THE REAL ESTATE TOKENIZATION INDUSTRY
How Blockchain Will Change the Future of Real Estate Investing
Real estate tokenization is taking all the benefits of private real estate investments — tangible asset, income-producing cash flow, tax benefits and appreciation — and combines it with blockchain technology to provide new opportunities for both property owners and investors.
This article is the culmination of more than three years of research and actual experience to launch Liberty Real Estate Fund, the world’s first net lease property security token offering.
What Is Blockchain?
A blockchain is a Distributed Ledger which can be described as a growing list of records, called blocks, that are linked together using cryptography. Each block contains a crypto graphical hash (mathematical algorithm) of the previous block, combined with a timestamp, and the transaction data. A Distributed Ledger blockchain is now possible because the worldwide nature of the internet allows a consensus of replicated, shared, and synchronized digital data geographically spread across multiple computers (called Nodes), sites, and countries.
The token is in essence the “deed” or “title” digitally recorded onto the blockchain. A token is a digital asset that cannot be duplicated. By design, if a blockchain is changed or modified it shows up throughout the distributed ledger network. When you send someone a token you cannot keep a copy for yourself. The ownership of one Bitcoin would be an example of digital token.
Tokenization is a way to digitally secure assets
Tokenizing real estate allows owners, syndicators and fund sponsors to tap into worldwide investment capital, streamline the process and automate administrative functions. Tokenization is a way to digitally secure real estate assets (or other assets like art, container ships, whisky funds and even sports star contracts) as a regulated securities offering.
Several successful tokenizations have been the Aspen St. Regis — AspenCoin (ASPD) issued by Elevated Returns; the La Estancia Digital Security Token (LAEST) which was marketed by Estatoken and RealT which has issued several successful single family/multifamily tokens which now trade on the Uniswap exchange.
Security Token Offerings are regulated securities
These tokenized offerings are known as Security Token Offerings (“STO”) and are regulated by the SEC in the US. An STO is not the same as cryptocurrency, which consist of unregulated Initial Coin Offerings (“ICO”). With an STO, a property, portfolio of properties or fund can be tokenized as a securities offering in which investors can buy fractionalized shares of the offering (i.e. the digital tokens).
Investors will benefit the most from Real Estate Tokenization and Security Token Offerings because the technology allows new optionality for investing, including receiving income, tax benefits, global trading and estate planning.
Tokenizing assets creates extra benefits for investors
When tokenizing real estate assets, investors benefit from:
· Smaller investment sizes
· Investing in other markets all over the world
· Worldwide access to their investment income and distributions
· Ability to receive their income and distributions in different currencies or cryptocurrencies
· Selling and trading their tokens person to person (peer-to-peer)
· Selling their tokens with the help of a securities broker
· Selling and trading the tokens on an exchange or Alternative Trading System (ATS)
· Dividing their tokens for estate planning purposes
For example, let’s say I place a 10,000 square foot (929 sq. meter)) CVS under contract for $3 Million and want to offer investors the opportunity to join me in this investment. Just like in a normal real estate syndication, a securities attorney would draft a Private Placement Memorandum (“PPM”) to legally offer the shares of the investment.
With an STO, those “shares” would be the Tokens issued. The Tokens could be divisible by the building price, like $10,000 or $50,000 each, or broken into even smaller shares so the token offerings could be by square foot ($300 per sq. ft).
As a sponsor interested in issuing security tokens, you should seek out a securities attorney familiar with securities regulations and understands how smart contracts interact with the blockchain. For Liberty Real Estate Fund, we are using Tyler Harttraft of Bull Blockchain Law because of his understanding of securities, the newer regulations with digital assets and technology wrapper issues.
Security Token issuance platforms are the on-ramps for digital assets
The next step in the STO process is to engage with a token issuance platform. The Security Token issuance platforms are the on-ramps for connecting tokens to the blockchain and making them actual digital assets. Many platforms also provide investor portals and other valuable services, which improves the investor experience and keeps investors informed on their investments.
A few well known Security Token Issuance Platforms include:
· Blockstate — Switzerland
· Koncrete — Australia
· Max Crowd Fund — Netherlands
· Polymath — Barbados
· Securrency — United States
· Securitize — United States
· SolidBlock — Israel
· Swarm — United States, Distributed
· Tallium Assets — France
· Akru (previously Tokenism) — United States
· Tokeny — Luxembourg
· Tokensoft — United States
The STO issuance platforms create what are called Smart Contracts that take all the legal and financial terms of the PPM then to incorporate legal restrictions enforced by securities regulators, such as the SEC, ESMA, FINMA, MAS, SESC and others. They also register the Token Symbol (like a stock symbol) and then the tokens are ready to be issued to investors.
