BBW25 - Day 2 - Tokenizing Real Estate & Fractional Ownership

Please join me in welcoming them to the stage. Great. Thank you everyone. Glad you can join us today on uh tokenization of real estate and fractional ownership. Uh I think we can all agree that real estate is one of the most stable assets that we've seen but yet at the same time one of the least liquid assets.

So when we think about tokenization of assets, there's no doubt that uh real estate is one of the poster childs for this. Um you know there's certainly some hurdles that have been involved from a regulatory front and uh you know what tokenization can really accomplish has to do with uh unlocking some of the transparency, some of the fractional ownership. And with me today, I've got three great founders who are trailblazing some of the most innovative um companies and solutions in this area. So with me with I have Chris, Alex and and Matthew. So I think to start before we get into the elephant in the room which is always seems to be around um compliance and regulatory matters let's first set the stage when we think about this landscape and traditionally when we think about the topic of liquidity versus stability and what that might mean from each of your perspective whether it's from the state and local uh perspective as well as Chris over here developing some solutions and and Matthew for some um innovative solutions around compliance.

Chris, you want to lead us off?

Yeah, absolutely. Uh thanks uh for the introduction and yeah, so just as quick background, Groma is building a real estate coin in the same sense that stable coins are tokens backed by dollars. Gromacoin is a token backed by REIT shares. Um so kind of spoiling it a little bit, the approach we've taken is a pretty conservative one here. were using reach shares using the exact regulatory framework that you would see for off-chain reach shares and putting it on chain.

So really not reinventing the wheel here using a fairly straightforward and compliant approach. Um and then as it relates to the liquidity here um there's actually a really interesting combination of uh price schema that we're using here. Uh on the one hand we're engaging in direct issuance today. Um the direct issuance is currently happening offchain. uh we we set NAV quarterly.

We issue coins and redeem coins at that NAV. Um as we go forward, we'll be doing that via an onchain address. Uh and then also the more interesting part of this is going to be once we get to the point where we're engaging in secondary market trading on chain. That's when you really open up a can of worms on what counts as a securities exchange. What features can you build into a decentralized exchange to ensure it's compliant without running a foul of the regulatory trip wires that move you into securities exchange territory?

Um, so we're figuring that side of things out. But there's a from an economic standpoint, the the interplay between issuance at NAV and secondary market trading imposes both price discipline on us as Groma as issuers. Um, but also anchors the uh the the market volatility by the fact that issuance will continue to take place at NAV.

Great. Thanks, Chris. You know, one one of the things that we're in our group discussion when we're thinking about this a little deeply when we think about the the trust associated from the that sector and to create that stability versus you know the urgency or want the demand to you know versus the um call it the um the development of the liquidity. How do we see how we're going to bridge that gap? Does any

Well, I mean, at Balcony, um, we want that end state where real estate is a very liquid type of asset, but to do that, you need the government to be involved in our, in our opinion. So, Balcon is building land record systems for local governments, county governments. We're really bringing the government on chain. We believe that if the government is a validator of real estate, they can also be party to a lot of these other activities that we all want to take place and do. But to do that, you need that single source of truth.

So what we've done over the past couple of years is we've gotten a lot of local governments in New Jersey, Virginia, and other states to prescribe to this way of doing business. And how we do that is we bring in all these legacy systems. We put them on chain, right? Um you'd be surprised how many 80 year olds I talked to in like county clerk's office across the country about the blockchain. And you'd be surprised how much they understand it when you really break it down the essence of what we're really trying to accomplish here, right?

All we want is a very uh transparent way to do business. But to do that, real estate is super opaque. So, you need the um you know the the buyin from these like stakeholders because when you think about who actually has the records for your house, the county clerk's office is the probably the the biggest stakeholder for real estate data across the country. But how many county clerks do you really know? How many county clerks do you vote for?

How many county clerks do you come in touch with? Right? But they have they have a lot of power. So, if if you provide them a very easy way to to access their data, that's where everything starts from in our opinion. Great.

Thanks, Alex. Uh, Matthew, do you have anything that you might want to share to that extent? I know when we think about from the compliance perspective, there's a lot of great tools that your company's building.

Yeah, I I guess I would just address liquidity from a high level, which is you have to recognize that liquidity is an auction process. You have buyers and sellers, and that means whatever you're selling has to be attractive. And maybe that means that you mitigate the regulatory risk. So you have a financial instrument that investors or institutions would be interested in or you're looking at the smart contract and the token. It has a competitive yields compared to a lot of stuff and that's going to bring in buyers or the underlying asset.

