Transcript: Enabling More Liquidity for REITs

Hello, and welcome to the Constructor Podcast, the future of the built environment. Welcome to this episode of the Constructor Podcast. Last episode, we spoke with Jordan Cram, CEO of Instoa, a New York City based system integrator that offers a data driven, evidence based approach to capital project development. So Jordan and I discussed why IoT does not deliver on its promise to provide overwhelming productivity that we expected. The future of IoT, we discussed data as an asset, the notion of applying science to culture, and how Instoa has rolled this out in their own company by no organizational charts really.

Very interesting stuff. So if you haven't listened to that episode yet, check it out at constructor.com slash Jordan Cram. This week, we're speaking with Simon Enua, founder, chairman and CEO of Building Block REIT. Building Block REIT is a blockchain backed real estate investment trust. It formed 2018, so just last year, by a group of real estate and blockchain technology professionals and is the first REIT in the US to combine tax advantages of investing in a REIT with blockchain technology.

Simon is actually local to Chicago and was able to participate in an event that the Chicago Blockchain Center hosted and where Constructor was a sponsor. This was awesome to meet him and have him participate in that event. In this episode, Simon and I cover what a REIT is, the structure of a REIT and why it is a great way to invest in real estate. We also discuss what the opportunities are for blockchain and real estate investment, particularly with REITs. I really enjoyed talking with Simon.

Listen in. So today we are talking with Simon Enua from Building Block REIT. He is the chief executive officer and founder. Building Block REIT is a blockchain backed real estate investment trust. First of all, Simon, welcome to the Constructor podcast.

Thanks, Brittany. Thanks for having me. Yeah, my pleasure. Building Block REIT, formed by a couple of real estate and blockchain tech professionals, tell us a little bit about, first of all, you. We actually want to know about essentially how you got into the REITs in the first place and then we'll get into what Building Block REIT is later on in the interview.

I started an e-commerce site called venaamores.com. It's a jewelry retailer back in 2011, is when that company started, and it's still up today. In 2016, me and my wife, after many years of real estate investing, decided to open a company called Flawless Homes, which is a real estate development company, a real estate brokerage, and a retailer for many household brands that you know for appliances and construction material and stuff like that. We were nominated for Business of the Year for 2018 and built a facility in Skokie, Illinois, with a grant from the municipality.

That was all very exciting and it worked out really well. That's pretty much about me and how I started this journey. As you're saying that you have a location in Skokie, sounds like I actually should be stopping by. I actually live maybe about 20 minutes from there. It's not often that I speak to people that are so local to me.

So, why REITs? How did you get into, obviously, you talked about how you got into real estate, but how did you get into the real estate as it relates to REITs? Why was it natural to you and why is it something that you're interested in? Sure. So, for me to touch on that, I have to really touch on why this all started.

I was approached in 2017 to invest in cryptocurrency like many people. What I saw was that a lot of the ICOs out there, about 95% of them had no merit, didn't have the right team and could not come to fruitation. Some of them also were outright scams. Very true. The other problem I had with cryptocurrency in general was that the exchanges were not tested and they weren't regulated.

So it was just a really bad combination. Obviously as we saw in 2018 with subsequent crash, I'm not going to say I told you so or anything like that, but it just wasn't the right environment for me to invest in. But the underlying technology behind Bitcoin and Ethereum and a lot of other cryptocurrencies was truly fascinating and was amazing to me. So it was really bothering me because I had to figure out a way to use this technology. And so I usually go right to sleep.

So I put my head down on the pillow and I knock out. But that night I could not sleep. I mean, I'm sitting up till 3 in the morning, 3, 3 in the morning, and I keep thinking about blockchain. And then essentially it hit me. I figured we could really stabilize these markets by attaching shares to, or in some ways what some people are calling tokens, to a hard asset that is vetted in a different way that has an appraiser, that has a market.

So securitizing those assets, it just made sense. And then the vehicle, and I've been thinking about REITs since 2012 or 2013, a couple years after I got into real estate, it just made sense for it to be a REIT. I mean, the tax benefits of the REIT tax vehicle are incredible. So that's why it just came to view. That makes sense.

So if you can share with the audience who may not be familiar, what is a REIT exactly? Sure. Yeah, that's a good question. So REIT stands for Real Estate Investment Trust. And there's a few different kinds of REITs.

There's private REITs and there's public REITs. Essentially a REIT is a investment vehicle for people to be able to put money into, people and institutions. And they buy REITs by commercial real estate. It used to be pretty standard. That's grown.

