If you want it...
Build it.
You know the famous line from Field of Dreams…“If you build it, he will come.” If you don’t know that line, go enjoy the movie and then come back to this post.
Now I’m going to spin that phrasing around a bit to encapsulate my personal motivation…“if you want it, build it.” Please don’t misunderstand…this is not a sappy statement about chasing dreams or achieving goals. That’s all fine, but that’s not my thing in this substack.
In the most literal sense, I seek to help build the investment vehicle that should exist now and that I wish had been available for the last 30+ years of my investing life. Simply put…I am building an investment vehicle best described as “custom commercial real estate for all investors.”
This new investment vehicle is a unique combination of something new - modern blockchain technology, which emerged less than 15 years ago - and something old -commercial real estate, that ubiquitous asset class that’s been creating wealth effectively forever. Investors like you will love custom commercial real estate, and we all truly need it, and it’s my task to bring it to market. With two decades of experience managing institutional real estate investment, I have the knowledge, skills and drive to pull it off, and the continuing evolution of blockchain technology now makes it possible.
Now there’s a lot to unpack within a nomenclature like “custom commercial real estate for all investors.” I’ll take it one piece at a time…
I’ll start with the premise that my primary focus is to work with stabilized real estate, which I define as a cash-flowing property that is well-occupied and collecting market-level rents. I don’t intend to build or develop new properties; rather I intend to build an investment vehicle comprised of existing stabilized properties with in-place cash flow.
With that as the basis, I’ll explain why I’ve chosen real estate as the foundational component of this new investment vehicle:
Stabilized properties have the capacity to reliably and consistently cash flow at high margins for decades upon decades. Self storage is my favorite type of real estate and multi-family properties (apartments) are attractive as well. These asset classes enjoy steady demand throughout economic cycles with high profit margins and controllable re-leasing costs.
Property operating expenses are well understood and relatively predictable. Given a reasonably diversified portfolio of properties, total revenues and total expenses exhibit low volatility —> simply put, cash flows (roughly, revenues minus expenses) to investors are generally quite steady.
Most real estate risks can be mitigated or insured against. Pick good quality properties in solid markets and they’ll deliver cash flow. Buy good insurance to protect your downside from catastrophes. Hire a good manager to eliminate the hassle factor and ensure solid financial performance. Real estate done well can be a reliable source of cash flow and hassle-free way to store value and grow wealth.
Valuation of properties increase with inflation. Inflation will happen. And when it does, rents increase accordingly. Without fail, operating expenses will also increase but they generally increase at the same pace as rents. Overall profit margins and cash flow grow in concert with inflation. Investors who own stabilized real estate get to surf the waves of inflation; they don’t get crushed beneath them.
Real estate returns are balanced between current cash flow and valuation growth, both of which are tied to inflation (see the preceding point). Real estate investors who have a long time horizon will build incredible wealth by collecting cash flow, reinvesting it, and harnessing the power of inflation to drive the growth of both distributions and the underlying asset values.
Real estate volatility is low, when compared to other available asset classes. Invest in a stabilized property with a solid cash flow…assume a 5% - 7% yield…and let it grow naturally with inflation at a 3% - 5% clip. Over the long haul, you will outperform almost all other alternatives on a risk-adjusted and leverage-adjusted basis. I know this is a loaded statement…take it on faith for the moment and we’ll dive into the details in a later post.
Tax benefits are the silent turbocharger for real estate investors. Taxes are a relentless and omnipresent parasite capable of eating into investment returns. Real estate investors with a long time horizon benefit from a little tax judo that turns tax liabilities into tax benefits. The details of the U.S. tax code are a too complicated for this forum, but rest assured, investors with a modicum of knowledge and timely help from well-paid experts can leverage the tax code to accelerate returns on investment. These tax advantages will be built into custom commercial real estate to make it feel like the “easy button” for tax savvy investors.
