WSO,
I'm sure everyone has heard of the recent Bitcoin craze or made a few bucks dabbling in it. Outside of Bitcoin, blockchain technology does create some disruptive opportunities. Specifically in real estate it could create a quasi-crowdfunding market.
Check out the article below. There are definitely some holes in the theory, but it actually seems like it could be possible.
Blockchain Technology Disrupting Real Estate
I'm assuming properties would have long-term property managers that remain in place regardless of exchange of coins/tokens. I think the main issue would be that the tokens could create a divergence in intrinsic price vs. token price(but then again if ppl overpay for tokens its similar to compressing the cap).
Whats everyone's take on this?
It's a legal nightmare for US investors right now. REAL (Real Estate Asset Ledger) which is based in Singapore is looking to tokenize their real estate investments. I'm guessing they will have some early success, but I'd still be worried about my liquidity. There no real precedent for selling tokens backed by 5% of an international real estate investment. If you want to get out and there were no buyers you're SOL.
What if the entire equity value is converted to a token-based model which could be traded in a secondary market?
Still in direct conflict with the SEC's views on the matter which is obviously a huge problem. Assuming you aren't a US citizen and the asset isn't located in the US, you are still assuming there will be a secondary market for those tokens. It's possible that would exist, but it's an untested concept.
In theory it is a great idea, but actually carrying it out would be incredibly difficult. I assume if REAL (or a similar firm) is successful a lot of copy cats will pop up. It solves some of real estates biggest issues, lack of liquidity and transaction fees.
The more I think about it the more this sounds like another take on the TIC or DST structures. Obviously there are some differences but it's still an interesting idea.
The devil is in the details. We trade fractional pieces of a company (stock) in a well-regulated marketplace among companies with formal boards of director and management. How exactly does one do that with real estate? I suppose I could imagine companies emerging that operate as custodians for hundreds of properties where they hire the property manager and make Asset Management decisions. But investment properties can be incredibly difficult to operate in the long-run because the asset management decisions (holding money back in reserves, lender decisions, dispositions, renovation, leasing to quality tenants, redevelopment) can be super complicated with no clear right-and-wrong answers. It is hard for me to imagine a, I don't know, custodian operating with the same kind of care in asset management that a direct owner operates with. For example, we are presently looking at a $23M renovation and cash-out refinance of one of our apartment buildings. The process for bidding out the deal included 42 lenders looking at the deal and receiving 11 hard quotes, as well as countless meetings with owners and attorneys discussing loan terms. Another example--we take great care in what tenants we lease our office buildings to. I just can't see an arms-length custodian treating the real estate investment with the same kind of care that direct owners do.
In other words, knowing what I know, I would never invest in a fractional piece of commercial real estate with some random custodian (with no ownership interest) making all the decisions. We do have third-party asset managers today, but they generally consult with the owner(s) about how to proceed with certain major decisions; however, I cannot conceive of a way to consult with dozens, hundreds or thousands of fractional owners on major decisions. Decisions would all have to be delegated to a disinterested third party.
Also, just to add, if you really want fractional ownership interest in commercial real estate, you could just buy shares in a REIT.
It's interesting to read what you've posted above in light of the "Why Invest in a REIT" thread elsewhere on this board.
If you owned a tokenized piece of real estate you should still receive all the tax benefits of direct ownership and you shouldn't have the operation drag that is present with investing in a REIT. In some sense this concept would address some of the shortcoming found with investing in REIT's. I do agree with your point that you absolutely need a hands on asset manager/custodian and a fee only AM/custodian is most likely not the right answer.
If I were an operator I would love to put in 10% of the equity and then crowd source the remainder from a huge number of passive investors. If the legal issues could be addressed here I think this idea would have some legs, but the legal issues are massive and a total non-starter.
"fractional piece of commercial real estate with some random custodian (with no ownership interest) making all the decisions."
When I was thinking about this I was thinking that the custodian would own say 51% of the property and create enough tokens that equate to 49% of NAV. Obvi you're not going to want to invest with someone who doesn't have their own skin in the game. For example:
Say I own a $1M CRE property and I create tokens (shares of equity) that people can purchase. I'll only create enough to equate to 49%. Think it would be a great way to grow fast. Most likely you would get ETH in exchange for the tokens which you can convert into USD and use as the equity down payment for a second property, assuming you're putting about 20-25% down you could purchase a property upwards of $2M. Create a second batch of tokens for this property, sell 49% etc. etc.. You'd have skin in the game and would want the properties to produce a healthy cash flow while leveraging your equity and the equity raised via a token sale.