And this is why tokenizing real estate is so interesting to me because it's a very sophisticated asset class. It's tangible. It exists in the real world. And so as we start thinking about compliance and what that means and what true transparency means, I mean these are the solutions that we are uh attempting to introduce to the market and think about how to actually translate what's happening in the real world into data and getting that onchain uh everything onchain as much as we can in the legacy systems as well and then ultimately using that to boost investor confidence which would thereby bring in buyers and stimulate the liquidity that we're all hoping for.

Great. Thank you. You know, as we move toward the discussion towards the the regulatory front here, when we think about where we thought this industry would be, this sub subsegment five years ago and now when we look at it, there's been a a latency of, you know, related to the adoption here. And a lot of that can be hinged upon the regulatory front, right? whether we're dealing with SEC and securities laws um property laws and then Alex even from the state and local um you know region.

How do you guys see that? I know what one of the greatest points that in our discussion was the fact that if we look back a year ago to where we are today even some of the things that you guys have been doing within your companies have changed. A lot of that hinged upon like the outlook um of the regulatory front and the positive of what we're about to see. Anyone care to share?

Yeah, for sure. So, so Gromo was founded in 2020. Um the approach that we had to take under the Gendler SEC was a very conservative one, right? you know, we we progressed forward uh doing the you know, utmost in compliance and reporting with the SEC, talking with them about our thoughts on, you know, a what is the read on the base level? How does tokenization change that?

What does that uh do enable in terms of other onchain functionality um but we had been, you know, running into a bit of a wall. There were obviously helpful people at the SEC to some degree, but uh direction from the top meant that it's very very hard to get a you know go-ahad or approval on something innovative. Um but that obviously changed earlier this year when Atkins took over and um in in the you know recent months our dialogue with the SEC has been very positive in terms of um coming up with novel ideas about how you can take something that is objectively a security right it is a reach share even if it's tokenized so it's going to be complying with everything that reach shares have to do KYC AML etc uh and so how can you bring in those features that exist in the trady market for securities and put them onchain. Um that's a question that nobody has really answered satisfactorily yet. The SEC doesn't know, Congress doesn't know.

Um there's been steps in that direction obviously, but it hasn't been resolved. Uh and so the fact that we're able to talk with the SEC at this point and have them encouraging us and you know thinking that our ideas are interesting and worth exploring uh and maybe worthy of some kind of an exemption is um a great sign for for us and for the industry. Uh and so it's an exciting time to be doing this. So, we're not selling securities, but at the same time, we get caught up in the industry buzzwords because politicians care about buzzwords and headlines, right? Like at the end of the day, like they're looking at how is the industry doing and then they're making their decision off of your technology based on what they know.

And I think as a founder, we all evolve in how we sell something, right? Like when we first start, we like, oh, blockchain is the best thing in the world. But you realize that they want a process more than they want the back-end technology. So, you you have to sell efficiency by way of the blockchain. And I think we we we we've evolved that balcony from being just this blockchain technology company to just a technology company that uses blockchain and uses artificial intelligence and everything that's at our fingertips to make people more efficient.

Um I I will say at a higher level of government when we're speaking to federal agencies or when we're speaking to like state governments um they're looking for the blockchain more than you would ever think right now. Like we're getting a ton of inbound. We did the largest blockchain deed initiative in our nation's history this year. over two 340 billion dollars of records and property from Bergen County, New Jersey are on the Avalanche private blockchain from Balcony. And with that, we got everybody reaching out to us because they're like, "What is this thing?"

You know, is it beneficial to my agency? Can it help me? And the answer is yes, but you have to frame it in a process like can it save them money? Can it save them time? Can it save them research time?

And then when you figure out that voice, that's how we got a bit more traction. Alex, just to extend on that, do you see whether federal or state is is either more agile or

state's always more agile? Um, just because I'm not sure how many people are familiar with the federal procurement process, but it's arduous, right? Like there's a cber route, there's a sitter route, there's a lot of um things that are prohibitive for startups, right? There's there's a thing called Fed Ramp. Fed ramp basically is this um designation that you get by paying a lot of money to a lot of different people to work for civilian agencies, right?

Very simple understanding of it, but that's what it is. Then you realize, okay, the DoD doesn't need fed ramp or the IC does not need fed ramp, but they need interesting technology. So then you figure out your go to market strategy that's a little different. Whereas states states are more agile because it takes one interesting person in a state to really move the needle as opposed to it takes a lot of people to say yes at a federal level. So you you got you got to look at it like uh the sales cycles are all different.