So the largest REIT in the US right now is American Tower REIT, for example, who owns a lot of these cell phone towers, which is a very interesting real estate to own, right? Who would think, let me buy or lease out cell phone towers? So the space has evolved. But obviously there's REITs that, you know, a lot of the malls that you walk into are owned by REITs. A lot of the skyscrapers in downtowns, urban areas are owned by REITs.

And so now they invest in a whole array of different commercial real estate. And so there's some REITs that focus on a specific type like multifamily or only, you know, office space. And then there's some REITs that, you know, buy different types of properties. I also want to point out that there are other REITs like mortgage REITs. And then there's some other REITs also like medical or hospital REITs that focus on those specific aspects and hospitality REITs.

So if you do have a hospitality REIT where you buy hotels, you're unable to purchase other commercial real estate for that specific REIT. So I mean, there's a lot of rules and guidelines. And you know, to keep REIT status, you have to do a lot of different things. And one of those things, and this is great for the investor, is that at least 90% of the net profits go back to the investors in the form of dividends. That was a part that I thought was really interesting about REITs, that there was that stipulation and reinvestment.

And from what I understand, and please provide some clarity, there is a huge benefit from a taxation perspective because of that. So if you could share a little bit about that, that would be really helpful. Yeah. So there's no double taxation when it comes to REITs, as long as the REIT keeps the REIT status. And there's a few rules that REITs have to follow to keep their REIT status from the IRS code.

They change from private to public REITs. To be a public REIT, for example, you have to have 2,000 different investors. To be a private REIT, or to be a REIT of any kind, you have to have at least 100 investors. So the 100 markets for private and then 2,000 is for public. There's also what's called the 550 rule, where no more than five people could own more than 50% of the stock or the shares.

And that's to prevent somebody from hoarding essentially all the shares and reaping the benefits of the REIT. I mean, these are really built for people to be able to invest in. And according to the National Association of REITs, 90% of people that are invested in REITs don't even know it. So for example, if it's in your Vanguard account or your 401k or whatnot, you could be in a REIT fund or invested in REITs through those and you don't even know it. What I also have come across is that estimate of 80 million Americans that own REITs through the retirement savings and other investments.

So I think that's an interesting point that you just raised. A lot of people may not even know it simply because it's in their portfolios, retirement. Yeah, the REIT industry is pretty large. $3 trillion of assets under management are owned by REITs. That's a pretty large marketplace.

So if you look at market size, I mean, that's huge. Definitely is. For REITs to own more than $3 trillion in gross real estate assets, that is the majority of the commercial real estate market because I think it was like $2.2 trillion in physical assets globally or something like that. So I feel like I got to double check those numbers, but that's a huge portion that's wrapped up in gross real estate assets. So let's talk a little bit about the REIT structure.

We talked about why you chose the REITs and how you felt blockchain, that technology itself, could really support and provide that security, right? Because it's going to be backed by a real asset. So it technically would be a security token. Could you talk a little bit about how that is structured? So we're not calling it a security token.

We are referring to it as a digital share. Basically, what we feel like is going to happen is that many companies and financial institutions are all going to be using blockchain technology. Many are already. And we feel like within the next five or 10 years, you're going to see the underpinnings of a lot of these companies be built on blockchain technology. So a security token and a digital share, they're a little different, but very similar in many ways.

So we're actually calling them building blocks. Those are our digital shares. They're indivisible. So one share is one share. You can't break it in half.

You can't have half a building block, for example. Just having read up a little bit upon the structure, it sounds like the REIT structure allows for the building block to pass on profits from income producing real estate to investors. And it's way more efficient simply because it's on the blockchain. What enables that because it's on the blockchain? Great question.

Let's talk about essentially why we're using blockchain technology. The same reason why a lot of these ICOs are failing is because you have to ask, why are you using blockchain? For example, I saw an ice cream parlor using blockchain technology. I saw somebody with a parking app tell me they're using blockchain technology. It didn't make sense.

Why are you using it? Right. It has to make sense. So let me tell you why we're using it and why we need blockchain technology for REITs specifically. So we're digitizing those shares.

We're putting those in the blockchain. Settlement times now are basically zero. I mean, they have to get verified. But compared to two business days or two days in the legacy markets, that's a huge difference. That can have a lot of implications.

There's a lot more market liquidity by being able to trade 24-7 using the technology. You need to vote for REIT governance and REITs. You vote for the board of directors. And so using blockchain technology, you're able to securely vote on the blockchain. And it's immutable.

It's encrypted. That can go a long way for a use case scenario. With elections coming up, that gives the government a little bit of insight into what they may be able to use in the future. So apart from that, it also eliminates a lot of the broker-dealers. So there's a big broker-dealer community that surrounds private REITs and public non-traded REITs.

