Restructuring the Real Estate Capital Stack

Blockchain enables more efficient real estate capital formation, eliminating pain points for the individual real estate investor. Here, we explain how the Two Token Waterfall is restructuring the capital stack for a more accessible and liquid investing experience.

Note: The information contained in this blog post does not constitute an offer to sell, or a solicitation of any offer to buy any securities. You should always consult your own financial, legal, tax or other advisers before participating in any securities transactions.

Every new real estate project must be financed before it begins, sometimes by a single source of funds, but more likely through a syndicate of several capital sources. These come in multiple forms, most broadly debt and equity, which comprise the “capital stack” of a given project.

The debt element is fixed income, which generally carries less risk in return for less upside. The equity element, representing actual asset ownership, is more risky but has more upside. Whether a buyer takes debt or equity is a matter of their appetite for risk versus returns.

The real estate capital stack of today

Syndicates typically have a “sponsor” whose role is to put the deal together, to find investors, and to generally shepherd the deal along. For example, the sponsor might determine that the project will be financed through a mix of 70% debt and 30% equity, and then find appropriate financing partners for each tranche of capital. These financing partners are typically large, sophisticated institutions, such as banks, private equity companies, or funds, with ongoing relationships to the sponsor.

As an individual investor, it was historically hard to know about or gain access to these types of private real estate deals. Individual investors, whether retail or accredited, primarily access real estate deals through investing in public REITs, similar to buying a share of Apple stock on a stock exchange, or by purchasing and managing an individual real estate asset such as a single-family home.

Active and passive ways to invest in real estate

In 2012, Congress passed the Jumpstart Our Business Startups (JOBS) act, which fundamentally changed the way companies could sell securities to individual investors. The JOBS act increases the flow of capital from individuals in three ways:

  1. The first change (Title II / Reg D) allows issuers to market the sale of their securities more broadly through general solicitation (e.g., newspaper advertisements or marketing newsletters), with no fundraising limit, so long as they verify that each purchaser is an “accredited investor” [1].
  2. The second change (Title III / Reg CF) allows issuers to openly market and sell up to $1,070,000 in a private placement to any potential investors, not just accredited investors, so long as the offering is conducted through a crowdfunding portal registered with the SEC.
  3. The third change (Title IV / Reg A+) expands Regulation A, allowing issuers to conduct larger exempt offerings.
Reg D, Reg CF, and Reg A+ of the JOBS Act

Together, these changes enabled the growth and prevalence of real estate crowdfunding sites such as Fundrise, Crowdstreet, RealtyMogul, RealtyShares, and PeerStreet, with PeerStreet funding over $900M in loans to date and RealtyShares funding over $750M in loans to date [2]. For the first time, individual investors were able to access a wide pool of real estate deals with the same ease as an institution.

Another trend that occurred over this time period was the growth of secondary funds for private equity. Typically, investors in private equity had to lock their investment in for a full ~10 year cycle, and they could only invest at the beginning of this cycle. Secondary funds allowed these investors to realize returns more quickly, by selling investments mid-cycle. They could also better mitigate their risk and return profile, because they could invest mid-cycle — when more of the value was realized. This allowed investors to rebalance the weighting of various asset classes in their portfolios more effectively. However, as these funds were primarily limited to institutions, it was still hard to get in and out of real estate private equity opportunities as an individual investor.

How blockchain drastically improves the investing experience

Today, blockchain has the potential to make real estate investing even more accessible for the retail investor. We can create “security tokens” to represent these assets. Tokenizing real estate interests with blockchain allows for the easy purchase and trade of assets, minimizing paperwork and other legal friction. It allows for simplified counterparty discovery with assets being available from multiple sources, as they are no longer “walled off” across the different asset platforms or geographies. Finally, blockchain naturally allows for rules-based, programmable compliance, for example making investor accreditation and KYC checks simple and automated.

Fluidity has a unique approach to both the tokenization and trading of these assets that makes it different from any other tokenized real estate structure:


Together with Propellr, we pioneered the “two token waterfall” concept, which replicates the traditional real estate capital stack.

