Commercial Real Estate Asset Tokenization: How It Works and How to Build
Tokenization of commercial real estate transactions will reduce transaction costs from 30% to 2%, entry barriers for investors from $200,000 to $100 and reduce the time for conducting operations from 1 month to 1 click. In this article, we will look at examples of how tokenization works and how to do it yourself.
This is the transfer of accounting and asset management (individual buildings, premises and directly related cash flows) into a digital format, where tokens symbolize the digital certificates of these assets.
Now for tokenization is used blocking technology, because it increases the reliability and security of data, and also makes it possible to automate certain processes. But some restrictions are imposed on tokenization:
The tokenization process on Alt.Estate is as follows:
To finance the repair, you decide to perform tokenization. This process proceeds according to the same scenario as in the case of a sale, except for the following points:
The issuer can raise the attractiveness of such investments by undertaking not to sell real estate or act against the benefits of investors. You can also enter limited asset management, for example, in the question of the choice of rates and tenants. Or delegate control to a third party.
The most difficult thing in construction is to get the first 20% of financing. Because of this starting threshold, many developers are forced to conduct lengthy, tedious negotiations, pay large commissions, mortgage personal property - do everything in order to convince investors of their honesty and prospects of construction.
You can conduct such a crowdsale at the BlackSquare.io site. Their experts recommend doing it in three stages:
Stage 1. Private pre-sale
As in the case of traditional ICOs, the initial offer during real estate tokenization is better to start with closed sales for large investors. This approach will help to understand whether the project has prospects: if investors are interested, the crowdsale can be continued, if not - it’s better to close it.
At this stage, 5–10% of all token emissions are sold. Investors are either invited privately or they written in the whitelist. In the latter case, those wishing to, as a rule, are screened out according to certain criteria: passing KYC&AML procedures, accredited investor status, a significant minimum threshold for entry, and so on.
Stage 2. Pre-sale
Upon successful completion of a private pre-sale, the project is presented to more investors. More public information on construction is given, details of the investment transaction, data on contractors, etc. are announced.
During presale, 60–75% of tokens are sold. If the project initiators are confident of success, they continue to work with the whitelist, if not - open sale is announced. This removes most of the restrictions and decreases the minimum threshold for entry.
Stage 3. The main crowdsale
The last 15–25% of tokens sell openly and usually without any barriers to investors. This is necessary to draw attention to the project and reduce marketing costs: you can run bounty campaigns and airdrops.
According to the World Economic Forum, by 2025 more than 10% of global GDP will be nominated in cryptocurrency assets, which will be over 10 trillion US dollars. Moreover, most of these assets will be associated with equity ownership and liquidity premiums.
So, tokenization will allow to break the value of the property into hundreds or millions of tokens, which can be further divided into eighteen decimal places. Thanks to this, even the most expensive real estate can be virtually divided into shares (tokens), which will cost a penny.
Studies show, that such changes increase the market volume by 20–30% due to the disclosure of its value through “liquidity premiums”. This growth will be a direct consequence of the opportunity to invest in real estate in any country from anywhere in the world, which can be accomplished, including through equity ownership.
Programmability in the case of tokenization means the ability to embed simple business logic into smart contracts, so you can automate most of the workflow. This will facilitate the management of both real estate and investment.
Programmability is especially useful for:
What kind of law depends on the specific tokensale (the value of the object, who is allowed to invest, whether there will be progress and what) and the rights that tokens give. This is covered in detail in the DAO Case Report and SEK’s warning about blockchain-start-up fraud.
Having the opportunity to purchase a token does not mean that it will be bought today or tomorrow. There is still no central market or markets in which one could find information about all real estate tokens. There are only separate sites with an audience of one or two hundred thousand users and a small list of tokens.
KYC, or Know Your Customer is an identification procedure, which is carried out to make sure that there are no scammers, criminals, fakes among investors. If you took a loan from a bank, then KYC also passed when employees scanned your passport or took photos with the document.
AML, or Anti-Money Laundering is a verification of personal data on Politically Exposed Persons (PEP) and other lists of potentially dangerous users, where they analyze information about citizenship, visiting countries at high risk of terrorist threat, looking for signs of possible money laundering, financing of terrorism or theft of personal information.
If you conduct tokenization in the USA, then you are obliged to conduct KYC & AML. Independently or with the help of third-party specialists, for example, through the Cryptonomos or Bitcoinsuisse.ch platforms.
There is no single standard for the requested information, but usually:
To verify the authenticity of this information are also asked to send:
#1. What is tokenization
#2. How to carry on tokenization
#3. Case 1: Residential sales
#4. Case 2: Real estate investment
#5. Case 3: Early Construction Financing
#6. What are the benefits of tokenization
#10. What you need to remember when conducting tokenization
#11. Lack of legal infrastructure
#12. Tokenization does not mean instant liquidity
#13. Always remember about KYC & AML