And they can charge, you know, I've seen charges up to 15%, but the typical is around 10 or 11%. So as an investor, if you're investing in a public non-traded REIT or a private REIT, your hundred bucks, for example, is now $89. Well, you can cut that intermediary out by using the technology. Also the time it takes to invest in these private REITs and public non-traded REITs can be up to six months, especially if it's the first time investing in that specific REIT. The reason is because there's a lot of due diligence on both sides.

There's a lot of contracts, as you can imagine, going back and forth, you know, contracts in between the broker-dealer, contracts between the REIT itself and the investor. And so there's a whole bunch of stuff going on and that all takes time. And so your money's literally on the wayside. And you know, you're losing that benefit. Now with blockchain technology and the smart contract, it literally takes however long it takes for you to do it, a little bit more time for the nodes to verify.

So it's a lot better. In fact, recently REIT.com or the National Association of REITs came out with an article vindicating our technology, saying that blockchain technology could really change the way private REITs and public non-traded REITs operate. And so we knew that all along. So it was just nice to see the industry standard come up and say, OK, you know, this technology may work. And now it's up for us to test it and prove that it works.

Yes. The technological benefits of blockchain itself, like you mentioned, the fact that it's transparent, secure, the fact that you have that governance structure as well, that's a pretty sustainable approach to blockchain. And we've talked a little bit about that on the podcast here and how that's different from say, some of the cryptocurrencies. Those actual settlements can take a few minutes, but it sounds like with the structure that you're utilizing, it will be much faster simply to do any contracting and transactions. The fact that also the disintermediaries are reduced in quantity, I don't want to say eliminated, but if they are, then that's great too, because the time associated with the handoff back and forth.

But in addition to that, like you mentioned, cost for the work that they do, that really does make things more efficient. Can you share a little bit about what the voting rights on the blockchain platform are? You can vote with every share, similar to how you would vote on the REIT. The only difference is that you're able to do it on a blockchain where it's immutable. There will be a user interface that essentially checks to make sure that you're in control of your product with some user identity.

And obviously you're white listed, so we know you're social. We may not have it on file because it's on the blockchain, but it's encrypted and you're basically able to vote using your shares on a user interface and then you vote for the REIT government. So it works the same way it works in a REIT. The only difference is now it's faster. There's less cost associated with it because you don't have to send out those mailers and have a third party do that for you, which saves the REIT some money.

It's not a huge amount of money. REITs typically spend about 20 or $30,000 a month on voting and stuff like that. So again, it's not a huge amount of money for a REIT because you're investing hundreds of millions of dollars many times in commercial property, but it still is a saving. So just for my knowledge, because I'm learning still, how are the partners, the typical partners selected when you're selecting them for a REIT? My understanding based on what you're describing is that they're voted upon.

What does that look like? Because from that side of things, I'm just not as familiar from a REIT aspect. I'm a little bit more understanding on how that could take place on the blockchain. So if you could dig into that a little bit more, I'd appreciate it. Well with partners, are you talking about REIT partners like the partners that we work with, like partnerships with different companies?

Or are you talking about like the REIT governance, like the board of directors? I guess both because I was merging them together. So if you could distinguish the two, that'd be great. Well, I'm not going to bore you too much with the REIT governance. I think everyone's got enough of elections so far.

But it's a typical process. The only difference is that we're putting that on the blockchain using the same shares. And so you can vote for that. The partnerships that we make with other companies and enterprise companies and other corporations, that's done on obviously on a need basis. So we're going to have vendors like any other company.

We're going to have partnerships where there's a mutual benefit for two companies. And so we pick those that are progressive, obviously being new to the space, being the first to announce in the US that we're a US based upcoming REIT. Many companies are skeptical. But there are a lot of progressive ones that see the future. There are some that are already using it.

Some companies we've talked to have over 300 people working on their blockchain practice. And so it's pretty amazing what some of these people and what some of these corporations and enterprise companies are doing. So we want to obviously partner with companies that we feel will give the best benefit to our investors and will give the best benefit to our company and to the space in general. Okay. So partners, to just kind of bring it home a little bit.

So your partners are what type of companies? Property managers? Yeah. So essentially property management companies, REIT banks. So there's a lot of REIT banking where we leverage a certain percentage of the funds that we have to be able to buy more real estate.

And the key there is to make sure that you get more rent than you pay in interest. And so auditing companies, in our case, technology companies, title companies. So there's a lot of different partners that REITs are involved in. REITs also have a lot of subsidiaries. Essentially those are companies that the REITs own or own part of that generate income.

