ALT.Estate Tokenization Protocol for Real Estate crowdfunding, the Case of Monodom.io
At ALT.Estate, we are building the toolset and the platform that help to overcome the key pain points of the Real Estate industry. As part of sharing the progress, we are bringing you today the exciting case we are currently working on with one of the key players on the East European market.
Executive Summary
Alt.Estate protocol has a product-market fit supported by the findings of such consultancy firms as PwC. While targeting the most significant pain points of the market we developed and successfully piloted the first blockchain based crowdfunding solution for Real Estate development company. We are working to further expand this approach, so if you are looking for crowdfunding of other alternative fundraising solutions for the Real Estate industry, please let us know — we are definitely interested to talk!
Market overview and the pains of funding, what are the options for real estate developers?
The Real Estate market is a sweet spot for new technologies and digitalization for three major reasons: it is still old and traditional, the size of the market is huge, it serves a constant need in society for people to occupy spaces. This year “Emerging Trends in Real Estate® The Global Outlook 2018” PWC report outlines a number of interesting trends we would like to share before we describe the crowdfunding use case:
1. Business model. Most respondents outlined that the primary business models for the Real Estate are changing from Space as an asset to “space as a service”:
Real estate is continuing to evolve into something that is less about ownership and more about access — or services and outcomes. In simple terms, this means that we are seeing a relative value-shift from the passive “bricks and mortar” component to a more dynamic, operational business. This is important for investors — who either need to find innovative and cost-effective ways of accessing operational expertise and innovation, or face diminishing returns.
Emerging Trends in Real Estate® The Global Outlook 2018 PWC
The concept of “space as a service” assumes that Real Estate ownership or other rights are easily split and reconfigured as necessary, liquidity is high and every action with the property is done instantly without heavy paperwork or other administrative delays. AlT.Estate team is happy to be at the edge of this trend. AlT.Estate protocol is purposed to allow easy transactions with real estate and allow flow and liquidity which is crucial for creating dynamic “space as a service” projects.
2. Upcoming changes. The respondents mentioned big data, sales, financing and property management among the areas most likely to be affected by technology.
Blockchain is a technology that the real estate industry knows will have big implications, but currently finds somewhat difficult to get its head around. There is consensus that the technology will have the capability to create a new system of property title documentation and transfer, and that governments across the world are likely to adopt this to complement or replace land registries.
“Emerging Trends in Real Estate® The Global Outlook 2018” PWC report
This resonates well with AlT.Estate Protocol purpose and focus. Tokenizing Real Estate both allows to increase the sales and unlocks new ways of financing for the industry.
3. Issues to overcome. The overall market climate is positive which is based on the recent and expected economic growth. But there are issues european Real estate community identifies as concerning (see the figure with the overview of the European business environment below). AlT.Estate Protocol allows resolving the most significant of those. We work to lower the cost of finance through enabling more types of investors (cross-border and small investments) and by enabling alternative ways of financing like crowdsourcing. We also work to increase the availability of assets/land via tokenization and increasing the liquidity.
Monodom.io crowdfunding Use Case Overview
Regarding potential financing sources, Real Estate community expects the biggest growth from Alternative platforms. Blockchain and cryptocurrencies are starting to play a significant role as an alternative financial platform in many business areas, Real Estate being one of such areas.
Based on the verified market fit for the main AlT.Estate platform developments, we are happy to uncover our recent developments. Based on AlT.Estate protocol we were engaged in the development of a crowdfunding solution for one of the leading Eastern European Real Estate Development companies.
Monodom.io
Area of business: Residential estate developer
Business size: Medium
Real estate class: Premium
The geographical area of operations: Eastern Europe, Russia
Core team: 180+
Financing type: Bank loans, Real estate ownership presale, Crowdfunding
Key operations: Project structuring and financing, sales and legal structure (construction is outsourced).
