Now that a regulatory framework for digital assets is emerging on Capitol Hill, the focus of the industry is shifting from a strictly crypto scenario to the tokenization and the potential it holds on many fronts.
One critical industry where tokenization will hold sway is the housing market.
There are many issues with the industry that seemingly have no end in sight.
New ideas and models could change that though.
Isaac Lidsky, CEO of Home Construction Collective (COLLECTIVE) explains.
Isaac Lidsky, CEO of Home Construction Collective (COLLECTIVE)
How are blockchains and distributed ledgers improving the housing market?
Blockchains, and the open, digital financial networks they host, bring much-needed financial transparency, efficiency, accessibility and transferability to real world asset markets, including housing and their construction.
Today only two classes of institutions benefit from new home construction’s financial returns: regional banks (themselves in crisis) and private lenders. In light of a global shortage of homes, we think expanding this market to more investors is an imperative.
Blockchain networks enable us to pursue a twin strategy to open up these markets to qualifying investors globally – individuals and institutions: first, we offer first-of-its-kind capital coordination and financial transparency – so important to instill trust and confidence in the underlying asset. And second, fractional investment in the new home construction projects that inherit the underlying transparency.
The result is to make it easy to invest in the construction of new homes, welcoming fresh capital to new home construction markets and enabling investors to alleviate the housing shortage.
What are the benefits of tokenization?
Tokenization offers several benefits in the context of Home Construction COLLECTIVE. Firstly, it brings new liquidity and accessibility to investors who might otherwise not consider these assets. Additionally, tokenization enables transparency and accountability, as investors can view the status of their projects – including and especially how money flows. Finally, tokenization allows for efficient and secure transactions through the use of blockchain technology, mitigating the need for traditional intermediaries, reducing costs. All told, tokenization enables us to create an asset in which investors who may know nothing about the asset class can be confident. It is an infrastructural benefit that can broaden access to otherwise complex, unchecked, opaque assets.
What is COLLECTIVE?
COLLECTIVE is the first fractional equity platform that allows qualifying investors to earn compelling equity returns on the construction of new single-family homes. Investors can easily invest in new homes and profit from their sale. By making it easy to finance new home construction, COLLECTIVE empowers communities to build more homes where they are needed the most, bringing fresh capital to profoundly supply constrained markets.
COLLECTIVE delivers strong financial returns from the earliest point in a home’s value creation, while enabling investors to address the housing shortage. We’re focused now on building entry-level homes – housing completions at the entry level accounted for 35% of all housing completions in 1970 and now make up less than 10%, leaving millennials and gen z in particular with few options to enter the market.
How does the COLLECTIVE’s tokenization platform work?
COLLECTIVE’s tokenization platform allows investors to easily invest in new home construction projects and earn compelling equity returns. The platform works by fractionalizing the equity of construction projects and offering investors equity interest in new home construction projects – each technically a Delaware LLC. The token gives investors proportional ownership and entitlement to the net income generated from the sale of the constructed homes – we’re targeting a 13-18% USDC return in about a year.
Why focus on home construction?
It is a crowded market for real-estate related financial products, but none focused on the production of new homes. Focusing on new home construction is crucial because there is an estimated gap of 4.5 million to 7 million. The current housing crisis is driven by a lack of supply rather than high prices; just look at what’s happened to prices nationally since mortgage rates increased – on the whole they’ve remained high. Building more homes is essential to address this imbalance.
And why is that so important? Because owning a home is the gateway to meaningful financial inclusion. Homeowners have up to 40x more net worth than renters. The home is the asset on which many families leverage the cost of education or other high-ticket items; it is the key to building generational wealth. By streamlining the construction process and using pre-designed model homes, Home Construction COLLECTIVE aims to increase the supply of affordable homes, broaden investor access, and catalyze the production of much-needed housing.
How has COLLECTIVE’s DeFi solution improved the housing industry’s inefficiencies?
We think the biggest inefficiency is how capital currently enters new home construction markets. It is the near-exclusive domain of regional banks and private capital. With fractionalized equity investment opportunities, COLLECTIVE has broadened investor access to new home construction, bringing in fresh capital to address the housing shortage.
What is the difference between accredited investors and non-accredited investors?
In the US, the SEC defines accredited investors as individuals who have a net worth of $1m or income of $200k ($300k if married filing jointly). Entities need $5m in assets or $2m in income. The idea is that accredited investors have enough financial sophistication and risk tolerance to invest in certain types of securities that are not available to the general public. Non-accredited investors are those who do not meet the criteria for accredited investor status.
At the present time, COLLECTIVE’s equity offerings are available to accredited investors here in the U.S. as well as investors who are not U.S. citizens nor residents.
What is the COLLECTIVE’s current regulatory status?
Home Construction COLLECTIVE operates in compliance with Rule 506(c) of Regulation D under the Securities Act of 1933. This rule allows for the offering and sale of securities to accredited investors without the need for registration with the SEC. The onboarding process includes verification of investors’ accreditation and KYC. Additionally, Home COLLECTIVE files a Form D notice filing with the SEC and pays any required filing fees to comply with state Blue Sky Laws. This regulatory framework ensures that Home COLLECTIVE operates within the legal boundaries of securities offerings
How are projects organized?