Why focus on commercial real estate? Isn’t my home a valid real estate investment? Yes, investing in a home is great, but here’s why commercial real estate is superior for long-term wealth building:
Scale - commercial real estate enables deployment of capital at scale. Individual property investments range in value from a couple million dollars to hundreds of millions of dollars, which quickly differentiates commercial real estate from investing in your home. Commercial real estate enables a more flexible ramp-up as the flywheel starts spinning for this concept of customized blockchain investing for all. Scale enables broader participation of investors which ultimately drives broader availability of investment opportunities and so the virtuous cycle continues. Scale also draws the best people into our sphere of operations - the best brokers and property finders, the best underwriters, the best operations and maintenance team, the best professional support team (legal, accounting, tax, IT) etc.
Efficiency - the scale of commercial real estate enables greater operating efficiency across multiple fronts, including but not limited to transaction costs, management costs, accounting, insurance, marketing, and capital improvements. Efficiency ultimately leads to better returns for investors.
Professional Management - commercial real estate enables us to engage excellent property management teams to take care of our properties and drive consistent high performance from a financial standpoint. Scale is also a beneficial factor here because some of the best property management operators limit their focus to larger projects.
Diversification - commercial real estate allows for highly effective diversification across markets and property types, so that our collective investments benefit from exposure to a variety of upside catalysts as well as risks that may cancel out or at least be mitigated by property type and market diversification. And we don’t want to ignore diversification across time…the consistent cash flows from stabilized commercial properties allow for dollar cost averaging throughout market cycles.
Liquidity - commercial real estate in the U.S. encompasses tens of trillions of dollars in asset value, which attracts investors across the entire spectrum, all the way from a young saver with minimal discretionary investment funds to the largest pension funds in the world, which are capable of moving markets. Broad based demand for the commercial real estate represented by security tokens on the blockchain will drive a tighter alignment between the market value of the underlying properties and the market value of the tradable security tokens. Liquidity enhances investment outcomes, and I’ll dive deeper into the liquidity advantages (higher returns!) available to early adopters of blockchain real estate investing.
Now let’s flesh out the concept of custom commercial real estate. I have deferred the discussion on blockchain technology until this critical point, and the concept of customization is where the blockchain technology really shines to the individual investor a superpower never before available.
And since we’re on the topic of customization, I’m also going to weave you, my dear reader, into this discussion. Picture yourself as the investor, which is exactly my approach as I go about designing and building custom commercial real estate for all investors. I am bringing this customizable vehicle to market to benefit both you and me as everyday investors.
Starting at the foundation, I want to emphasize that custom commercial real estate begins with a single stabilized property - maybe a self storage facility, or an apartment complex, or a neighborhood retail center. It’s a real asset in the real world. Then the ownership of that property is legally divided into small shares (maybe worth $1 or $10 or $100 per share), and those shares made available to you as the investor in the form of a security token that can be bought / sold / held / traded via a blockchain platform. A security token is just an electronic representation of your claim on a real asset; it’s not functionally different than the electronic representations of stock shares that you would trade in a Robinhood or Schwab account. Within that framework, here’s how you and I as investors can leverage the flexibility of security tokens and blockchain technology to customize a real estate investment:
Select your investment. Only invest in the properties that you are excited about, via the purchase of individual security tokens on a blockchain platform. You are not handing a big check to a sponsor or manager to go build a scaled-up portfolio worthy of a private equity fund or big enough to take public on the NYSE as a publicly-traded REIT (real estate investment trust). Using a simple stock market analogy, you don’t have to buy a mutual fund (portfolio); you can just buy shares (tokens) in the companies (properties) that you choose. Like me, you probably want to know what you own and feel a “tangible” connection to your assets. Selecting properties, one token at a time, allows you to have that tangible connection. How many real estate fund investors and REIT investors really feel that way?
Diversify…your way. Real estate tokens on the blockchain may trade for $1 or $10 or $100; they won’t trade for thousands of dollars or tens of thousands of dollars. You can spread your chips all around the table, diversifying your bets among different markets, different sectors, different managers, different sponsors, and ultimately different properties. And you can have it “your way” (sorry Burger King), which is vastly different than cutting a check for $100,000 or a $1 million or more to place a bet on a single deal or a single manager running a portfolio as he sees fit. Blockchain technology empowers the investor, and real estate security tokens on the blockchain allow you to pursue multiple dimensions of diversification.
