In recent years, the rise and fall of blockchain technology, nonfungible tokens (NFTs) and cryptocurrencies has been a popular topic of conversation in the media. From the wonder of how Justin Bieber could purchase the then-sought-after “Bored Ape Yacht Club” NFT for $1.3 million (now valued at $69,000) to the meteoric ascension of the ever-aloof Sam Bankman-Fried followed by the salacious collapse of his FTX empire, the crypto economy has certainly been no stranger to headlines. In what appears to be a rebirth, blockchain and tokenized assets are once again stepping into the ring, this time in a new industry—real estate and construction. 

In 2022, Alterra Worldwide (Alterra) launched one of the largest real-estate-tokenization projects in history by issuing a $100-million security token offering for the development of a new multifamily high-rise tower in downtown San Jose, California, named Tower 27. In doing so, Alterra created a token named “T27 Silicoin” using Ethereum Blockchain, issued 100 million T27 Silicoin security tokens—each equal to $1—and proceeded to sell fractional ownership of Tower 27 to investors around the world.

Tower 27 is described as a 24-story, 374-unit, multifamily residential project that includes 35,597 square feet of leasable commercial space in the heart of Silicon Valley’s real-estate market. The project is certainly one of the first of its kind and has caught the attention of both investors and developers alike, with some groups asking, “What do I need to know about real-estate tokenization?”

WHAT IS TOKENIZATION?

Tokenization is the process of converting physical assets into digital tokens on a blockchain network. A blockchain is essentially a distributed database of records, or a public ledger of all transactions or digital events that have been executed and shared among participating parties that have exchanged a token. This process allows investors to purchase and developers to sell fractions of assets, such as physical real estate and construction projects.

Each token can represent a different element of ownership, such as direct equity in a company owning real estate, a piece of a parcel, participation in a real-estate investment fund, property-related payment rights similar to dividends or distributions paid through the collection of rents. Real-estate tokens create new opportunities for investment and development that may shape the future of the industry.

So, what’s the catch?

THE REALITY OF REAL ESTATE TOKENIZATION

Real-estate tokenization creates new opportunities for the industry, such as increased liquidity by bringing in new investors and creating a larger pool of potential capital for developers; lowered transactional costs compared to traditional methods of real-estate investing; and greater transparency of property ownership due to the blockchain nature of the token technology. Alternatively, real-estate tokenization has myriad question marks related to its viability, largely due to tokens triggering certain legal obligations under state and federal securities laws; a lagging legislative framework to properly regulate tokenized real-estate transactions; and the lack of a centralized exchange for tokens that fosters trust for investors and developers.

WHAT’S NEXT?

The tokenization of real-estate assets will surely create intriguing opportunities for investors and developers moving forward. For construction professionals, tokenization may open new doors, but it is advised to proceed with caution and carefully evaluate any transaction where a project or development may be financed through tokenization, as there are still many questions regarding regulation of the technology.