How building owners are seeking new sources of capital via blockchain
Known as "tokenization," companies are trying to pioneer a system for trading ownership shares in real estate using blockchain technology and REITs as the vehicle
Real estate’s much-anticipated affair with blockchain technology seems to be becoming a reality.
Just as investors in real estate investment trusts can buy shares that represent an ownership stake in a piece of large trophy assets, a digital security token offering functions much the same way. The difference for tokens is that distributed ledger technology is used to record the transaction, and any subsequent transactions on a blockchain.
Blockchain is a public distributed ledger system, which means that, unlike with centralized ledgers often maintained by one entity, multiple copies exist and each participant within the system retains their own copy of a blockchain that updates as new transactions occur.
By using blockchain technology, low-cost peer-to-peer transactions can be made between anyone, anywhere in the world, circumventing established banking systems. Though exchanges running off blockchain are best known as trading hubs for cryptocurrencies, which arguably brought the technology into the mainstream after last December’s bull run, a vanguard of real estate owners and investors are now diving in.
How blockchain and tokenized securities could be used by real estate players to tap new sources of capital gained traction after Chimera Group’s Shahal Khan proposed using an initial coin offering to buy the Plaza Hotel earlier this year. And, more recently, Amirian Group’s launched New York City’s first equity play powered by blockchain for a luxury condo in the East Village. (David Amirian declined to comment on the status of fundraising.)
But now a handful of players are creating new platforms to launch new businesses. Here are two recent examples of new companies trying to harness blockchain to disrupt traditional real estate financing and ownership, with a surprising vehicle.
In Aspen, Colorado, the 179-room luxury property, St. Regis Aspen, recently raised $18 million through a security token offering where Aspen Coin tokens represented shares in the single-asset REIT that owns the hotel.
“You effectively buy an electronic, digital share in the REIT,” said Stephane De Baets, the CEO of Aspen REIT, the entity that owns the St. Regis Aspen.
(De Baets later said the company intended to file taxes as a REIT, but it “may or may not be a REIT right now,” due to the requirement for REITs to have at least 100 investors. He said the final determination would be made at tax time.)
The minimum buy-in for Aspen Coins was $10,000, though De Baets said many investors “actually wrote a much bigger check than that.”
The hotel token was only open to accredited investors, though it was marketed by crowdfunding platform, Indiegogo.
He said the $18 million offering “wasn’t about raising money, it was about making a proof of concept.”
Elevated Returns, the parent company of Aspen REIT which is also run by De Baets, is working on a similar security token offering in Bangkok with the city’s “number one developer” and using three condominiums as the underlying assets. He said the company’s goal is to become “the leading real estate tokenization platform globally.”
“We’ve done the tiny first step of a much bigger business plan,” said De Baets.
The “all-knowing trade oracle”
Another example is San Francisco-based company, Harbor, which claims to have raised $40 million from investors Andreessen Horowitz and Fifth Wall. The startup touts itself as a specialist at tokenizing real assets, like property. By using security tokens to represent shares, Harbor believes it can unlock unprecedented liquidity in assets known to be difficult to trade quickly and real estate is their main focus.
“Harbor’s role is to bring these tokenized assets to market” in order to allow “a broader pool of investors to participate,” said CEO Josh Stein. He noted that “the people coming to us [are in] real estate.” He estimated that about 75 percent of the assets in Harbor’s pipeline are properties.
In late November, famous Chicago-based derivatives trader Don Wilson, launched a security token through one of his real estate companies, Convexity Properties, where one token represents a single share in the single-asset REIT that owns a $95 million student dorm.
According to Stein, Wilson wanted to syndicate out about half of Convexity’s equity in the building — a total of $20 million — by selling tokens for $21,000 a piece to accredited investors. (Non-accredited investors can buy tokens after the first year.)
Harbor’s role — the startup’s first to date — in Wilson’s venture is to ensure the token’s compliance with U.S. securities regulations.
Stein described the company as an “all-knowing trade oracle,” that can monitor trades using code embedded into the digital coin and will block “non-approved” trades. For example, if one party’s “real-world identity” cannot be ascertained, or a sale will violate the ownership rules of a REIT, Harbor will block the transaction.
Stein hopes Harbor will become a tech company that provides services to real estate investment banks.
“It is a transfer from the world of snail mail to the world of email,” he said.
New York City-based tax attorney Roger Lorence described the “many, many regulatory issues” around tokenizing real estate as “daunting,” unless a “really big compliancy budget” was available — particularly when a private REIT structure is being used.
If a REIT exceeds the maximum number of investors — “You want to stay way below the 500,” Lorence said — it must become public, which could land a company “in a heap of trouble” if it crossed that threshold inadvertently.
Furthermore, REITs require detailed identification of shareholders in order to maintain status. Revealing investors’ identities could prove to be a critical stumbling block, according to Lorence.
“In the cryptocurrency universe, the investors are kind of shy about the IRS,” he explained. “[But] if they have a coin, they have to give up their ID numbers to the REIT and the REIT has to give it up to the IRS — if they’re interested.”