Owners of said tokens could trade among themselves in a secondary like market buying and selling tokens. Price of tokens would be related to NAV of the RE.
The issue is U.S. securities law. The scheme you've put forth assumes lots of small investors. The reason that is rare today is not because of technology but because of securities laws surrounding accredited investors. Most accredited investors are not going to be interested in tiny shares of real estate and most GPs are not going to be interested in dealing with small, un-accredited investors. So to me, this isn't an issue with technology; it's an issue of law, which is why I didn't even address this scheme originally.
The terrible scheme I put forth is probably a way around those securities laws since there is no GP; just a bunch of individuals hiring an asset manager.
Well take Fundrise or Rich Uncles for example. They're micro-funding $500 investments from most definitely unaccredited investors. Apologies for my ignorance but if they can do that with a traditional REIT I don't understand why one couldn't do something similar by setting up a cryptocurrency built on the ETH blockchain and having an ICO.
I'm also thinking that this would be regulated differently that a typical fund structure/REIT because, at least in the states, there are no regulations, to my knowledge, regarding coin offerings. With most coins tied to nothing more than speculative ideas, having tokens that backed by actual real estate and actual CF seems like an interesting & potentially lucrative opportunity.
This is an incredibly niche market, and I'm not convinced it's even a profitable model. Fundrise, for example, went from crowdfunding individual RE investments to crowdfunding RE funds. So they aren't really crowdfunding for individual deals anymore. Further, if it's a viable model, why would you need blockchain and/or cryptocurrency to engage in this model?
Of course, someone might try to argue this, and in the stroke of a (literal) pen, the SEC can author a letter clarifying that cryptocurrencies aren't exempt from securities laws. And I see no way in the world the SEC would exempt U.S. real estate investments backed my cryptocurrencies from securities laws. It would be such an obvious hole in the law that it would undermine the entire basis of the regulations themselves.
The real estate itself will be owned by a legal entity. "Selling" ownership of that entity by issuing tokens is considered a sale of securities in the eyes of the SEC. This means you fall under traditional securities regulations.
In most states Fundrise requires you to be an accredited investor to invest in real estate deals. Investors who don't qualify as accredited investors can only invest in Fundrise's REIT's which are not subject to the same regulations.
Most of these ICO's dodge this potential problem by issuing tokens that act as the "currency" required to transaction within their ecosystem. Other ICO's basically just issue tokens to raise capital with no regard for securities laws. Not exactly a prudent long term business plan...
Solid point.
I hate to admit this, but, in my ignorance, I've done this myself. LOL. Will not be making the same mistake again. So long as the investment goes well, you'll probably be fine. If the investment goes sour that's when the investors will start looking for legal remedies... >:/
And I assume the sale from an accredited investor to a non-accredited investor would need to obtain an exemption or register as a new sale of securities? So that eliminates the ability of accredited investors buying from the issuer and then being able to sell their interest via an exchange.
Back to the drawing board...
I'm convinced that blockchain will fundamentally change global real estate. In fact, I just told my settlement agent friend to enjoy the next 10-15 years because she was going to experience a shake-up in the industry. I just think that U.S. Securities laws are so draconian that they will make the shake-up suggested here not super likely. I'm actually not belittling your idea because it's a good idea; and if you lived in a freer economy (ironically, China's), the idea you put forth is more than possible. People don't believe this when it's said, but it's true--the U.S. financial sector is one of the most regulated industries on Earth.
Completely agree. Having lived in China for minor stint I can attest to that statement, albeit they've clamped down hard on the ICO mrkt lately.
In addition to settlement/closing agencies I think the broker market will also be shaken bare in due time. Greater efficiency can be gained and utility maximized by both the buyer & seller to cut out the middle man. Might not hold true for the upper echelon of global RE and off market deals, but for MF, condos/single-family, CRE in prime locations, etc. I totally see this industry disappearing, or at least being managed in house.
Guess it wasn't that bad of an idea after all. #HeardItHereFirst
https://usethebitcoin.com/kevin-oleary-and-the-hotel-ico-deal-could-thi…
The blockchain technology will have a great impact on the future of economy and currency. I also believe that it will have to do a lot with the amount of freedom people have on the Internet, but there is still a long road before we get there...
Anyone heard of Caviar IO? Its a crypto backed by real estate assets
Can anyone speak on or have an opinion about ATLANT? the blockchain real estate trading platform referenced in the article the op attached
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