Liquidity is at your discretion. You don’t have to sell until you’re ready. The investor is back in charge. There may be a lot of reasons to hold your investment for a long time. Those reasons may be driven by your personal situation or your tax strategy or your assessment of the market. On the other hand, you may choose to liquidate your investment very quickly. Blockchain technology gives liquidity decisions back to the investor. By contrast, when you hand a check to an investment manager in a traditional real estate deal or fund, timing and liquidity are out of your hands. You may be forced to hold a lot longer than you want to or are able to. Or you may be forced to sell when the fund manager wants to sell and thereby end up with a tax liability that you’d rather not incur. It’s vastly different with security tokens and blockchain investing.
Leverage is controlled by the investor. The custom commercial real estate investment vehicle that I am building will be unencumbered - no debt, no mortgage, no financing or re-financing, no origination points and fees, no lenders, no bankers, no underwriter’s counsel, no interest rate risk, no caps, no swaps…you get the idea. Real estate security tokens that are traded on the blockchain represent a stake in a property that is owned free and clear of debt. Here’s where the customization comes in…investors may choose to pledge their security tokens as collateral to a “lender” in exchange for a loan of cash or anything else, and you can choose to take on as much debt or as little debt as you like. No debt is okay too! BUT…and this must be exceedingly clear…what “Investor A” does with his or her tokens has no impact on “Investor B” and no impact on the property itself. The property is always free and clear…forever unencumbered. There is no debt at the asset level; financial leverage and capital strategy is purely at the discretion of the investor, and thus the default status is a no-debt, all-equity investment. This customization feature simply does not exist in commercial real estate investing today, but with blockchain technology and security tokens, I want you to take control of your own capital strategy. By contrast, the status quo is that portfolio managers and/or fund sponsors pursue a leverage strategy that may be either helpful or harmful to their investors, but is certainly beyond the control of those investors.
Finally, I’ll define this concept of “all investors.” The illiquid nature and scale of commercial real estate has made it almost unapproachable for the common investor. It has been an exclusive playground for insiders with specialized knowledge and big checkbooks. The world of commercial real estate has been dominated by institutions and experts who have been happy to keep the profits to themselves. But the distribution power and democratization of blockchain technology finally will make commercial real estate available to all investors*. In the same way that anyone with a smartphone and a few bucks can leverage Robinhood to buy stocks, bonds, options, cryptocurrency etc., blockchain platforms known as ATS’s (Alternative Trading Systems) will bring commercial real estate investing to everyone’s doorstep via security tokens.
If it sounds too easy to be true, your intuition is right on target. Within the context of today’s regulatory environment, delivering real estate security tokens to all investors via the blockchain requires a two-step process. Step one is to capitalize a property investment with funds solely from accredited investors (high income and/or substantial net worth), and deliver to those investors the security tokens representing their proportional ownership of the property. There are more nuances here with securities law, but the key point is that the initial investment opportunity is not directly available to all investors. Step two involves a one-year holding period during which the initial group of accredited investors will hold their tokens (or trade amongst themselves after a 90-day waiting period).
At the expiration of the hold period, the initial investors can make their security tokens available to everyone (both accredited and non-accredited investors) on the blockchain via established trading / tracking platforms known as Alternative Trading Systems or ATS. This is the point where we have achieved the goal of custom commercial real estate for all investors. Once security token trading begins on the blockchain for a real estate investment, the clunkiness of this two-step process falls away, and it’s largely transparent to you and me as the investor.
To wrap up, I’ll circle back to the “why.” The investment vehicle that I’ve described here is the wealth-building tool that I wish I’d had from the very beginning of my investing career. Custom commercial real estate on the blockchain has it all —> consistent cash flow, broad diversification, leverage against inflation, dollar cost averaging, small ticket entry point, minimal fees, and beautiful upside with low volatility. And there’s a wonderful tangibility feature here, in that these properties will ultimately be the same properties that you and I drive by every day, or where we store our stuff, or where we live or shop or work. I’m hard pressed to imagine any other investment opportunity that checks all of these boxes. That’s why I’m helping to build it. Please subscribe to follow the journey and learn more.
* In all fairness, Aspen Coin was probably the first to deliver on this promise several years ago by offering shares of the Aspen St. Regis hotel to non-accredited investors via tokens on the tZERO platform (and via other platforms prior to tZERO). My vision of custom commercial real estate for all investors is functionally similar, yet different (and better) in many respects.