Real Estate Horizons

Tokenization of real estate

By Ted Mlynar

We look forward to considerable growth in the securitization of real estate assets via real estate security tokens on a blockchain. The tokenization of fractional real estate ownership interests, and of other interests related to real estate, will provide a new and diverse array of investment options for a much larger pool of real estate investors. Both security token issuers and accredited real estate investors are likely to reap significant benefits from the implementation of real estate security tokens.

The prospect of obtaining better financial terms can be expected to incentivize security token issuers to eschew traditional sources of real estate funding in favor of more diverse accredited real estate investors. The ability of a security token issuer to tap new sources of investment capital with minimal friction and expense has the potential to inspire the monetization of more aspects of real estate value, speed the real estate financing process, and spur further real estate development projects.

Where traditional real estate financing involves delays and unnecessary expense, the sale and trading of real estate security tokens on open, global regulated exchanges may provide welcome efficiency and liquidity. Certain financial intermediaries may be bypassed to yield some economic benefits while also increasing some risks. As well, the ability to diversify an investment portfolio with real estate security tokens may be a valuable opportunity for accredited investors otherwise unable to participate in such investments.

The array of potential benefits from implementing real estate security tokens, however, should not be expected to include any exemption from existing regulatory regimes. Most likely, real estate security tokens will be fully regulated as a type of security or other traditional investment vehicle by an array of regulators. Issuers will need to anticipate substantial, time-consuming, and expensive regulatory compliance efforts. Even where real estate security tokens are issued from a jurisdiction with relatively light regulations, the marketing of those tokens to investors outside that jurisdiction may be carefully scrutinized for regulatory compliance in the jurisdictions where the investors are located.

Real estate security tokens investments will also remain subject to tax. Whether tax is to be paid where the real estate exists, where the real estate security tokens are issued or traded, where the investor is located, or in all such jurisdictions, may present interesting new challenges for tax planning and optimization efforts. Moreover, the representation of real estate interests as tokens that can be flexibly exchanged for other tokens or used for payments will introduce additional tax complexity.