Big Wins (and Challenges) Tokenizing Real Estate

After we published the Real Estate DAO article, heads of the tokenized projects we featured asked to talk about their wins, challenges and vision for tokenizing real estate. So we got them together in a Twitter Space to talk openly.

Here are their answers (edited for clarity):

What’s your biggest web3 real estate win?

Jerry Chu, Lofty.ai

Lofty is a real estate marketplace that allows anyone to list a property and sell fractionalized shares to investors.

Our biggest win has been figuring out and crafting a brand-new regulatory strategy in this space. Lofty is a pure marketplace. We do not own or have exposure to any of the real estate on our platform. Anyone can come to Lofty to list a property for sale.

Traditionally, one seller sells to one buyer. However, we allow one seller to sell to groups of buyers through a DAO. Buyers can pool funds into this DAO to acquire the underlying asset, then vote and collectively manage the real estate.

Joel, CitaDAO

CitaDAO is a global marketplace for tokenized real estate, secured on the blockchain.

Our biggest achievement is that we established that real estate tokens are not security tokens where we operate in Singapore.

This is a major accomplishment for us because it enables tokens to be listed on decentralized exchanges like Uniswap, which provides 24/7, 360-degree liquidity.

The second significant accomplishment is what we refer to as a de-tokenization structure. We believe that any tokenization project should also include a pathway for de-tokenization — to redeem the title deed of the real estate with the real estate tokens.

James McCall, CougarDAO

CougarDAO LLC is bringing income-generating real estate, on-chain.

We acquired a farm at an auction in Haxtun, Colorado, in Northeast Colorado. It is a dry farm, which makes things a little easier since there is no depreciation or depreciating assets. After purchasing the farm, we found a tenant and leased it out for five years. We have also continued various other experiments since then.

Our biggest success has been the ability to test these smart contract frameworks by using them ourselves. We are experimenting with on-chain DAOs, one farm at a time.

Brendan, DeRE

Decrentralized Real Estate DAO allows fractionalized ownership in real estate assets that are found funded and fostered by the community.

Our biggest win is just creating the community that we have so far. But we're just getting started.

Angelo, Build_ DAO

Build Cities DAO is building startup cities around the world, where people in a real-life community crowdfund real estate together.

Our biggest win so far has been building a platform with over 600 highly cohesive online communities across 50 cities on 6 continents.

The goal is to enable people to crowdfund as a community, adding value to a piece of property or land. We acknowledge the pioneering work already done by many in the legal, regulatory, story, and development aspects. Our aim is to provide a tsunami of social and financial capital to further this movement. This is a win-win for both tenants and landlords.

Matai, KiftDAO

KiftDAO is building decentralized cities starting with van lifers and digital nomads.

Kift’s vision is to innovate how we live together and share community resources. Currently, I’m in a 2-bedroom house in Joshua Tree with a side cantina building. Here, 30 people share this co-living unit, using vehicles of all shapes and sizes as their bedrooms. We have someone in a Honda Fit that they modified to fit a bed, as well as people with vans, buses, and small RVs.

What’s your biggest challenge in tokenizing real estate?

MemeBrains, CityDAO

CityDAO is working to build a decentralized city of the future.

Developing an entire city involves numerous challenges, including legal and governance issues.

On the legal side, if any disputes or problems arise, including lawsuits or SEC involvement, having a legal opinion letter doesn't matter, because trying to defend our case would bankrupt us, regardless of whether we're right or wrong. This forced us to be cautious and slow in these topics and led us to completely separate the governance tokens and NFT tokens from the physical ownership of the property.

The so-called shield of being in a DAO is starting to get tested and poked at and possibly penetrated in some cases. It's not as safe as people may have once thought.

[Andrew’s note: Origami can help with that. After this Twitter Space, Matt from Origami spoke to them.]

On the governance side, the challenge has been trying to get 10,000 people to agree on which path to take. We initially built CityDAO as a direct democracy, which, in hindsight, may not have been as efficient as it could have been. Other DAOs like LinksDAO buy a property and are aligned, which is a bit faster. We started with direct democracy, in true web3 nature.

Jerry Chu, Lofty.ai

Lofty is a real estate marketplace that allows anyone to list a property and sell fractionalized shares to investors.

When dealing with a large number of entities, taxes can become quite complicated. This is particularly true for multi-member LLCs, which are automatically taxed as partnerships by the IRS. As a result, filing a simple 1099 return is not possible, and instead, the partnerships require the filing of forms like 1065, 8825, and 4562. These forms address various aspects of real estate asset depreciation, which is beneficial for owners to offset their income.

The complexity of these tax documents means that handling them can be quite expensive. Today Lofty has over 140,000 fractionalized properties on the platform, but at the end of our first year, we had just 70. In that first year alone, when we added up the costs of handling these forms, the quote from accountants totaled almost a quarter of a million dollars. This obviously isn't scalable, and we had to find another solution.

