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CRE Awards 2019: Blockchain – Bringing Real Estate into the 21st Century

Not long ago, most of the people in the real estate industry had never heard of “blockchain technology.” Now, blockchain technology is poised to transform the real estate industry by changing the way information is stored and exchanged.

Blockchain technology refers to a digital ledger that contains all of the historical data relating to a transaction. The ledger, shared simultaneously with multiple participants linked together through a secure network, is continuously visible to all of the participants, which enables each of them to verify the accuracy of the information immediately. The shared visibility makes it virtually impossible to alter the information and creates a record that can be audited easily.

In a world where many industries embrace digital records and eschew paper, the real estate industry is a relic. Physical delivery of wet signatures and original notary stamps is the only acceptable means of conveying real property interests in most U.S. jurisdictions. Closings involving international parties often experience delays because documents must be brought to a U.S. embassy in a foreign jurisdiction for an apostille before they are sent to the United States for recordation. The systems for registering and maintaining land records are antiquated, disjointed and inefficient, and seem only slightly more advanced than stone tablets. These systems lack transparency and are prone to mistakes and fraud. Blockchain technology may be able to solve these problems and bring real estate records into the 21st century.

By centralizing essential real estate data and making it publicly accessible, blockchain technology has the potential to allow for better and more integrated title records. It also offers the promise of greater transparency. Transparency should reduce mistakes and fraud. An additional benefit of blockchain technology is that it enables the participants to interact directly with each other (without a middleman), which streamlines the process and diminishes both the time and expense of real estate deals. “Blockchain will address high transaction costs, long time delays, and heterogeneity of real estate transaction types, accelerating the investment in real estate across sectors, the nation and the globe.” (Stuart Kaplow, “Blockchain Has Come to U.S. Real Estate,” Green Building Law Update, Dec. 16, 2018).

In addition to bringing greater transparency, speed and trust to real property transactions, blockchain may help amplify liquidity in the real estate market. One new approach to investment involves the fractionalization of real property so that an investor will own units (or tokens) in real estate rather than owning the real estate itself. Blockchain technology could facilitate fractionalization and enable real property units to be bought and sold at the touch of a button. Widespread fractionalization would have a huge impact on the real estate industry by turning real estate into a liquid asset in much the same way that securitizations (RMBS and CMBS) turned mortgage loans into liquid assets by allowing investors to purchase fractional interests therein.

New businesses are starting to explore the practical applications of blockchain technology to real estate. In July 2018, Propy, a California-based real estate platform with a decentralized title registry, announced its completion of the first comprehensive blockchain property transaction in California. The cross-border transaction involved a bitcoin-to-bitcoin sale of 10 acres of land. Since that time, Propy has completed several other blockchain real estate transactions throughout the world, including a second sale transaction in California.

There are opportunities to integrate blockchain technology into many facets of local and international commercial real estate transactions, including title searches, purchase and sales, financing, leasing and cash flow management, but the full capacity of blockchain technology to impact the real estate industry is not yet fully understood. John Kim, leader of BMO Capital Markets’ U.S. blockchain applications and real estate group, notes that “the maximum potential of blockchain in REITs will be unlocked once the entire real estate lifecycle is transitioned onto the chain.” (Clay Risher, “How Blockchain Could Transform Real Estate,” Nareit, Oct. 24, 2018).

Blockchain technology is an emerging field that is poised to revolutionize the real estate industry. Both within and outside of the United States, various jurisdictions are enacting blockchain pilot programs. By adopting blockchain technology to store and exchange information, the real estate industry will be able to improve the way in which it records, transfers, finances and manages real estate. Real estate may even become a liquid asset.

Susan J. Booth is a Partner at Holland &
Knight LLP.
Dora de la Rosa is an Associate at Holland & Knight LLP.

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