Security Token Offerings are similar to a normal syndication
A Security Token Offering is launched in the typical way: investment capital is raised through normal private placements. This can be through a crowd sale, broker-dealer offering, organic website traffic, existing investor lists or friends and family. Depending on the offering, Security Tokens allow investors worldwide to choose the best investments for themselves in other parts of the world. Private real estate investments have always been mostly local, but now investors can invest in the best or most advantageous places anywhere in the world.
For an investor interested in investing in the offer, there might be the normal step of confirming “Accredited Investor” status if it is a restricted securities offering. With an STO, there are a few extra steps, including a Know Your Customer or client (“KYC”) check to make sure the investor is who they say they are, and an Anti-Money Laundering (“AML”) check to make sure the investor’s funds did not come from illegal activities. These checks are all automated and provide a plug-in service to the issuance platforms.
Investors in Digital Assets have flexibility on how they hold assets
After the investors receive the PPM, complete the subscription agreements and any other necessary paperwork, they then invest their equity in the offering. All that information is programmed in a Smart Contract then “Minted” into a Token and issued on the blockchain.
A Smart Contract can be thought of as a vending machine. For example, you want to buy a bottle of water; only when you deposit your money in the machine does it dispense the bottle. The same goes for a Smart Contract; only when the parameters programmed into the software are met does it execute the information on the contract.
The Smart Contract also controls and monitors the offering’s capitalization table to keep track of the equity shares of the company. The monthly distributions, interest payments to investors and gains are also paid out automatically, according to the rules set in the Smart Contract. When a token is sold, traded, gifted or lent out, the Smart Contract tracks the transactions and registers them to the blockchain.
Investors control and hold their Digital Assets
Unlike traditional public securities where the investor typically never sees a stock or bond certificate, investors can choose several different ways to hold digital assets (Security Tokens, Cryptocurrencies and Non-Fungible Tokens).
Investors can choose Self-Custody, which is holding your own digital currencies and digital assets in a Wallet. A wallet is a software program that interacts with the blockchain, allowing you to store, pay, receive and lend your digital assets. Since tech guys like to make things complicated, you can store your assets in a Hot Wallet that is connected to the internet or Cold Storage that is not connected to the internet but rather stored on a thumb-drive-type device.
Investors can also hold their assets in custody with institutional custodians, similar to placing your assets in a safe deposit box. Larger custodians are: BitGo, Coinbase, Gemini, Kingdom Trust and Anchorage.
The breakthrough concept of this system is that your money and investments are now beyond the banking system.; no more bank holidays or stock market closures. You can buy, sell, pay and lend your money and assets 24 hours a day, 7 days a week, all year long.
The other revolutionary concept is that you can receive and access your income and assets from anywhere in the world to anywhere in the world. You live in the US but spend winter in Panama or Costa Rica? No problem. Your money is with you, not it a bank. And if you live in a country like Venezuela with an unstable currency and runaway inflation, you can hold your money and assets outside that banking system.
It is true financial freedom.
STOs have a Lock-Up period before trading can begin
Once tokens are created and issued to investors, there is a one-year “Lock-Up Period” in the US where the tokens cannot be resold or traded. The Lock-Up period in other countries may vary depending on the regulations.
After the expiration of the lock-up period, investors can hold their tokens and enjoy all the benefits of real estate investing: income, tax advantages, appreciation, wealth preservation and inflation protection. An extra benefit with tokens is that the income and distributions can be collected anywhere in the world. You, as an investor, are no longer tied to a bank in one country.
STOs create options for investments and income in different currencies
Additionally, investors can potentially invest with dollars, euros, yen or other currencies and receive their income from the real estate investments in the same currency or in Stable Coin or Ethereum. You can see why we are so excited by the possibilities and options security tokens provide to investors.
New flexibility for investors to decide their holding period
Investors can also sell, trade or divide their tokens (depending on terms of smart contract) among family members for estate purposes, or even donate their tokens to charitable causes. Security tokens have the extra potential to provide never before seen liquidity for private real estate investments.
In the United States there is a one-year “Lock-Up,” or waiting, period in which investors cannot trade their tokens. The Lock-Up period varies in other countries depending on those laws and regulations but are typically three to six months, but they can also have no waiting.
Digital Assets can be traded directly from person to person
Selling and trading security tokens can be peer to peer. For example, if I own $100,000 worth of the CVS mentioned earlier and each token is issued at $10,000, I can decide to sell five tokens to a friend. I put up the tokens for sale on the platform portal and my friend agrees to pay $50,000. As long as the tokens and money are placed in the trade, the exchange will automatically be executed by the smart contract. This can take place 24 hours per day, 7 days per week. The smart contracts don’t take vacations or time off for national holidays.