Local sales cycles are like 3 to six months. County sales cycles are about a year. State sales cycles are about two years. And the federal sales cycle is three or more years. So you have to manage your runway with the sales that you get and also the traction that you want to kind of not die, right?

like we don't want to do that but at the same time you need to sell your product to the right people.

Matthew, anything from from your perspective related to I I know you you have a lot of um you know when it comes to compliance and you know when we think about where the bottlenecks lie I think that's exactly what what building inc is trying to solve.

Yeah. Well, we want to automate compliance on multiple levels uh from the underlying asset, the real estate itself. I mean, think about codifications. Is this a safe building to live in up to what's happening at the securities level and uh beyond that, you know, how it's circulating in capital markets. So, I think the more that we can emphasize compliance and respect our regulators, the more that they buy in and appreciate the value that we are offering.

And recently there's been some developments in this industry where there was a tokenized fund that essentially disrespected every level of compliance from the underlying real estate which was so uh disastrously man disastrously managed that it was uh a health risk to the tenants living there to the way that the capital was actually handled and the mortgages that were taken out on the properties and the taxes that were not paid and the securities that were sold inappropriately. So, it was uh something that actually led the city of Detroit to open a lawsuit against this company and say we're sick of tokenization. And so, if if that's what is the poster child for tokenized real estate, uh we're in a bad situation. And I'm glad to be sitting next to Alex and uh everyone on this panel where we have the mentality that we want to play by the rules and demonstrate that if we do that properly, then we could be trusted with more. And I think that's what this industry is waiting for.

We have to get rid of some of the bad actors. And then when we can show that this is there's real alpha here, the capital will flow on chain as we're all expecting. And that's where all of our our ambitions whether it's in faster transactions or liquidity or global distribution will actually manifest. And you know, one other thing knowing that you're all very, you know, young entrepreneurs and founders.

I have two kids, man. I'm not young anymore.

Um, looking perspectively in that in the course of how your businesses have changed, is there anything like insight that you can give to the crowd out here? Because I know that we have

How long do we have?

All right. Um,

good. 10 minutes. I I I think for us it's just about um being aware that you don't know everything like and your first pitch deck probably sucks and your second one sucks and then you kind of get better and better and better as you go along. I think that we all pride ourselves on being smart people but at the same time you just don't know what you don't know. So if I can tell myself two years ago I would just be like be patient and just be aware of the industry and just take the notes of the VCs that tell you no.

I feel like our company has progressed a lot from the nos that we've gotten more than the yeses that we've gotten because you really understand how people look at you from a different lens because you can be caught up in your industry so much that you can't step back and take a look and see what you're actually talking about. So I I would think one piece of advice is just take it slow. Even though we all want to make money, we all want to be successful, it just takes it takes time to understand what you're actually selling and then it and then it evolves and so on and so on. Yeah, de definitely agree with that side of things. When we first started this process in 2020 2021, um there was so much that we didn't know.

Um and our our initial approaches at getting certain elements live um just ran into a wall of lack of knowledge, lack of experience, and even bringing in, you know, expensive outside counsel and advisers um didn't really get there. Now, part of that was the regulatory environment, but um it it takes time to build uh you know, a global currency based on real estate. It takes time to build systems that are as complex as these and uh you you need to put in the work first, but at the same time you need to realize when there's an opportunity and I think we've seen that this year, you need to be able to drop other things and move quickly ahead to seize that and and to get to the right positioning. Um and so that's that's really where we are right now. Yeah, I was going to add that five years ago when I first got into tokenized real estate, I like many entrepreneurs didn't really grasp what we were trying to accomplish with this technology entering into such a legacy industry.

And it's very been very curious to see how it's evolved over the years and matured and the niche use cases that have emerged. We're no longer treating this as a silver bullet. We know that blockchain has very particular applications and when you use those that's when you really generate the value the alpha that you're looking for. And so I I think in the past year for those of us who were very slow and steady and didn't burn out, didn't raise a bunch of capital more than we needed to or built marketplaces that became obsolete, which is the case for so many tokenized real estate companies uh that show up in Google and you click on their websites and they're they're gone. For those of us who respected the process, now the regulation is in our favor.

And it's just like luck. When you're prepared, you see an opportunity and you seize it. And now I think you're going to see this rise of tokenized real estate being treated as a respectable asset class, which it we like real estate. We talk about how stable it is, but in terms of tokenization, it's not being tokenized. It's mostly T bills, right?

bonds, things that are reliable because there's a lot of risk mitigation, those types of parameters, right? It's government. So, on the other hand, real estate, I mean, just allowing this maturation and I really like what Chris is doing with Groma and the way that they've approached this and when we talk about compliance at building and how we want to create an asset class that's trusted through and through and actually digitized and fluent within capital markets, especially tokenized capital markets. I mean, the next few years are going to be very exciting. So, I'm I'm I'm just glad that we we learned and pivoted over and over and over again.

