Blockchain Real Estate FAQS
If you are interested to learn more information about how RedSwan CRE works, you can check out these FAQs
Investment Process, New Investor Onboarding
(for US investors only)
An individual is considered an “Accredited Investor” if s/he meets any of the following four criteria:
- The individual’s net worth (individual or combined with spouse) exceeds $1 million, excluding the value of the individual’s primary residence.
- The individual’s income exceeds $200,000 in each of the last two years and has reasonable expectation to achieve the same income level in the current year.
- The individual’s joint income with a spouse exceeds $300,000 in each of the last two years and the couple has a reasonable expectation to achieve the same income level in the current year.
- The individual has knowledge and expertise to participate in private investment opportunities based on relevant professional certifications, credentials, and designations. As of today, individuals with Series 7, Series 65 and/or Series 82 security licenses are considered “Accredited” regardless of net worth and income.
A trust is accredited if it meets any one of the following criteria:
- Possesses investments more than $5 million and was NOT formed for the specific purpose of acquiring the investment and is directed by a sophisticated person.
- The trust utilizes a bank, insurance company, registered investment company, business development company or small business investment company as a trustee.
- The trust is revocable, and grantor(s) are accredited individual investors.
An entity is accredited if it meets any one of the following criteria:
- Possesses investments more than $5 million and was NOT formed for the specific purposes of acquiring the investment
- All equity owners of the entity are accredited individual investors.
There are two ways you can demonstrate accreditation to RedSwan CRE:
- Have your registered financial advisor, licensed attorney, CPA, or licensed broker-dealer complete a verification letter that attests you are an Accredited Investor. This letter can then be submitted to RedSwan CRE.
- If you do not have a relationship with a registered financial advisor, attorney, CPA, or broker-dealer, you can have RedSwan CRE directly verify you.
Regardless of which approach you choose to become verified, you will need to submit documentation to prove that you can be considered an accredited investor.
For individuals, the documents depend on whether you are getting verified under the net worth test, one of the two income tests or the knowledgeable investor test. For net worth verification, you would need to submit any combination of bank statements, brokerage statements, other statements of securities holdings, and appraisal reports to assess the value of your assets. For income-based verification, evidence can be supported by tax returns, W-2, K-1, 1099 or other government documents. For knowledgeable investor test, a copy of the unexpired Series 7, Series 65 or Series 82 securities license suffices.
For business entities and trusts, one can show the $5 million minimum assets by furnishing a bank statement, brokerage statement and/or appraisal reports of real estate or other tangible assets held by the entity. If a business entity does not meet the minimum assets requirement, then each owner of the business entity must be individually verified as an accredited investor, in which case the documentation requirements mentioned above for individuals applies.
Similarly, if a trust does not meet the minimum assets threshold, then the trust documents should be submitted to determine if the trust qualifies based on the type of trustee or if the trust is revocable. If the trust wishes to achieve accreditation under the condition that the trust is revocable, then all trust grantor(s) must be accredited individually, in which case the documentation requirements mentioned above for individuals applies.
Unfortunately, no. Income based proof is only good for one year and net-worth based documentation is only good for 3 months. Therefore, as you participate in more investment opportunities over time, you may need to be repeatedly verified.
Commercial Real Estate Basics
In addition to one’s own primary residence, investors typically hold a portfolio of stocks and bonds. Many studies have shown that adding commercial real estate adds diversification benefits. Historically US commercial real estate returns have offered similar returns to stocks but with less volatility. More importantly, they exhibit low correlation to the US stock and bond markets and have proven to be an effective inflation hedge.
Publicly traded REITs typically focus on a single commercial property type and have diverse exposures across geographies and markets, some of which may not be favorable depending on the economic environment. Moreover, as a REIT investor you are beholden to the decisions of the company’s senior management in terms of the properties they choose to invest in or dispose of. By investing in direct CRE, you can select the property type(s) and exact locations that you feel will perform the best. Also, you have full control, subject to any holding period requirements, of when you would like to liquidate your token investment.
RedSwan CRE focuses exclusively on Class A and Class B commercial real estate. Class A represents the highest quality buildings in the market. They are typically attractive quality, good locations, well built, have good amenities, good access and are professionally managed. As a result, they attract the highest quality tenants and command highest rents. Class B is one notch down. Class B buildings are generally a little older but still have good quality management and tenants and are well maintained. Often value-add investors target these properties as they can be upgraded to Class A -through renovations and operational improvements.