Projects on Home Construction COLLECTIVE are organized by Project Sponsors, who list new construction projects for investment. Project Sponsors invest their own capital alongside investors – aligning incentives – and manage the project from start to finish, including securing titles, contracting with the building supply chain, and working with realtors for home sales. Once sold, Project Sponsors also handle distributions, taxes, and tax forms for investors.
What are the minimum investment requirements?
Right now, the minimum investment level is $5k USDC or USD.
Why use stablecoins?
Stablecoins are programmable money. We have standardized on USDC so that we can provide financial transparency to investors while offering payment coordination through the supply chain. In the context of home construction, consider that today contractors wait an average of 80 days to be paid for their work. When those contractors work with us, we’re able to coordinate their payment with proof of construction work – proof is provided by signatures to a smart contract indicating that the right contractors, inspectors, or other designated party has attested to the veracity of the work on the ground.
How do your KYC processes determine the eligibility of investor accreditation?
We require potential investors to submit information we need to verify identity and comply with local and federal law. Information is screened for face matching, address verification, AML checks, identity theft, and document forgery using a third-party user-verification service. Once users pass these screenings, they are required to specify their accredited investor status and upload verifying documents for review by an attorney. This rigorous process ensures that all investors meet the requirements of Rule 506(c) and are accredited, providing a level of confidence in the eligibility and legitimacy of our investors.
What are project sponsors? How are project sponsors selected?
Project sponsors are individuals or organizations that propose and manage new construction projects on the COLLECTIVE. They invest their own capital in projects and raise additional funds from investors. Project sponsors are responsible for selecting the lots, securing title and insurance, contracting with the building supply chain, managing construction progress, working with realtors for home sales, and handling distributions, taxes, and K1s. Right now, the first project sponsors on the platform are the founders of COLLECTIVE themselves, who have years of experience in the construction industry and a strong track record of success. And as mentioned, project sponsors invest themselves in the investment opportunities they offer the public.
What roles do project sponsors play in the process?
Project sponsors have several crucial roles in the home construction process. They propose new construction projects, invest their own capital in the projects, raise the necessary funds, manage the project and are ultimately responsible for selling completed homes and distributing returns. They also work closely with the building supply chain and real estate advisors to select valued lots and market-appropriate home designs. Project sponsors keep track of build progress and provide regular updates to investors. They contract with the building supply chain and manage the sale of homes through trusted realtors. Additionally, project sponsors manage distributions, taxes, and K1s for investors. Overall, they oversee the entire process and ensure the successful completion and sale of the homes.
What are the exit strategies and requirements for investors and sponsors?
We’re focused on building homes for sale, not rent. Respectfully, we submit that the world doesn’t need more rental homes – more rentals make the housing crisis worse by depressing inventory available for purchase.
So, the exit strategies for investors and sponsors in Home Construction COLLECTIVE involve selling the homes constructed on behalf of investors and distributing the net income pro-rata. The expected investor Internal Rate of Return (IRR) is between 13% to 18% with the sale of new homes in 12 to 18 months. The financing is all-equity, with no debt or subordination. Investors participate pro-rata when homes are sold, ensuring they receive their share of returns. In addition to return on principal invested, Project Sponsors earn a set per-project management fee as well as a performance fee (a % of upside created). The requirements for investors include being accredited or a non-U.S. resident and non-U.S. citizen investor. For sponsors, they must go through due diligence, secure land, contract with the building supply chain, and manage the construction process.
Can you tell us about your other project, Rigor, and the role it plays in construction finance?
Sure, Rigor is a decentralized lending platform built on the Polygon blockchain that revolutionizes construction finance. It addresses the challenge of coordinating transparent capital flows with on-the-ground construction logistics, a task uniquely suited to a blockchain. Rigor harmonizes capital coordination with work coordination, facilitating seamless construction finance management. By streamlining construction finance, Rigor attracts more capital, reduces complexity, and creates a harmonized supply chain, ultimately making home construction more affordable and profitable.
How does COLLECTIVE help regional banks and the issues they face in the home construction sector?
It doesn’t. COLLECTIVE provides homebuilders with non-bank financing of new home construction projects. With the ability to raise equity contributions from investors through their platform, COLLECTIVE reduces the reliance on specialized financial institutions for funding.
What will be the COLLECTIVE’’s impact on the housing sector a decade from now?
We’re tired of reading about the housing crisis and its complexity without accompanying solutions. The reality is we have been underinvesting in new home construction for decades. COLLECTIVE has a huge opportunity to disrupt how vital infrastructure is financed – away from traditional institutions and toward community financing. By providing a fractional equity platform for investing in new home construction, COLLECTIVE will help bridge the widening gap between the supply and demand for housing. With strong target returns and a focus on building in high-demand areas, COLLECTIVE will attract new capital to the housing market, encouraging more investors to participate in the construction of new homes. Collectively, we can build more homes and create lasting positive change in the housing sector.