And the best way to do that is just to ask your customers what they want. A lot of entrepreneurs built blockchain products that could not sell because they were not solving problems. Just go out and ask people in an industry where they spend a lot of time and money and then build a solution around it. And we believe that's what we've done. And uh if I may, I do want to actually just build on that last point about finding the actual need and where is the most um acute pain in the system today.

Um the the use case that we're really looking at right now is um in the rental demographic in the US. There are 100 million renters in the United States today. They spend about $650 billion annually on rent. Um and they build no equity by default. Uh, and this is just such an enormous missed opportunity, right?

When you think about a hundred years ago when mortgages or at least long-term mortgages were not widespread made it much harder for people to buy a home uh and to start building wealth and building appreciation. Um, and so, you know, given how high quality of a collateral real estate is today, right, arguably the world's favorite collateral, you can say it maybe shares that spot with treasuries. um despite being at a you know disadvantage of several orders of magnitude in terms of liquidity. Um giving renters the ability to take advantage of that same dynamic um and and use borrowing based off of liquid real estate uh to to build wealth incrementally is one of the key uh areas where we think blockchain is not just you know building abstraction upon abstraction and you know being a solution in search of a problem. there is a problem, right?

You have this massive quantity of spending and it's not um it's not helping anybody other than just basic short-term consumption of living space. Um that's one of the things we're most excited about. And a few great points there and I think just to dive in a little bit deeper on where we see this evolution going and I think we we've heard some a a lot of great um you know accolades here about how your businesses have had to be dynamic. Where would you see us in say two years, five years or what are you most excited about when we look out to the future?

Well for us it's interacting with the ecosystem. I feel like in two years time we'll have a lot more counties and states to be running on balcony. So what does that do? Let's say a company like Figure that does um you know crypto-based mortgages. Imagine having a liquid mortgage that actually is recorded at the municipality or county in the in the instant that it's actually issued as opposed to it being issued just on the figure balance sheet.

Imagine you having the full authority of the data of your asset that you own from the local government side to the county side. Every permit that you pulled, every tax payment that you had, every deed that's on that property in a chronological order. Like America can't even do an address search on a property from a county perspective. As simple as that is, most systems aren't set up like that. They're set up, they're indexed by, you know, booking page number and personal name.

So the foundation of the system has to change for everything else to kind of lead off that. So when you unlock that liquidity, um a wise man once told me, "Transparency is the mother of all liquidity." And I feel like that is super true. You know, once you have transparency, then everything else kind of falls in place.

And I'd build upon my my last answer a bit for that, right? I my my hope is that in five years, we'll see as as large of a percentage as possible of those 100 million renters actually converting their rent payments into equity in the real estate system. Um, we are doing this right now internally. We have 15 people who are doing this every month on our team, testing the program, working out the kinks. They're already seeing appreciation on their investment.

Uh, and we we we think that, you know, once this is live for the general public, which is probably first half of next year. Other people will realize this value proposition too and spread to that scale.

Well, in the nature of this event, I think that blockchain and AI are going to be this match that continues to grow together. If you look at the common denominator between blockchain and artificial intelligence, it's data. And blockchain is a very strong tool for authenticating and attesting data. And AI is a great tool for aggregating and processing data. So, we're going to see these two elements used in a lot of different use cases and then especially at scale.

And I think that there's a lot of new opportunities that will unlock, especially in real estate. We keep talking about transparency or the need for data. Well, we've got the tools to start to collect all of that data. Maybe we'll start to centralize it, make it accessible, and then we can start to anchor it to the blockchain, which is that verification process to come to trust like the provenence of the information itself. Where did it come from?

Where is it going? And where ultimately has it arrived at and what's the recency of it? And going back to the deeds case, I mean, I think that's that's phenomenal because if we look at what happened in Detroit, again, despite there being real estate that was tokenized, we found out that the deeds themselves were not even transferred to the tokenized fund. And so you'd say, well, if it's on the blockchain, like what what's actually on the blockchain and how much of that information was? So that's just a one data point in an industry that has millions or tens of millions of data points, but it's very essential each one as much as the previous.

I mean, think about insurance. You would want that information to be captured and trusted or the financing of the property or the actual tangible ownership or the capital stack. So I'm I'm excited to see how these two grow together. They're starting to happen a little bit more and institutions certainly buy into it. They want structured data and they want verified structured data.