Through the application of tokenization, we can streamline and compress the time it takes for real estate sponsors to raise equity capital for their projects. A fundraising process that typically takes many months to complete and requires many intermediaries and tedious paperwork can be shortened into weeks at lower cost. Also, RedSwan CRE’s Accredited investor orientation means that real estate sponsors can be assured that they are attracting capital from a high-quality investor base looking to diversify their assets.
Equity Investment opportunities offered on RedSwan CRE are diverse and include new construction, stabilized assets as well as value-add projects. Value-add investments typically involve a real estate sponsor buying an underperforming property and applying capital improvements, and operational and marketing know-how to improve occupancy and rental rates. Returns from value-add opportunities come from both income and price appreciation when the improved property is later sold. For new construction, returns are derived somewhat from income as the property starts generating cash flow in later years but much more so from price appreciation when the property is sold.
While RedSwan CRE may provide ongoing advice to the project sponsor, ultimately it is the project sponsor who is responsible for managing the properties that back the tokens issued by RedSwan CRE.
This refers to the projected length of the investment period during which the equity holder will receive income and realize a return on the initial investment. During the investment period, equity investors receive as income any residual cash flow left over after expenses, capital improvement spending, and debt service payments are made. The end of the investment period is typically when an exit is planned, and the sponsor sells the property and pays off any outstanding debt. The amount left over is then shared by the equity holders.
IRR stands for “Internal Rate of Return”. Once you invest in a property as an equity holder, the total return you receive corresponds to the residual cash flow left over after expenses, capital improvement spending, and debt service payments are made and then a final payment at the end of the investment period when the property is sold, and debt holders are paid off. IRR is the common way to express this total return and is reported as a percentage. You can think of it as an annual return on investment. Mechanically, the IRR is calculated as the discount rate that would make the projected cash flows to the investors over the target investment period equivalent to the initial investment made.
Another metric to help investors think of the potential return to a real estate deal. A targeted equity multiple of 2.0x, for example, simply means that over the investment period, the sponsor is looking to return $2 to the investor for every $1 invested. Note that unlike IRR, this metric does not directly incorporate the time value of money.
The average expected annual income to the equity holder divided by the initial investment. A targeted cash yield of 8% means that for every $1 equity invested, the sponsor is targeting an annual payout of 8 cents. Note that this calculation does not include the potential final payment that would occur when the property is sold at the end of the investment period.
Net Operating Income (“NOI”) is a common financial metric when analyzing a property’s financials. It is essentially the revenues of a property less property taxes, insurance, utilities, property management fee, sales/marketing/administrative expenses, and additions to property reserves. NOI divided by revenues is the property’s profit margin.
In most investment opportunities, the end of the target investment period assumes an exit event in which the sponsor sells the property. To project the sales value of the property at the end of the investment period, the sponsor assumes that by then the property is stabilized, i.e., the property achieves a stable level of NOI in all future years after the disposition. In this case, the projected value of the property is simply the expected stable annual NOI divided by a discount rate, which is referred to as an “exit cap rate”. For example, if the projected stabilized NOI is $1,000,000 and the sponsor believes that s/he can sell the property at an exit cap rate of 5%, the sponsor therefore believes that the building can be sold for at least $20,000,000 (=$1,000,000/.05) at the conclusion of the investment period.
A token is simply a digital representation of an asset. A token by itself does not have any intrinsic value but is linked to an underlying asset that has value. In addition to real estate, tokens now exist even for art and collectibles. Tokenization allows easier and frictionless trading of assets that historically were difficult to exchange between buyers and sellers. The tokens you invest in through RedSwan CRE represent equity ownership in actual properties and thus derive value from them.
All tokens issued reside in a secure custodial vault at Coinbase, one of the largest digital currency exchanges in the world with over 43 million users, $90 billion in crypto in over 100 countries. Coinbase’s custody business is a fiduciary under New York State Banking Law and regularly undergoes financial and security audits by external firms. Coinbase’s crypto custodial business is held to the same capital requirements as traditional financial custodial firms.