Helpful Scotsman Guide for RedSwan CRE – Tokenization of commercial real estate

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Tokenization of commercial real estate

Serve the next generation of investors by offering blockchain-based digital mortgages

Tokenization of commercial real estate

Tokenization of commercial real estate opens opportunities for greater demand and enhances options for capital markets. Tokenization describes the technical process involved in converting an asset’s analog shares into digitally securitized shares. This simply means that existing paper shares have been replaced (in whole or in part) with digital tokens and registered on a blockchain capitalization table.

Commercial mortgage professionals will be able to provide many relevant services in this new environment — including sponsor and investor representation, marketing, consulting, transaction specialization, and valuations. There is a growing demand for advisory services and financial structuring.

All U.S. digital securities are regulated by the SEC just like stocks and bonds. Buyers of digital securities must be classified as accredited investors under Regulation D. Before any digital- security transactions can be approved, the issuer must verify that every buyer meets the qualifications. These requirements are put in place by the SEC to protect novice investors from fraud and financial losses.

Tokenization of Commercial Real Estate – Investor advantage

Tokenized shares of commercial real estate are placed on a blockchain by the registered owner for trading purposes. This digitized model provides liquidity options for commercial real estate shareholders that did not exist before. Having more liquidity options opens a new world of profit-making strategies.

Early liquidity means that an owner can sell without needing approval from general partners. Their decision to sell all or part of an asset can be an optional tool. Illiquidity in commercial real estate investments has been a big problem until recently.

Limited partnerships and general partnerships for real estate investments historically have had zero opportunity for liquidity until the asset was refinanced or disposed of. Neither the sponsors nor the limited partners had a way to sell their ownership shares to a third party before the planned disposition. In reality, this problem of illiquidity was an obstacle that prevented many private investors from entering commercial real estate.

Increased liquidity via tokenization is a win for real estate investors. Having the ability to exit an investment before its maturity date is a major benefit and helps to reduce risk. An investor never knows when an unusual circumstance will occur and create a need for immediate liquidity.

Mainstream commerce

Whenever a digital shareholder decides to sell or transfer their ownership shares to someone else, they will do so through the blockchain, sending the shares to a buyer with a whitelisted (verified) address. Blockchain technology is one of the safest protocols for protecting ownership against fraud or theft. To make a change on the blockchain, several computer nodes managing the network must simultaneously acknowledge and agree to the change to permanently record it.

Blockchain transactions and records are rapidly transitioning into mainstream commerce. They are safer and more reliable than traditional processes used by banks and other mortgage lenders.

Blockchain has multiple applications for real estate, from providing liquidity to fractionalization. With a commercial mortgage, for example, the debt can be recapitalized and replaced with digital securities. Today, a mortgage that is originated and serviced by a bank can be replaced with a digital security product that has been fractionalized into 2,000 shareholder units, allowing each owner to proportionally share the collateral and income.

The same process can be used for equity capital as well. In this case, the sponsor’s shares of stock are digitized. Blockchain-based mezzanine loans are particularly attractive for second-position collateralized debt and typically account for 10% to 15% of the capital stack.

Tokenization of commercial real estate has many great benefits. Be sure to read the full article below.

Download the full Scotsman Guide Tokenization of commercial real estate article as a pdf here.

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