That income is limited though. You can't have too much money coming in from subsidiaries. You still have to get them from rent roles and capital gains from selling of property. But REITs do have subsidiaries. I mean, there's a lot of REITs out there, even local ones here that own banks.

They own 1031 exchanges. Some of them own title companies. And so as long as it's good for the investor, as long as it's good for the product, as long as it's good for the company and for the industry in general, then we'll look at those partnerships and make sure that we pick the right ones. Thanks for laying that groundwork a little bit here. So I understand you developed a partnership with Fidelity National Title.

To quote you, ushering a new age in title insurance. So obviously you talked about title insurance. Title, rather. But yeah, could you just explain what that looks like? What is ushering a new age in title insurance?

What does that mean to you? Sure. So not to be too mysterious, but our agreement with Fidelity states that we can't talk about the agreement. So I'm going to have to not talk about our agreement with Fidelity at all. But I can give you some generalizations about title insurance.

And I can tell you what I think may happen in the future with title insurance and blockchain technology. Yeah, no problem. So a lot of people are saying that blockchain can have a negative impact on title insurance. I don't think that's the case. I think title companies are trusted and they're a trusted third party.

And so a lot of people say blockchain technology can get rid of that because of the public blockchain. Herein lies a problem. You have 100 plus years of real estate transactions, right, that will never be on the blockchain because it's already out there. And these are deeds. People have put them in safes from many years ago.

These are deeds with counties that don't record digitally. So about half the counties in the US don't even record digitally, right? So that would be very difficult to get that on the blockchain. So with title insurance, they basically go through and they do checks and then they insure that title. So if anything happens or somebody comes up and says, wait a minute, I already bought that property or whatever, they can protect the consumer or the buyer or the purchaser on that transaction.

So even with blockchain technology, that's going to change. Title companies in general still have 100 plus years of title they need to insure. And now comes in another aspect of property purchases. So as more properties are going on the blockchain and as there are more and more blockchains becoming available, for example, let's talk about a lot of these different slice and dice blockchain projects where they take a property, whether it's a hotel and they fractionalize the ownership and then they sell those shares. Well, if that goes on to someone's wallet and that hotel decides to do another raise on a different blockchain, for example, well, now there's different shares on the blockchain.

So you could have a problem where there's many different blockchains and the properties are on all these different types of blockchains. And so I think title insurance companies are going to have to figure out a way to essentially insure that title on the legacy deeds, the deeds and titles that have come across in the past 100 years. But they're also going to have to check all these different public blockchains to make sure that they figure out where this ownership is and where it's going, follow that chain of title.

So there's a lot going on with that. So I think the industry is definitely going to evolve like many industries that are affected by blockchain technology. I don't think they're going anywhere. The smart ones, I think, will stay in the space and will monetize on that. And they'll also figure out a way to help people by checking those different blockchains in the future and by checking, obviously, the legacy titles like they have been doing.

So let me ask you this about insurance as well. Do you think the insurance companies are accurately identifying the coverage for what should be insured? And do you think that there would be any improvement or change based upon the fact that more titles will be documented on blockchains moving forward? You know, again, I'm not a I am by no means a title expert, by no means an insurance expert. So I think that as you digitize things, it does make things more convenient.

If there are titles on the blockchain, that will definitely make it easier to check. But that means that, you know, most of them have to be on there. And so like I said before, if half of the counties don't digitally record yet, that's going to be obviously some growing pain there. So I think that space needs to definitely evolve. And you're going to see two very different aspects of it.

So one very digital and with some counties like Cook, for example, right here in Chicago, Cook County does a great job with using blockchains for titles. And then you have other counties that may not be able to evolve that technology or may not have the means. So again, that space is definitely going to evolve. I definitely see a lot of improvements from blockchain like many other industries. But I'll leave that one up to the experts.

Fair. I agree with you. I think it's going to take some time for many different industries to be able to have those sorts of records to even reference in the first place, like you mentioned, 100 years of deeds sitting in many different ways. But I think if they were using this technology for 50 years in the future, that's something that maybe we'll be able to realize as we grow. Maybe it won't even take that long.

So we'll see. So let's talk a little bit about trading across multiple currencies. How does that work? Is that possible with building block rate? We will not be exposing our investors to the cryptocurrency market.

We're not a cryptocurrency and we're not an ICO. But if people are investing into building block rate using crypto or even different fiat like yen or whatever, they can definitely trade that in for US dollars. And then we take those US dollars and we purchase real estate with them in the US. And the dividends are paid back because obviously we're getting rent in US dollars. And so we don't want to keep changing the money and losing money on the exchange rates.