So they know the use case. We just got to make sure all the other companies and the startups are supporting that.

Well, I mean Outlook is certainly bright. No doubt. I I'll open it up to the floor if anyone has any questions for our panelists. Uh yes.

Yeah, great question. Uh yes. So we do have our own private re you know there is division of corporate entities. We have Groma Cororp the operating company Groma read the REIT. Uh it's currently uh private non-listed.

Uh we are about to enter into reggg cf. Uh so reggg crowdfunding nonacredited investor raise up to 5 million annually. Um we've been under regggd previously so just accredited investors. Um, and what we invest in, uh, we invest in triple deckers, u, small multif family real estate around the Boston area. Um, they're they're great properties.

They haven't, um, previously been open really to institutional investors because they're usually very inefficient to manage. We've built a tech platform. A lot of our team came from GrubHub actually, and so we're very used to building tech platforms that operate in the real world and, you know, facilitate operations for that. Uh, and so over the past five years, we've, uh, bought about a hundred of these. uh and so have a total value across a few different vehicles, not just the REIT right now.

I can go into the logic for that if you're curious, but um about 350 million worth of residential real estate in the Boston area.

Um hello Chris, I ask a question. Just like a tokeniz in the real estate which kind of real estate is easier to be tokenized just like commercial residential or the industrial and the second question is about the uh it's about the what the biggest difficulty part for tokenize the real estate because it's is the local is stable and how can you do the globalization and attract people to do the invest how to protect their benefit Yeah, good question. So, I I think um the first question, which class of real estate would be the easiest to tokenize would be more of a question if we were focusing on tokenizing individual properties, which we are doing, but behind the scenes. Um the the primary token that we're dealing with here is the tokenized share of real estate, which has pretty homogeneous characteristics across different classes. Right?

So, some of our units are commercial. It's a small minority. Um but it works basically the same way. you have a valuation of the property, you have revenue being generated by it, you have various other characteristics and those are, you know, feed up from the non-fgeible tokens of the properties to the fungeible tokens of the REIT shares. And so I, you know, if we were pursuing a more mixed strategy, I might have stronger thoughts on what it would look like for individual properties, but given that we're doing shares are what's actually being sold, uh, you know, diversified shares that are funible, uh, it doesn't actually impact it that much which class they're based on.

Um, and then your second question, how are we thinking about expanding beyond Boston and going, you know, across the country and internationally? That that is on our radar. Uh we're we're looking closely at a second market also in New England for now um probably late this year, early next year. Uh we'll we'll be starting you continuing with the same asset class because that's what we're best at right now. But as we expand and as you know demand picks up um we are looking at expanding into um probably first other uh other cla other classes of real estate in the US and then it'll be a bigger jump I think to get into the different tax structures etc that you need to have uh real estate funds in other countries but um we do hope to be a global currency so that's that's not um too far in the future.

Hey Chris, how are you? um you you said two things that I just want to double click on. Maybe you could give us a little caller on it. The the first thing you said was that you were providing this token as a mechanism for renters to to get some sort of yield on rent paid. Um and my question there is where does that value come from?

Is that a discount that's taken from the landlord that's being reverted as a rebate or is it produced in some other mechanism reinvestment into the fund itself? And those proceeds are then skimmed and then used to uh to provide that yield. The second thing that you said that I'm not quite clear on is that you said that it was a reg CF structure but that it was also a REIT and these two structures seem to be in conflict. Is it does it operate as a REIT in so far that you don't have access to individual discrete assets and it's a pool and you're generalizing the nomclature to to describe sort of an index of these assets or is it actually a REIT under RE structures that precludes you from the tax benefits of individual ownership depreciation and so forth.

Uh so so question number one on rentfesting one thing I should clarify is that you can buy the the REIT shares the tokenized re shares outright. It doesn't have to be part of the specific renter oriented financial tool, but the way it works, and I'll go quickly, um, you you buy you put your rent payment into the REIT as an outright investment. We then lend you an equal amount that you use to pay your rent. Any appreciation upside is yours. Um, and then it's our job to make sure that dividends and fees exceed the interest in order for Groma to make money on that.

Um second question uh yes it is a REIT and it will also be in REGG CF uh starting likely in October. Uh so um you know we we can talk more about the exact tax details but um both of those things are are going to be existing concurrently but right now it's just in regggd

I think we're out of time. Thank you. Appreciate everyone's insight. Thank you. [Applause] All right, ladies and gentlemen.

We're just going to do a quick stage flip.