Tag Archives: Tokenization

Digitalized Tokenized Real Estate Part 2

Posted on by

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

Posted on by

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.