So we're going to have a few options on paying back dividends also. One option is that you get it back in US dollars because we get US dollars from rent rolls and from capital gains from sales. That's one option. Second option is obviously we are using the Ethereum network to get your dividends back because you can choose to get it back in Ethereum. And again, that depends on each individual investor's risk tolerance.

So if they want to take it back in Ethereum, they can. And then at that point, they can change it out to any other cryptocurrency they feel is more beneficial for them. And we have another option where you can, like many shares, you can reinvest your dividends into more building block that will be built into our user interface. And hopefully the exchanges will have a similar function for that. So what platforms or exchanges are you going to list on?

So I can't say where we're going to list. I can't say there are great ones out there. I know TZERO is a great one. Open Finance is another great one. So I can tell you this, though.

We will be listing on an SEC compliant exchange. We will. Yeah, we will not be listing on an exchange that's not SEC compliant. Obviously, you know, we're heavily regulated as a REIT. And since day one, we've followed the path of compliance.

And this is what I like to say. You know, when you're building a car in the US, you build it for California standards because you can use it pretty much anywhere in the United States, right? And so when you're building a security or when you're building a REIT, build it for US standards and you're going to be able to use it pretty much anywhere in the world. Fair enough. There's a lot of standards within construction as well.

If we were to design according to the most stringent California standards with Oshpod and things like that, there would be minimal issues with meeting building code anywhere else in the US. So I would agree with that. OK, so let's talk a little bit about the timeline for building block REIT. Where are you all right now in building the software and inviting partners? And just kind of give us the timeline on where you sit today.

As far as partnerships go, many of those are still very private. We do make announcements and I'll let you know how to keep track of what our announcements are. But we have a lot of great companies that we have strategic partnerships with, alliances with. And some of those are SVN Chicago. SVN Chicago is a commercial real estate firm.

Chicago Blockchain Project, another great organization. So these are some of the ones that we've already announced. And then there's others in motion that we'll announce in due time. As far as where we are on the technology, so we are still making sure that we identify all the right areas of the technology. We have a roadmap, essentially, and a tech map and some testings that we've done.

But the completion of our seed round will help us complete that tech fully and get us enterprise ready. And this is only open to accredited investors. But we do understand that a lot of people want to get into this because it is very exciting. We do plan on doing the REX CF or a crowdfund in the future. I can't say specifically when, but I can say that we are planning on doing one at the moment.

And that will be the first time that non-accredited investors are going to be able to buy into the company. Okay, that's great. So what's the best place to learn more about Building Block REIT? And how can someone get in touch with you if they'd like to learn more as well? BuildingblockREIT.com.

We also have a newly opened Telegram channel that we've opened up. And you can find that through the website. We are on LinkedIn, we are on Facebook, and we are on Twitter. But the best place to get the information is going to be BuildingblockREIT.com. You can even sign up on there with your email address.

And we'll send you the announcements as they come along. And just for the audience's knowledge, I just joined Telegram at BuildingblockREIT. I joined the group. I'm looking forward to be part of the community and learning more about what you're up to. It is really exciting.

Thanks again, Simon. Thank you so much. Thanks for having me. Have a great rest of the day. Thank you.

If you liked this episode, find out more in the show notes at constructor.com slash Simon Enwia. If you learned something valuable, share it with your friends and colleagues. You can also let me know you enjoyed our discussion by connecting with me on Twitter at Brittany underscore CT or find me on LinkedIn. You can email me too at Brittany at constructor.com That's B-R-I-T-T-A-N-I-E at constructor.com. Next week, you will hear a discussion I've actually had with three people working under the EMEA blockchain lab, one of which is the COO Anthony Day.

And the other two are developing some really interesting blockchain and real estate pilot projects, Jan Willem Santing and Jakob Borisma. This team works to develop disruptive strategies and build blockchain propositions for their clients. Broadly, they work on digital strategies, digital transformation, blockchain strategy and proposition design, digital retail banking experiences, and digital wallets and payment propositions. But what I took the time to speak with this team about is the smart building concept. It just so happens to be that both Jan Willem and Jakob work in a building that I've focused a lot of attention on actually, probably this time last year when I spoke with PLP Architecture.

This building, the Edge, has been deemed the smartest and also the most sustainable building in the world. So with that, we cover a lot of it from their perspective. What is Deloitte doing there? What are the pitfalls? What are the benefits?

We also talk about the opportunities for blockchain and construction and real estate more broadly. And we talk about some specific pilot projects that they're working on and how this might integrate with different technologies like AI, machine learning, etc. I'm looking forward to sharing this interview with you next week.