Tokenized Commercial Real Estate vs. REIT Investing..and a Killer App
At RedSwan CRE, we often get asked by our customers what the key differences are between investing in security tokens backed by commercial real estate equity interests versus publicly listed real estate investment trusts (REIT). The main differences boil down to three areas: 1) Targeted Exposure, 2) Control, and 3) Tax Benefits. In many aspects, as you will see, tokenized CRE is a superior option to simply buying shares of publicly traded REITs. Let’s take these differences one at a time.
Targeted Exposure. Publicly traded REITs typically focus on a single commercial property type and have diverse exposure across geographies and markets, some of which may not be favorable depending on the economic environment. Therefore, there is risk that strong financial performance in certain submarkets can be partially or completely offset by weaknesses in other markets. With tokenized real estate, an investor can achieve very specific targeted exposure based on his/her views. If someone is particularly bullish on say, Multi-Family Residential in Austin and HealthCare Facilities in Orlando, then that person can hone in on investment opportunities that meet those exact profiles. The end result is that the investor can form a customized portfolio of CRE types and geographies that best capture his proprietary forward looking views on what will perform best.
Control. As a REIT investor, you are beholden to the decision making of the company’s C-suite in terms of the properties they choose to acquire, develop and dispose. For practical purposes, as one of thousands of shareholders, you cannot override management decisions if you feel they are making strategic mistakes. With commercial real estate tokenized on blockchain, liquidity is now possible and gives you greater control. If your view on an asset class and/or geography has changed, you have the possibility of immediately divesting your tokens in a secondary market in order to deploy the proceeds in other deals that better reflect your current thinking.
Tax Benefits. This might be the “Killer App” of tokenized real estate! As a reminder, a CRE property in the US is typically held by a limited partnership entity that was formed specifically to hold that one asset. Therefore, the tokens of the type we offer on RedSwan CRE represent interests in the equity capital stack of the limited partnerships. As such, a token investor on our platform effectively becomes a limited partner and has a fractional ownership in the building. The general partner (i.e. — the CRE sponsor) every year must allocate the property’s depreciation expense to equity holders. This has a powerful application. If one has a lot of realized short-term capital gains, dividend and/or interest income, this depreciation expense can offset this income generated from other investments! Instead of paying 37%, currently the highest tax bracket, one can effectively pay a rate significantly south of that when property depreciation expense is netted out against the short-term gains, dividends and income. This is particularly advantageous and relevant in today’s environment given the massive bull run we’ve experienced and potential increases to capital gains tax rates into the 43% range under a future Biden tax plan to help fund new social programs. Therefore, demand for ways to reduce taxes through activities such as direct real estate investing should only increase in the next 4 to 8 years, depending on the outcome of future elections. When you buy shares of a publicly traded REIT that is listed on say the New York Stock Exchange, you are really buying shares of a company; depreciation benefits do not accrue to the investor. The REIT company receives depreciation shields, but nothing directly passes on to you as a stockholder that can be used as a deduction on your tax return.
In closing, there are several key advantages to investing in security tokens backed by CRE. The minimum investment for any deal that we syndicate on RedSwan CRE is $1,000, so the entry price for anyone to experience firsthand the benefits of investing in high quality, direct CRE is no longer a barrier. Join us!