by: Taher Kameli and Steven Burke
Of the many potential benefits of blockchain technology, few have garnered more interest than its potential to disrupt the commercial real estate (CRE) industry. In fact, the impact blockchain technology could have on the CRE industry is so expansive that we cannot discuss each possibility in a single post. As such, this post will largely focus on how blockchain technology can be leveraged to provide all parties with more meaningful information when searching for property, valuing property, performing due diligence, and structuring CRE deals.
Traditionally, the commercial real estate (CRE) industry has relied on opaque practices and private information to secure a competitive advantage.(1) Moreover, although technological advancements like the internet have dramatically increased public access to large amounts of information, the heterogenous and immobile nature of CRE assets continues to support an illiquid, localized and segmented market, full of private transactions and expensive intermediaries.(2) Despite a marked increase in the publication of once inaccessible information, driven largely by an increased demand for transparency, property-related data continues to be hosted at discrete locations, creating an inefficient and often inaccurate view of the commercial real estate market; moreover, CRE transactions continue to involve costly third parties and take place behind closed doors. (3)
Blockchain technology has the potential to revolutionize the fundamental functions of the commercial real estate industry.(4) At its core, blockchain technology consists of a digitized distributed ledger, that immutably records and shares information.(5) With such features, blockchain technology could offer a unique and efficient solution to the information asymmetry rampant in the CRE industry, and, by deploying smart contracts on a blockchain, the CRE industry could transform the manner in which it executes its core operations including the purchase, sale, financing, leasing, and management of a property. Notably, by processing the above activities through a smart contract, we can provide meaningful access to critical information and enable more data driven decisions throughout the entire CRE industry.(6) Furthermore, through a cryptographically secured, immutable, and decentralized ledger, blockchain technology offers a secure and neutral environment for individuals to transact without the need to rely on trusted third-party.(7)
Accordingly, by leveraging the trustless system of a blockchain, the CRE industry could create an environment in which each party to a transaction can trust that a counterparty is capable of fulfilling its side of the bargain, and, perhaps more importantly, the parties can trust the sanctity of information material to the transaction.(8) Moreover, blockchain’s inherent element of trust (or its ability to make trust irrelevant), could significantly reduce, if not eliminate, the need for a majority of intermediaries, which would substantially decrease the frictions and costs associated with CRE transactions.(9)
Currently, CRE participants (such as brokers, owners, tenants, sellers, and buyers) need to rely on disparate multiple listing services to publish and access information about a specific property.(10) While undoubtably helping connect interested parties, MLSs should also be considered one of the many CRE intermediaries that could be disrupted by blockchain technology.(11) To access the property information, each MLS generally charges a subscription fee, but, while the fees can quickly become significant, MLSs’ largest problem is the deleterious effect on transparency and efficiency arising from the lack of uniformity among listings.(12) Without a uniform standard, the accuracy and completeness of property-related information becomes dependent on the practices of a particular MLS or even a particular broker, which too often results in the information being incorrect, outdated, or incomplete.(13) Notably, the fragmentation of inconsistent and often inadequate data creates unnecessary friction, discourages trust, and further obfuscates a process already struggling to provide transparency.(14)
While the role of MLSs remains relevant, the integration of blockchain technology could significantly improve an otherwise unwieldly tool. Specifically, by recording a property’s information on a blockchain, the industry could standardize the information provided for each property and prevent the data from being controlled by any one person or entity.(15) By increasing access to a secure and decentralized record of meaningful, accurate, and comprehensive information, blockchain technology could reduce transaction costs, increase efficiency, and enhance transparency by adding clarity to details such as the location, address, comparable rental rates, capital values, ownership history, tenant profiles, property age, and title clarity.(16)
Similarly, by combining digital identity with blockchain technology, the industry could further increase efficiencies by accelerating the due diligence process and simultaneously reducing administrative costs and the associated burdens they create.(17) Blockchain technology provides a superior alternative to the dated paper-dependent labor-intensive paradigm on which CRE currently relies and can enable properties to have a unique digital address that incorporates its pertinent details including occupancy, finance, legal, past performance, and physical attributes.(18) Moreover, each property’s digital address and the associated information could be perpetually maintained on the blockchain providing a comprehensive and consolidated repository of current and historical details associated with each and every property. Theoretically, the industry could acquire near instantaneous access to an exhaustive record of information about any given property. Surely, such access would allow parties to efficiently complete due diligence; however, all participants in the CRE market would also have equal access to an unfettered set of relevant information allowing for increased market wide efficiencies and data driven decisions.(19)
In summary, blockchain technology presents a unique opportunity to significantly overhaul the antiquated and inefficient CRE industry; however, blockchain technology remains relatively novel and its potential disruption of the CRE industry remains largely theoretical; to date, no significant implementation blockchain technology has achieved widespread acceptance in the CRE insdustry. Unfortunately, over the past few years, we have come recognize U.S. regulations as a significant deterrent to potential blockchain projects; however, while we appreciate the difficulties of navigating a complex and unsettled regulatory framework, we strongly believe that such difficulties should not stand in the way of innovation. The Law Offices of Kameli and Associates takes great pride in its attorneys’ meaningful experiences in a broad set of practice areas. If you have considered starting a project involving blockchain technology or cryptocurrency, we would be happy to schedule a confidential consultation to discuss how we can help you identify and surpass the numerous regulatory hurdles that may arise.
1. Surabhi Kejriwal & Suarabh Mahajan, Blockchain in Commercial Real Estate the Future is Here, (Deloitte, 2017) available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-dcfs-blockchain-in-cre-the-future-is-here.pdf.
2. Somi S. Thota, Blockchain for Real Estate Industry, 5 Scientific Review, 53 (2019).
3. Kejriwal, supra, at 1.
4. PWC, Block Chain in Real Estate (July 31, 2018), http://www.pwc.de, https://www.pwc.de/en/real-estate/digital-real-estate/blockchain-in-real-estate.html.
5. Kejriwal, supra, at 1.
6. Id. at 14
7. Thota, supra, at 54.
8. Jim Blasingame, Blockchain Isn’t The End Of Trust, It’s The Future Of Trust, Forbes, (July 18, 2019), https://www.forbes.com/sites/jimblasingame/2019/07/18/blockchain-isnt-the-end-of-trust-its-the-future-of-trust/?sh=63d644711596
9. Thota, supra, at 55-56.
10. Kejriwal, supra, at 10
12. A Decentralized Multiple Listing Engine and Real Estate Smart Contract Application, Rex (October 27, 2016).
13. Kejriwal, supra, at 10.
17. Max Nijland & Jan Veuger, Influence of Blockchain in the Real Estate Sector: In Which State of the Buying Process of CRE can Blockchain provide Value for the Stakeholders Involved?, International Journal of Applied Science, No. 2, 22, 26 (June 11, 2019).
18. Jason Ray, Blockchain and CRE: It’s All About Speed To Transact!, Linkedin, (November 2, 2015).