The customer pains we solve are pretty common for such companies:
- need for a fast capital turnaround;
- too high-interest rates for lending the capital;
- the pressure of regulations;
- recent restrictions on property presale before it is actually built;
- need to involve foreign investors and enable the cross-border payments;
- no extra funding for payment and legal infrastructure are available;
To address these issues we proposed a solution which includes the following components:
- Smart-contracts for the Ethereum Ledger Layer;
- Legal advisory;
- Set of integration components for interaction with the customer CRM, customer websites’ front ends and customer financial backends.
Tokenization workflow
Depending on the chosen deployment option the tokenization workflow includes several steps (see the diagram below). The main actions include the issue of tokens (tokenization of the property using the ERC20 tokens), the token sale (attracting investors to take part), subsequent fund transfers to allow the funding of construction, and finally the Real Estate property ownership rights release based on the tokens distributed during the token sale.
Legal framework
There are two types of investors the developed AlT.Estate crowdsourcing solution mainly works for:
- Private investors. This type of investors can be a subject to the additional rules on mandatory licensing.
- Institutional investors. Usually do not fall under the restrictions provided for private investors and include banks, investment and insurance companies, large companies, and in some cases private owners of large assets.
Stage «A»: the property is transferred to the SPV’s balance.
Stage «B»: token holders (investors) own SPV via tokens. Tokens distributed to the token holders represent tokenized shares, that entitle investors to own SPV.
- In case of investment contract between token holders and the SPV’s nominee owner, token holders will be entitled to the cash flow generated by the property and will participate in SPV management.
- Alternatively to the one-token model, two-token-type tokenization can be conducted through equity or debt financing. A part of debt tokens will be secured by the property mortgage, whereas the remaining part will guarantee the return of the loan and interest, and/or will be allocated for the profit share. Offering diversified investment instruments will expand the pool of prospective investors.
In this case, tokens represent securities as well and are issued with a view to the future listing and trading on regulated exchanges and platforms.
Alt.Estate proposed tokenization schemes for EU and US markets and mostly concentrated on the case of EU.
The provision of the EU Prospectus Directive (Directive 2003/71/EC) will apply to the token offer. As a general rule, the issuer must publish the prospectus. However, the obligation to publish a prospectus shall not apply to the following types of offer:
- an offer addressed solely to qualified investors; and/or
- an offer addressed to fewer than 150 persons per EU member state, other than qualified investors; and/or
- an offer addressed to investors who acquire securities for a total consideration of at least EUR 100 000 per investor; and/or
- an offer whose denomination per unit amounts to at least EUR 100 000; and/or
- an offer with a total consideration in the EU of less than EUR 100 000 per 12 months.
In addition, laws of some EU countries provide the prospectus exemptions for crowdfunding. For example, in Germany domestic offers of up to EUR 2.5 million do not require the prospectus (§ 2a of Law on Investments — Vermögensanlagengesetz). Similar provisions contained in the laws of other EU countries: in Finland the domestic threshold is set at EUR 5 million, in Spain — at EUR 2 million per the EU, etc.
Taking in account that the property price exceeds EUR 50 million, to avoid the obligation to publish the prospectus, we can focus on the offer limited to qualified investors (credit institutions, investment firms, insurance companies, high net worth individuals, etc.); or set the token price no less than EUR 100,000 or set the minimum total consideration no less than EUR 100,000, however, this can lower the liquidity.
Executive Summary
ALT.Estate protocol has a product-market fit supported by the findings of such consultancy firms as PWC. While targeting the most significant pain points of the market we developed and successfully piloted the first blockchain based crowdfunding solution for Real Estate development company. We are working to further expand this approach, so if you are looking for crowdfunding of other alternative fundraising solutions for the Real Estate industry, please let us know — we are definitely interested to talk!
References:
- Emerging Trends in Real Estate®: Europe 2018 (Web link, Direct PDF link)
- Emerging Trends in Real Estate® The Global Outlook 2018 (Web link, Direct PDF link)
