Digital transfer agent Vertalo is helping to tokenize $300 million in real estate.
In the first deal completed on its new tokenization platform, consulting firm Advantage Blockchain is teaming with Vertalo and alternative trading system tZERO to tokenize the portfolio of Class A properties owned by a boutique firm, the companies told CoinDesk.
The portfolio belongs to Pennsylvania-based Real Estate Capital Management, and Advantage plans to tokenize the portfolio in phases, starting with $90 million of office and hospitality real estate over the next three months, said Alec Beckman, president of the consulting firm. Hotels in Pennsylvania and Costa Rica will be the first to be tokenized in the deal.
The multi-firm partnership lays the groundwork for a steady stream of real estate tokenization projects for properties and real estate investment trusts in Philadelphia and other parts of the northeastern U.S., said Vertalo CEO Dave Hendricks.
The digital representations of real-estate shares will trade alongside tZERO’s private equity token, TZROP, and Overstock’s digital voting series A-1 preferred stock, said tZERO CEO Saum Noursalehi.
“Rather than doing one-off deals … we’re partnering and are able to scale that way,” Noursalehi said. “We’re the most liquid platform out there for security tokens. We should have our own retail broker-dealer live in Q2 and have signed up another four to five broker-dealers to integrate and trade security tokens on our platform.”
There are already 55 additional funds in the pipeline, waiting to begin tokenized, Vertalo’s Hendricks said. Vertalo is working with four other firms similar to Advantage that will provide access to more funds.
Through Vertalo, Advantage will use the Tezos blockchain to tokenize the real estate. On tZERO, investors can sign up to trade tokens through Dinosaur Financial Group, a broker-dealer that is consumer-facing. The tokens will be custodied by Nevada-based Prime Trust.
In the past, tokenizing real estate has been viewed as a way to make it easier to trade real estate investments. Trading real estate normally requires finding a buyer and transferring paper certificates to a central office.
“If you own a building and your plan is to own it for five years and improve the value, the cost to buy and sell is expensive,” said Gary Brandeis, president of Real Estate Capital Management. “The amount of value you have to create is significant. … You have to make it up to get in and out of real estate.”
The properties in this portfolio will now be open to all accredited investors instead of just those within traditional real estate owner networks, said Marc Paquin, Advantage’s co-founder and chief operating officer.
While past efforts to tokenize real estate have failed because of low investor interest, Vertalo is aiming to help managers who are looking to improve back-office efficiency and create more liquidity, Hendricks said.
Vertalo has agreements with firms tokenizing real estate across the globe, but Advantage is the first firm to specialize in real estate tokenization that is choosing to bring all of its deals through Vertalo.
‘Time is now’
“Before now, and our integrations with [alternative trading systems] like tZERO and custodians like Prime Trust, it was not really possible to create and facilitate compliant secondary markets,” Hendricks said. “That time is now.”
Hendricks says he developed the Vertalo Real Estate Platform as a tool for real estate holders, investors and fund managers to tokenize current investments, as opposed to tokenizing real estate and finding new investors for those security tokens.
“When you do an STO [security token offering] in the U.S. using a Reg D, you have to wait a year before those are tradable,” Hendricks said, referring to the Security and Exchange Commission’s Regulation D, which covers private placement exemptions. “Because the deal is tokenizing real estate with existing investors, these shares will be able to be listed immediately and traded immediately.”
This first licensee represents a shift in the transfer agent’s tokenization model. While it plans to continue using security tokens to fundraise for real estate, it is now aiming to build a more stable secondary market.
“The stuff we’re doing now is with fund managers who already own the assets,” Hendricks said. “We’re not using a security token to raise money. We’re using the technology to reduce costs and save money.”
UPDATE (April 17, 21:42 UTC): An earlier version of this story incorrectly stated that tokenized shares would be open to non-accredited investors. They will only be open to accredited investors.