Token A replicates debt, while Token B replicates equity, and the sum of the two token classes represents the total capitalization of the transaction.

Each group of tokens is issued at a designated price. Once the tokens have been sold, they can be independently traded on the secondary market. While the tokens have an underlying value — the asset value — their price still fluctuates based on market sentiment.

First, let’s assume an example where a property is tokenized and sold at year 1. Both the A tokens and the B tokens are freely traded. The property held for 10 years and sold at maturity. At maturity, the tokens are redeemed, and the two-token waterfall details how each token holder type is paid back, just as how the capital stack is paid back in a specific order.

Aligned incentives

Now, let’s assume an example where the property is sold prior to maturity, at year 5. In the traditional lending framework, the lender is not incentivized to be open to an early sale, as it deprives them of additional interest payments. However, in the two-token framework, the incentives are now aligned as the lender (now the Token A holder), despite receiving a lower interest payment, is able to participate in the upside.

The two-token framework creates a clear standard for real estate tokenization that facilitates the ability to compare and value different deals. Despite its seeming simplicity, it can also be adapted for more complex deal types.

Increased flexibility

It’s important to note that the entire capital stack of a project doesn’t have to be financed through the blockchain, similar to how the entire capital stack doesn’t have to be crowdfunded. Sponsors can take a small portion of either debt or equity and tokenize it, while leaving the rest capitalized through less liquid traditional financing vehicles. Sponsors can then link ownership between the analog and digital worlds.

On the flip side, if a sponsor wants to tokenize an entire project, but doesn’t want its investors to have to interface directly with the blockchain, they can simply tokenize the back-end. Investors still invest as normal and never have to deal with tokens or the blockchain directly.

For more detail, read the whitepaper.


Private placements are typically “held-to-maturity” by investors, without much secondary trading — this is due to an inefficiency in the way they are held and traded, not due to a lack of interest in being able to trade them. Significant time and paperwork is required to transfer ownership to a new party, and furthermore, assets are often traded below market or net asset value (NAV) price, as the market typically associates the desire to sell with some sort of distress.

The Fluidity capital stack naturally integrates with secondary trading through decentralized technology pioneered by AirSwap, which allows for conversational, peer-to-peer trading. AirSwap’s unique and non-custodial design enables four key secondary trading benefits:

More assets available for trade

In a custodial exchange, which holds custody of the underlying tokens, each and every token requires approval from a regulatory body before it can be custodied and traded on the exchange. Centralized cryptocurrency exchanges are custodial, and many decentralized exchanges are custodial as well. With AirSwap’s non-custodial design, our technology allows for many more assets (the long tail) to be available for trade.

Better trading experience

Many securities trading platforms operate central limit order books (CLOB). However, because these securities represent real world assets, trading activity is happening between investors on a case by case basis. This makes it much better suited to the conversational “over-the-counter” (OTC) trading supported by the decentralized AirSwap network.

More accurate information

Blockchain enables transparency in ownership and in pricing. Today, rarely does an investor have a full view into the capital stack. It’s hard to know who owns all the various debt and equity pieces and what the current market valuation is of each of those pieces. Once the assets are put onto the blockchain, this data becomes visible, as ownership can be tracked through wallets.

Minimal fees and clearing costs

Without the need to issue and sign paperwork for each transaction, transactions can occur more quickly and more often. Compliance can be coded into the blockchain, so there isn’t the need to perform manual checks every time there is a transaction. For example, if there are ownership limits on an asset (e.g., a maximum of 1,000 unique investors is allowed), this can be encoded and the 1,001th investor automatically waitlisted. Moreover, by eliminating intermediaries, trading fees and other costs can be lowered.

At Fluidity, we are excited to enhance traditional commercial real estate investing by combining it with the best of blockchain technology.

Thank you to Michael Oved, Don Mosites, Khurram Dara, Richard Slenker, and Gal Eldar for providing their input.

[1] As defined in Rule 501 of Regulation D of the Securities Act of 1933