The adoption of cryptocurrencies and the emergence of blockchain platforms have made real estate tokenization a potential capital-raising option. With tokenization, ownership interests in real estate assets can be more immediately bought and sold, but tokenization requires a thorough understanding of the technology, the offering process, and the regulatory issues involved.
Investors typically invest in real estate through an LLC or limited partnership that owns an underlying property. With tokenization, LLC or LP interests are in the form of tokens that can be traded or used as collateral in smart contracts. The issuer must determine the number and type of tokens and select an exchange platform for trading.
The issuer must also decide whether a security is being offered and registration is required. Offering documents may include operating agreements, subscription agreements, and a private placement memorandum. Offerings must also comply with KYC requirements and have appropriate protection of user data.
Tokens should have built-in compliance features such as restrictions on transfers and secondary trading. Issuers will also need to determine how distributable cash will be paid (perhaps using stablecoins or other digital currency).
Listen as our authoritative panel discusses these and other matters associated with commercial real estate tokenization.
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Oftentimes insufficient time is factored in for project design and technical review and obtaining required government approvals. Developers may also not fully appreciate the challenges that will be faced in funding the development, structuring the condominium regime and negotiating with associations and surrounding property owners to address title, easement and cost-sharing agreements. Additionally, operational issues associated with an urban condominium development, such as parking, transportation, use restrictions, public space enjoyment, integration of different types of users and ongoing cooperation with governmental agencies, can present ongoing challenges.
Before taking the plunge into commercial real estate investing, one should have a clear understanding of how to select the right location, preferred type and class of property, what due diligence to do, how to secure financing, how to negotiate a deal, and how to manage the property going forward as a commercial landlord. This Financial Poise panel explains the process from looking for the investment, to contract, to closing, and beyond.