Security Tokens can be listed and issued on Digital Exchanges
Additional ways for investors to trade are dedicated security token exchanges where token holders can list their tokens as “for sale.” Additionally for issuers and investment sponsors, most of these exchanges listed below will also list your token issuance as a mini IPO and distribute your securities directly to qualified investors.
Exchange trading also opens up private investments that were previously available only to Accredited Investors (Professional Investors) now to a wider audience of non-accredited investors. This will allow many more individuals options to diversify their investments and participate in some of the best investments in the world.
Below is a partial list of exchanges that specialize in Security Tokens:
· Archax — United Kingdom
· Canadian Securities Exchange — Canada
· Coinbase — United States
· Cryptosx — Philippines
· DEX — United Arab Emirates
· Fusang — Hong Kong, Malaysia & Singapore
· Gibraltar Stock Exchange — Gibraltar
· InvestaX — Singapore
· INX — Gibraltar, New York
· iSTOX — Singapore
· MERJ Exchange Limited — Seychelles
· SIX Digital Exchange — Switzerland
· STX.SWISS — Switzerland
· TokenFunder — Canada
· tZERO — United States
· Uniswap — Decentralized
Exchange listing and trading will make currently locked-in real estate assets more accessible to the world’s growing middle class. Real estate is the world’s most proven investment for creating, generating and preserving wealth.
Security Tokens can be traded on Alternative Trading Systems (ATS)
Alternative Trading Systems (ATSs) in Europe and Multilateral Trading Facilities (MTFs) are regulated entities that match buyers and sellers of securities. For lack of a better example, they are like the dating app Tinder, allowing for connections between buyers and sellers without being a full-on exchange. They are regulated trading platforms and typically operated by Broker-Dealers.
In September 2020, the SEC approved a revised process that would allow for orders to be matched and settled, taking into account how digital assets use blockchain for transactions and that many individuals hold these assets in a digital “wallet.” The ATS process works in this way: 1) a buyer and seller send their orders to the ATS; 2) the ATS identifies and then matches the orders; 3) the ATS notifies the buyer and seller of the match and the trade is executed between the parties.
Several ATSs & MTFs have regulatory approval and will trade Digital Assets:
· Archax — United Kingdom
· Coinbase Securities — Coinbase, United States
· The Rialto Cross — Rialto Markets LLC, United States
· SeedInvest — SI Securities, LLC, United States
· Texture ATS — Texture Capital Inc., United States
· tZERO ATS — tZERO ATS, LLC, United States
ATS and MTF entities will provide additional options for investors to obtain liquidity for traditionally illiquid private real estate investment partnerships.
Broker-Dealers can sell your Security Tokens
Broker-Dealers are licensed securities professionals who are in the business of buying and selling securities. Special-Purpose Broker-Dealers assist investment sponsors with promoting and distributing their Security Token Offerings and assist investors looking to buy, sell and trade their Digital Assets and other securities.
Additional services provided by Broker-Dealers include raising capital and distributing investment offerings for sponsors and companies; facilitating trading; assisting customers with investment advice; supplying liquidity with market-making activities; and publishing investment research.
· Atlas One — Canada
· Black Manta Capital Partners — Austria, Germany and Ireland (Liberty Real Estate Fund — EU partner)
· Entoro — United States
· GB Capital Markets, Inc. — United States
· Securitize Markets — United States
· Texture Capital — United States
· Tritaurian — United States
· Watchdog Capital — United States
Some Broker-Dealers also operate Alternative Trading Systems and will assist with investment banking and capital raising for sponsors and companies looking to access wider markets.
What is Decentralized Finance or “DeFi”?
“DeFi” is an overarching term that is sometimes difficult to pin down but defines financial activities using Blockchain-based Distributed Ledger Technology (DLT). It is decentralized as opposed to centralized institutions like central banks, traditional banks, investment banks, credit card payment processors and even PayPal.
DeFi got its momentum with Bitcoin because users did not need one central bank to print money. The money creation process is spread throughout the world and the network the money transfers run on is also distributed around the globe. Decentralized Finance is changing finance the same way the internet changed communications; it is on a network instead of contained on one computer, in one building or with one company.
Cryptocurrencies proved the use-case for digital assets and soon most currencies, including the US dollar, will be digital. Right now, there are Stable Coins that are digital representations of USD, EURO and WON.
