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real estate tokenization

Tokenizing Commercial Real Estate Doesn’t Necessarily Democratize the Asset Class

A few weeks ago, Ineveniam Capital Partners announced its plan to tokenize about $260 million in four private real estate transactions including a WeWork building in Miami, Florida. The company plans to sell tokenized shares of the building, but only to potential buyers who hold at least $10 million in cryptocurrency with a minimum purchase of $500,000.

In my view, the tokenization of this property has failed the blockchain community before one investor has signed on to the project. Why? Because the $500,000 floor for investors flies in the face of the underlying premise of blockchain: to democratize tokenized assets making lucrative commercial real estate accessible to everyone, not just the wealthy in a trustless fashion.

“…I want sophisticated investors who understand how to do due diligence into projects like this to be the ones starting out the investment process,” stated one attorney familiar with the project.” Sophisticated in this case, appears to translate into investors who have large reserves of cash and equity at hand.

Each time a trader considers purchasing an asset, they must perform deep due diligence, which is expensive and resource intensive, further limiting the playing field. In commercial real estate, not all assets are lucrative. This is why we created AI to quickly source and analyze properties to remove underperforming assets from initial tokenization.

The mindset in the commercial lending arena that “cash is king” could be the primary reason why tokenization–as it exists today–is not achieving widespread or rapid adoption in the commercial field. In commercial real estate, liquidity rules. Owners want their cash, brokers want their commissions, and traditional (yes traditional) tokenization models are not set up to quickly unlock the equity necessary for a successful transaction to occur in a timely manner.

This is the primary reason why my company, Jointer, decided to build a better tokenization platform. The standard tokenization model begins with a first step that is exactly the same as a traditional commercial transaction: the issuer needs to first purchase the property, which requires capital. Next, the investors need time to perform due diligence, and only after that laborious step is completed can the investors buy tokens and “tokenize” the property. Also note, this due diligence is ongoing for every token trade.

So, if you unpack this transaction, you will find this type of tokenization remains rooted in the traditional structure of a commercial deal: first, the process requires cash; secondly, a lender must perform due diligence; third, only the wealthy can play, and lastly, lucrative properties must be sourced.

For tokenization to truly transform the real estate industry, it must be structured to provide instant liquidity in a trustless fashion to property owners and investors. To solve this puzzle, we developed a scalable tokenization platform that provides investors with the ability to realize instant investment, better returns and less risk.

Unlike standard tokenization models, we created an end-to-end public tokenization platform that provides property owners with liquidity for their equity and also helps them instantly unlock their equity at zero cost. To make this concept scalable, an unlimited number of property owners can tokenize their properties at the same time. If reserve funds are available, tokenization takes place instantly.

This design allows an unlimited number of investors can lend unlimited funds by purchasing debt tokens which are backed by cross-collateral generating an interest rate pegged to national commercial real estate market performance.

Using a proprietary AI system, we first identify and analyze lucrative properties then perform a deep underwriting approval processes conducted by CCIM underwriters. Then, we purchase some of the free equity from these properties but keep the current sponsor in place. At the same time, we issue digital debt notes to borrow funds from lenders. The lenders receive cross-collateral from all of the properties (including the equities themselves). We also offer equity of our company as part of the collateral.

The bottom line is that this makes for  better returns for the property owners, instant investment, and less risk for all involved.

To democratize the commercial real estate industry we decided to list our tokens for $1, which creates an accessible market for all property owners, leveling the playing field and opening opportunity for all. As more people access their property equity via tokenization, a larger pool of investment funds will be made available to quickly tokenize new real estate opportunities. The property owners all stand to gain in this model.

Yet, the commercial real estate industry continues to hesitate on opening up to tokenization and accepting the possibilities this new model offers. In February, we placed a $1.5 billion bid to tokenize the iconic 77-story Chrysler Building in New York City. The building’s owners, Abu Dhabi Investment Council, purchased the tower in 2008 for $800 million and held a 90 percent stake of majority ownership.

By tokenizing the building, the property owners had the opportunity to unlock their equity for free and at the same time, allow the public to invest in commercial real estate without having any exposure to the specific property. The owners could also remain as the property managers and realize additional revenue.

This offer came about after a meeting with some of the nation’s most knowledgeable commercial real estate and investment experts, who had gathered for a meeting in New York at which myself and David Weild, the former Vice Chairman of the NASDAQ and one of our top advisors were the guest speakers.  After our presentation, several attendees encouraged us to make the offer for the property. As Weild said at that time, “a new tokenization approach presents a better solution that has the potential to disrupt the real estate industry.”

Our offer was presented to the brokers, CBRE, and surprisingly, their representative discouraged a lead member of our team from moving the offer forward. The building sold at a massive loss.

Other commercial real estate entities have also attempted to tokenize buildings in the New York City market. In October of 2018, the commercial real estate community buzzed with the tokenization of two luxury condo buildings in Manhattan for $30 million. This transaction, the media said, was a sure sign that tokenization was about to explode onto the commercial real estate scene with the potential to bypass the traditional transaction model.

Less than three months later, the building went up on the auction block. David Amirian of the Amirian Group, which owned the properties said the group decided that a bulk sale was the best exit. “The prospect of instant liquidity, both for my investors now and for my next projects going forward, justified going the auction route,” Amirian said in a statement.

So what’s next for tokenization of commercial real estate properties?  It should be noted that the Kepler Finance database states that experts are calling 2019 the year of tokenized securities. The market cap for securities tokens has been estimated at $10 trillion by 2020.

For tokenization to be successful in the commercial real estate industry, it must be open to all property owners or those who aspire to be owners. Owning property has traditionally provided a way out of poverty and the middle class for those who choose to make a living in this exciting and competitive industry.

If tokenization remains out of reach to the majority and is only made available to the wealthy, then commercial real estate will remain in the hands of the privileged. This mindset goes against the ideals of cryptocurrency and tokenization, which is to make the transfer of assets accessible to everyone. The adoption of real estate tokenization will only occur when it becomes scalable and available to all.

  1. What value did you identify in the Chrysler Building that was not recognized by traditional real estate investors? That is a significant spread between your bid and the actual sale price.

  2. Hi, if I am the public that wants to invest in the commercial real estate, what are the benefits of holding fractional ownership of the building?

    Should I (as an investor from the public) be looking forward to rental yields?

    Or should I be looking forward to sell my fractional ownership to someone else at a higher price?

    I’m trying to understand what would drive investors (the public) to purchase a fractional ownership of the building.

    Appreciate if you could help explain a little bit more on this.


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