Tokenizing Commercial Real Estate and the Promise of Liquidity

Published on by Cointele | Published on

The commercial real estate sector is squarely in the sights of the blockchain industry.

While liquidity has historically been less of an issue for public equity markets, in private real estate markets, liquidity has always been a key factor significantly affecting asset valuation - or more specifically, pricing.

Reasons for the illiquidity discount in the commercial real estate sector.

Looking at the nature of the commercial real estate market as a whole, one can easily identify some obvious reasons for illiquidity, such as the lack of market depth and transparency, the fact that most activity takes place in shallow private markets, and assets are often priced on an as-needed basis.

The most important factor contributing to illiquidity in traditional commercial real estate investments is that most of these investments are considered, at least in the United States, securities or investment contracts and, as such, are subject to a myriad of transfer prohibitions and restrictions on liquidity, resulting from complex legal and tax requirements imposed by U.S. regulatory agencies like the Securities and Exchange Commission, the Financial Industry Regulatory Authority and the IRS, just to name a few.

The "Minimum 100 Shareholder Rule," which states that, in order to qualify as a Real Estate Investment Trust under the Internal Revenue Code, a company must comply with many relevant provisions in the code, including having a minimum of 100 investors, holding a majority of its assets in real estate and annually distributing a minimum of 90% of the REIT's taxable income to its shareholders.

While blockchain technology should help, given the proper infrastructure, accelerate core elements of real estate transactions - such as price and title discovery, identifying any liens or easements against a property and adhering to restrictions placed on shares - tokenizing real estate assets does little to change the fact that the underlying real estate is fixed to a particular location and is difficult to move.

Finally, tokenizing real estate assets does not change the subjectivity of these shares to securities regulation, which is sometimes a common misconception in blockchain circles.

Alexander is Chair of the Real Estate Working Group at the Wall Street Blockchain Alliance, a leading 501(c)(6) non-profit, that guides the comprehensive adoption of blockchain technology within the financial and real estate industries, and a Member of WSBA's Legal Working Group, and serves on the New York Board of Directors of FIABCI with members in more than 50 countries and Special Consultative Status with the Economic and Social Council of the United Nations.

Involved with Distributed Ledger Technology since early 2013, Alexander pioneered the concept of "Bitcoin Closings", and currently advises domestic and international companies, high-net-worth individuals, family offices and private equity funds in all aspects and stages of commercial real estate transactions, including raising new capital through tokenized equity offerings and other asset-backed digital security issuances.

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