Following the significant impact that new technologies are having on the financial sector (commonly referred to as “Fintech”), the real estate industry has now become a focus of disruptive technologies which are claiming to change how real estate is purchased, developed and sold. Players in the global real estate industry have become increasingly focused on the impact that “Proptech” will have on global real estate markets. Israel is one of the leaders in the creation of technology startups and Israeli startups have increased activity in Proptech and are actively developing innovative Proptech technologies and products. However, in order to determine the potential impact of Proptech, the industry needs first to have a clear understanding of exactly what “Proptech” means. Although Proptech is often defined as real property technology or technology that is focused on the real estate industry, I would expand the definition of Proptech to refer to innovative technologies, processes, standards and uses which are transforming the real estate industry. By taking advantage of Proptech, companies can maximize profits while having a positive impact on the community.
One of the main concerns that many companies have is whether Proptech is simply the latest buzz word or whether Proptech will have a lasting impact on the industry. Therefore, many companies have not been early adopters in incorporating Proptech into their businesses. Given the potential reputational risk associated with using new technologies and the potential effects on legacy systems, it is certainly understandable why real estate companies are cautious about adopting Proptech. Additionally, blockchain and other new technologies raise concerns about the potential legal consequences which may result from adopting software that may not be fully compliant with existing legal requirements. Even though there are significant obstacles facing companies considering how to best utilize Proptech, our attorneys who understand Proptech can help clients navigate this new landscape to take advantage of Proptech and become a leader in the next generation of the real estate industry. For example, three different areas where we can help clients better understand Proptech are: (1) how Proptech applies to different stages of the real estate development cycle; (2) green building initiatives and processes; and (3) innovative legal structures for new real asset classes such as co-working and co-living spaces.
Digitizing Real Estate Assets: The Impact of Blockchain
Blockchain is one of the most talked about Proptech technologies that will impact the real estate industry. Blockchain is a distributed ledger or database which contains a record of information. A simple explanation of how blockchain applies to real estate transactions can be shown through how a transaction can be recorded on the blockchain. Once a transaction occurs and the parties have satisfied all conditions for completion of the transaction, the transaction is verified by the network of computers or “nodes” on the blockchain. If a transaction is verified by the network, then a new “block” for the transaction is added to the blockchain and everyone on the blockchain can then view the block containing specific information related to the transaction. The blockchain verifies transactions using complex cryptographic technology. One of the common industry misperceptions surrounding blockchain is that blockchain has the same negative perceptions that of cryptocurrencies like Bitcoin. Blockchain is not the same as Bitcoin. Blockchain is only the technology which makes Bitcoin and other cryptocurrencies work. There are many different potential uses of blockchain technology in the real estate industry that go well beyond creation of tokens and other cryptocurrencies.
An important use of blockchain is the digitization of real estate assets, which can occur in two important ways. First, using blockchain, real estate owners can create fractionalized ownership interests in real estate assets through issuance of “tokens” which can then be sold to third parties. The tokens simply refer to a digital representation of a typical share in a company which is recorded on the blockchain. Once the tokens are created, the owner of the real estate asset can raise capital through the sale of the tokens using blockchain. All of the information related to the sale and ownership of the tokens is digitally recorded on the blockchain and preserved so that it is fully transparent and available to third parties. Additionally, the creation of secondary markets for the sale of the real estate tokens can provide liquidity for owners of the tokens to be able to easily sell tokens for one project and purchase tokens in another real estate asset. The process of digitizing the real estate assets through the creation and sale of tokens will provide real estate owners and developers with access to new domestic and global markets that were previously unavailable due to the barriers inherent in the traditional process of raising capital.
The next critical step in digitizing real estate assets is by digitizing the deed recording process. The traditional deed recording process has historically been subject to a significant amount of counterparty risk which is minimized by the title insurance industry which creates insurance to trust and certainty in real estate transactions. However, by moving toward a digital recording process, blockchain can verify real estate transactions and then maintain a record of the transfer of real property by recording deeds digitally on a blockchain where the information would be immutable and readily transparent and available to all third parties who have access to the blockchain. In order to change the process as little as possible, the deed that is digitally recorded on the blockchain can be prepared using the same form and can be physically recorded in the current local recording office just as it is now. Once the deed is recorded it can then be digitally uploaded onto the blockchain. A critical aspect of digitizing the recording process will be to create a consensus of what constitutes a valid conveyance. However, digitally recording the transaction on the blockchain can be an important way to reduce counterparty risk in real estate transactions. Capital markets and lenders rely heavily on title insurance in underwriting traditional acquisition and construction loans as well as in securitizations of mortgaged-backed loans. Although the title insurance requirements will not completely be replaced by blockchain, perfecting the transfer of title to real property digitally using blockchain can create additional trust in the validity of real estate transactions.
Proptech: Next Steps
Our Proptech team takes a multi-disciplinary approach to provide comprehensive solutions for our clients. Obviously, there are a number of laws and regulations that are impacted by using blockchain and other innovative technologies. In order to move the industry forward and create trust, the real estate industry must ensure that use of these new technologies comply with legal requirements and perform as expected. Our lobbyists understand the current regulatory landscape for these technologies and where the regulatory environment is headed. Our corporate attorneys understand issues facing the technology companies in raising capital and scaling their businesses. Our real estate attorneys understand the real estate industry and the development process and to incorporate the technologies into the entire process. Our securities and privacy attorneys understand the requirements of applicable securities laws and KYC (“know your client”) and AML (“Anti-Money Laundering rules”). Our broad experience in all of these sectors helps us provide innovative solutions to our Proptech clients (including technology companies and real estate companies) in order to help them move the real estate industry forward into the future.
Although Proptech is positioned to help the real estate industry decrease costs and increase efficiency, technology alone is not sufficient to bring significant changes to the industry. Traditional real estate industry players and other stakeholders will need to shape the future of the industry through the thoughtful integration of Proptech. Although many claims that Proptech will disrupt the industry, the reality is that the promise of Proptech is more likely to serve as a tool to help industry players create the future of real estate.