Banco BTG Pactual was among the world’s first investment bank
to offer a STO, hence the excitement in the fintech space.
However, it also raised interest in the commercial real estate industry because the project may well actually prove what many have said
is theoretically possible: tokenization will unlock the liquidity of
smaller investors by democratizing access to opportunities—even
global ones—by providing fractional real estate opportunities.
There are many exciting proptech developments but perhaps
none are better positioned to be a game-changer than tokenization.
“This opens up a new world with respect to real estate investments and real estate ownership because we can now use blockchain technology to create faster, more efficient ways of transacting
ownership,” says Katya Fisher, a partner who leads the law firm
Greenspoon Marder LLP’s blockchain, digital assets and technology transactions practice.
Tokenization also introduces new investors to commercial real
estate. These range from smaller companies and individuals that
can’t afford to acquire say, an apartment building in Brazil, to
global institutional investors that want to be more strategic by buying stakes in certain assets.
A BRIEF PRIMER
For the uninitiated, this technology—the crux of which is blockchain—no doubt seems daunting.
Fisher describes blockchain technology as allowing the sharing
of files and digital assets in a peer-to-peer manner, without mid-dlemen and duplicate copies. This makes digital money possible
without the fear of replication that can lead to counterfeit.
Unlike Napster, where people were able to share copies of files so
piracy could proliferate across the Internet, blockchain more
resembles a shared database with authorized access where every
transaction is recorded.
“The technology is a distributed ledger that allows all the parties
to a transaction to actually witness the transaction in real time and
certify the terms of the transaction,” Fisher explains.
With tokenization, the digital asset does not represent currency.
It can represent stock, shares in a company or any type of asset on
the digitized ledger, including, of course, real estate. Instead of
paper certificates of shares, these digital assets are issued.
TOKENIZING THE ST. REGIS ASPEN
The US commercial real estate industry got its own taste of tokeni-
A CUMBERSOME PROCESS
zation last year when Elevated Returns, which owns the St. Regis
Aspen Resort in Colorado, decided to sell security tokens backed
by the hotel on a blockchain. “Asset backed coins like the Aspen
Coin not only offer a transformative way to invest in real estate, but
also establish a new way to store wealth by utilizing collateralized
and income generating digital assets,” said Stephane De Baets,
founder and president of Elevated Returns when the initiative was
announced. “We believe that the real estate tokenization model has
tremendous potential in that it brings liquidity and disintermedia-
tion to the world’s largest asset class.”
Elevated Returns ultimately closed $18 million for the sale of a
small stake in the hotel.
Typically in such transactions, the seller will either have to form a
real estate investment trust—as Elevated Returns did with the St.
Regis Aspen Resort—or raise capital with syndicated investments.
The latter can be particularly cumbersome, according to Mark
Fawer, a real estate partner at Greenspoon Marder LLP, who
explains the mechanics when an investor syndicates a project. The
investor will receive a partnership or membership interest in the
entity that owns or is developing a property. If the asset is income
producing, the investor will receive monthly or quarterly distribu-
tions, but the ownership interest is extremely illiquid.
Now, real estate investment holders have to wait for a purchaser,
maybe the sponsor or another investor, to buy out their shares.
That requires finding the buyer, negotiating terms, and entering
into documentation. The seller needs permission from the general
partner, the managing member and needs to submit paperwork
into a transfer agent. This can take weeks or months, Fawer adds.
“With tokens on the private market, on private exchanges, you’ll
be able to see bids and asks for those tokens,” says Fawer. Whether it’s
restricted to existing investors or by invitation, it will be completely
open. He describes the possibilities: They can get pricing intelli-
gence. There will be greater transparency. There will be greater pro-
tection in making sure it’s limited to accredited investors and that
security compliance and anti-money laundering laws are followed.
Over time, this seemingly cumbersome process should become
easier, especially as liquidity is introduced in the back end.
“We believe that over time a robust secondary market will
develop in not just real estate investments but investments in all
alternative assets, whether they be investment in hedge funds, port-
folios of fine art, coin collections, you name it,” says Fawer. “If
someone wants to sell, if they want out, they don’t have to wait.”
Head of global technology strategy for Deloitte’s real estate
group, Kevin Shtofman also predicts that there will be activity in
this area sooner rather than later. For instance, he believes that
Digitally automating real estate administrative processes is catching on in the
industry. The startup TapCap, a national multifamily digital lending company,
launched in June. Using public information, such as Fannie Mae and Freddie Mac
loan rates, along with users’ property addresses, the platform provides multiple
options for mortgage loans in approximately 10 minutes. Without using blockchain
technology, TapCap has moved beyond the pilot phase and is up and running.
MyCoop Technologies is a startup that created a cloud communication tool
for smaller multifamily buildings with 50 or fewer units. The co-founder and
CEO Alex Norman is a mentor in the community of ALM Media’s Young
Professional Networks. He sees his company beginning to collect data that is
now used to assist people in their immediate buildings, and envisions further
applications for the greater community—in areas such as infrastructure,
energy and public communications in emergencies.
Enertiv, a data-driven, tech property management company, works to save
landlords’ money by property systems including information on building infra-
structure and energy use. The company CEO Connell McGill says “Data is the
fuel that feeds the proptech fire.”
Disrupters have built “data oceans” around aspects of running a real estate
business such as leasing, operations, construction or tenant experiences,
according to McGill.
“Real estate companies are recognizing that the data from their portfolio is
alone insufficient compared to the aggregated data from across the entire
industry,” he says.