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 on digitalizing real estate on a SEC registered broker/dealer.