To automate the tax process, we built our own tax software. This software generates forms automatically based on the data on chain and in our own database. Starting in January, users on our platform will receive these forms without delay. This automation is particularly important given that many people who invest in a fund or deal with K1 forms are often late due to the complexity of the forms. This makes it easier to scale the platform as we grow.

Decentralized ownership is another challenge to handle. Our Lofty platform has experimented with 5,600 governance votes to handle edge cases related to real estate operations and management among its 100,000 members. Members have made decisions collectively, firing property managers, dealing with repairs, changing insurance providers, and dealing with delinquent tenants. Efficiently reaching a consensus with hundreds of people in real-time has been difficult, but members' self-interests are usually aligned, and we've been able to make decisions and carry them out collectively.

James McCall, CougarDAO

CougarDAO LLC is bringing income-generating real estate, on-chain.

One of the challenges we face is the rudimentary banking system. When dealing with real-world assets, there are various aspects to consider, such as taxes and regulations. Therefore, we need a good fiat/crypto ramp to overcome these challenges.

However, as most people in the industry know, banks that touch the crypto rails are getting hit hard, which makes it pretty challenging to operate in the United States in the way we do. We use a Mercury bank account, which is kind of a neobank, and then we can use other accounts to move money between USDC and that bank. However, it has been challenging to find a good ramp to go from crypto to fiat or vice versa. We had to get creative, and I'm still hoping that there will be a good bank-to-fiat regime that is not a complete pain.

It makes you wonder whether it's worth the trouble to have these other things that we can do on-chain. In the long term, the answer is yes, but we still have a ton of kinks to work out.

Jordan, BitByBitHomes

Bit By Bit Homes specializes in highly-targeted, micro Real Estate Investment Trusts (REITS).

From a regulatory perspective, complications arise in knowing whether these assets are securities or utility tokens, and where the lines are drawn. We believe they fall somewhere between the two.

However, like many web3 assets, they create new ways of interacting with securities or tokenized assets, blurring the lines between commodities, memberships, and securities or pegged commodities. Unfortunately, regulators aren't providing enough clarity on their intentions, resulting in high legal costs and opportunities being pursued outside of the United States, particularly in England, Northern Europe, and Southeast Asia.

What’s your 5-year vision for tokenized real estate?

Joel, CitaDAO

CitaDAO is a global marketplace for tokenized real estate, secured on the blockchain.

I imagine that real estate on-chain will be more valuable than the real estate in the real world given that it's more capital-efficient, and has better accessibility, liquidity, and composability.

MemeBrains, CityDAO

CityDAO is working to build a decentralized city of the future.

Decentralization isn't going away. DAOs aren't going away. Progress isn't going away.

So to me, it's inevitable that in the future — whether it's 5 or 10 or 15 years — decentralized ownership of real estate and decentralized communities will exist.

This isn't a question of if—it's about when. And that to me is very inspiring and it keeps me really dedicated to the space.

Brendan, DeRE

Decrentralized Real Estate DAO allows fractionalized ownership in real estate assets that are found funded and fostered by the community.

If everything goes well in five years, DeRe will allow its members to own thousands of properties in a fractionalized manner. They will also be able to communally vote and manage properties through tasks and boundaries, allowing anyone to enter the real estate market and complete tasks and get rewarded for them.

Jordan, BitByBitHomes

Bit By Bit Homes specializes in highly-targeted, micro Real Estate Investment Trusts (REITS).

If our vision works out, the goal is a new type of savings instrument that allows a lot of people to actually have a relevant and correlated asset to save for their first home, so they don't have to make irresponsible decisions along the path to the biggest decision in their life.

We would see fewer speculators and more genuine stakeholders. We would see more people having a fractional piece of ownership in the cities they live in, as they are parts of that economy and deserve a chance and a clear path towards ownership. We would see less speculation, more utility, and more liquidity in people's homes as a saving instrument.

Jerry Chu, Lofty.ai

Lofty is a real estate marketplace that allows anyone to list a property and sell fractionalized shares to investors.

Real estate remains one of those asset classes that are not very accessible and are more offline than they should be, given the technology we have. This causes a lot of friction, and high expenses. It makes it harder for people to get into this asset class and manage it.

Our vision is to build a platform that is extremely flexible, allowing anyone to spin up a DAO with a group of people, acquire, manage, and eventually liquidate an underlying real-world asset.

Over time, this erodes all those problems and inefficiencies, democratizing, making it more accessible, and easier to manage than the traditional way.

We believe that, over time, everything real estate-related will be done on-chain. Transactions will be conducted on-chain, and management will be performed on-chain.

Matai, KiftDAO

KiftDAO is building decentralized cities of van lifers and digital nomads.

The biggest lesson I've learned from my Kift experience is that this process is healing, and we can accomplish more together. I hope that all of these efforts combine to create extremely accessible and equitable means for large groups of people to share communal resources.

This could be through family DAOs purchasing land together or the construction of entirely new cities in a distributed fashion, like the many awesome crews working on it.

I believe that this is the foundational infrastructure that will help our society live in a more communal, collective, and intentional way going forward.

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