Decentralized Finance unlocks your real estate investments
Why are these developments important to real estate investing and real estate tokenization? Because, once you take your analog, locked-up real estate investment and convert it to a Digital Asset, you are now “beyond the banking system” and into Decentralize Finance — financial freedom achieved.
As an investor in a circa-2018 private real estate syndication, you had only paper documents and no control over your exit from the deal or ability to obtain cash fast from your equity. With real estate investing in 2021 and beyond, you can tokenize the real estate investment shares and your investment is now on the digital rails of the new financial system.
Security Tokens let real estate investors trade with any currency
The extra innovation is that you can take your distributions, interest payments and return of capital in cryptocurrencies, such as in Ethereum or stable coins like USDC or EURS. Terra’s SDT is based on the IMF’s Special Drawing Rights (SDR) unit of global account composed of 41% USD, 32% Euro, 11% Yuan, 8% GBP and 8% Yen. You are now beyond the banking system!
As stated above, you can get regular passive income from cash flowing real estate and receive your money anywhere in the world. Your digital wallet goes with you. It is not locked up in a bank, banking system or stuck in any one country. If you are in a country with an unstable currency, you can diversify your hard-earned capital into high quality, cash flowing, inflation resistant, wealth generating real estate in other parts of the world. High net-worth individuals, family offices and nobility have used real estate for centuries to preserve wealth. Why shouldn’t you?
Security Tokens offer additional options for real estate investors
Digital Assets will create more options for financial products, including the ability to deposit your Security Tokens and achieve additional interest income. You can also choose to borrow against your tokens as collateral so you don’t have to sell your assets.
Liberty Real Estate Fund is honored to partner with BlockFi Institutional Services, one of the leaders in DeFi that provides interest earning accounts, cryptocurrency trading accounts and digital asset backed loans. We believe this will provide extra optionality for increasing liquidity and control to our investors of their assets and investments.
BlockFi has institutional backings from investors that include Valar Ventures, Galaxy Digital, Fidelity, and Coinbase Ventures. Additionally, Gemini Trust Company, LLC, a New York trust company, is BlockFi’s primary custodian.
The Security Token Offering Ecosystem is Global
There are many more innovators, founders, consultants, industry trade organizations and writers in the Security Token Offering ecosystem. Adam Blumberg, the Whiteboard Wizard at InterAxis has produced some excellent YouTube videos on investing in Digital Assets; Kyle Sonlin and Herwig Konings producing excellent research and reporting at Security Token Market and the Security Token Show podcast; Baxter Hines for his excellent book “Digital Finance: Security Tokens and Unlocking the Real Potential of Blockchain”; Lara Abdul Malak covering Digital Assets at Unlock-BC; Omar Faridi for his fantastic tokenization articles at Crowdfund Insider; along with Alon Goren, Josef Holms and Adam Levy of Draper Goren Holm the creators of LA Blockchain Summit and the Security Token Summit and many more.
If you are looking for interviews with some of the top experts in real estate on the blockchain signup for our Chicago Blockchain Real Estate Collective meetup ( www.meetup.com/CBREC1/ ) for excellent past speakers and more to come in 2021.
Liberty Real Estate Fund started out three years ago with the idea that we wanted to create a Stable Coin backed by some of the most stable, tangible assets in the world: Net Lease commercial real estate properties. We saw the promise of blockchain technology to bring financial empowerment to investors around the world. Security Tokens will open the $280 Trillion of real estate value currently locked up across the globe.
Since 1990, billions of people rose from poverty and entered into the middle class. We know that income-producing real estate is the most proven asset class, with thousands of years for a track record. Investors all over the world deserve options to generate wealth, which is the best way to create human flourishing.
Michael J. Flight is a founding principal of Concordia Realty Corporation in 1990 and more recently CEO of Liberty Real Estate Fund LLC, ( www.LibertyFund.io ), the World’s First Net Lease Security Token Fund. Michael is a real estate entrepreneur and Security Token evangelist who is an expert in Triple Net, NNN, Shopping Centers, Net Lease commercial real estate investment and real estate on the blockchain.
Michael has been featured on CNBC Arabia, CEO Magazine and Bitcoin.com. Michael is co-host of the Nothing But Net — NNN podcast (www.triplenet.re) — an educational podcast about Net-Leased (“NNN”) properties. Courtney Stone and Mariyana Zhelava also contributed to this article.
About Liberty Real Estate Fund:
Liberty Real Estate Fund is the World’s First Single-Tenant Net-Lease Security Token, using more than 30 years of institutional real estate experience to invest in Net Lease properties that deliver stable, diversified, tax-efficient returns combined with blockchain technology to create ease of access, liquidity and new investment optionality.