruce Engel (BE_Design)
Check out the photos at: Architizer
From bleak to bustling: how one French town solved its high street crisis | Cities | The Guardian
Today, Mulhouse is known for the staggering transformation of its thriving centre, bucking the national trend for high street closures.In the past eight years, more than 470 shops and businesses have opened here. Mulhouse is unique in that 75% of new openings are independents, from comic book stores to microbreweries and organic grocers. It is one of the only places in France with as many independents as franchises. And it is one of very few places in France where more shops are opening than closing…
…Town centre residents were among the poorest as higher earners moved to houses on the outskirts, leaving properties vacant and run down.
Mulhouse set out to rebalance the housing mix. Generous subsidies for the renovation of building fronts expedited a facelift of more than 170 buildings. Security and community policing were stepped up. Transport was key – with a new tram system, bike schemes, shuttle buses and cheap parking.
But making the town’s public spaces attractive was just as important, with wider pavements, dozens of benches, and what officials deemed a “colossal budget” for tree planting and maintenance, gardening and green space. Local associations, community groups and residents’ committees were crucial to the efforts. A town centre manager was appointed to support independents and high-street franchises setting up.
Source: From bleak to bustling: how one French town solved its high street crisis | Cities | The Guardian
Stunning observation tower runs rings around Danish forest
Source: Stunning observation tower runs rings around Danish forest
Compare this observation tower v. the Vessel in Hudson Yards, NYC. Take the time to go to the website and check out the 30-picture gallery.
