REAL ESTATE ON THE BLOCKCHAIN

2017 WHITE PAPER

1.0 INTRODUCTION

1.1 ABSTRACTRealShares opens the doors for real estate investment to retail investors, becoming a viable new source of financing for capital firms. RealShare will open the doors to new capital and new investments providing investors, developers and capital firms a new means to raise and generate funds. Using blockchain and smart contract technology we can produce a genuinely transparent ownership ledger that reduces costs of borrowing and lending on both sides of the transaction. The RealShare platform will open a whole new marketplace between investors in foreign and domestic markets increasing personal and global economic growth. The ability to sell all or part of your investment in a property on the RealShare internal exchange will provide liquidity to a previously illiquid investment vehicle. RealShare aims to propel a traditional industry into the modern age, simplifying and removing the barriers associated with traditional real estate investing.

1.2 EXECUTIVE SUMMARY

Using a decentralized application and a specialized blockchain RealShare is looking to democratize real estate investments, allowing the everyday investor to participate in the investment opportunity. This not only provides the investor an avenue to invest in previously unavailable markets, it provides the party looking for funding a new means to access capital. By securely placing the investment ownership on a distributed ledger the RealShare platform can drastically remove overhead, improve privacy and allow retail investors and developers more control and transparency than a traditional REIT or limited partnership.

The decentralized nature of each transaction ensures complete transparency and higher security while the deals are carried out exactly as stipulated. The use of smart contracts provides a direct peer-to- peer investment lane cutting down on expensive intermediaries further increasing potential returns. With each token owned represented a certain level of ownership,  this will be represented through an internal marketplace that has a ledger for each property listed, allowing you to take an early exit from an investment if necessary. 

The appetite for investing in real estate assets is strong but often hindered by high barriers to entry. These barriers include expertise, time commitment, capital restrictions, geographical location, and security/legitimacy of the investment. With recent improvements in blockchain technology specifically with distributed ledgers and smart contracts, there is a unique opportunity to break down the traditional restrictions placed on real estate investments.

2.0 REAL ESTATE INVESTING

2.1 OVERVIEWAccording to Forbes, the Real Estate industry is the third largest source of wealth representing 9% of the world's billionaires in 2016. This is further represented by the industries performance with the Real Estate market outperforming the S&P 500 by a factor of 2:1 since 2000.

2.2 REAL ESTATE INVESTMENT TRUST (REIT'S)A REIT (Real Estate Investment Trust) is a trust company that accumulates a significant amount of capital, which is then used to purchase, manage, and develop real estate assets. To classify as a REIT at least 90% of profits must be distributed out to shareholders as dividends, thus allowing the trust not to pay regular corporate income tax. Since their inception in the 1960's REIT's have taken on many forms including both private and public companies, as well as focusing on specific asset classes. The majority of REIT's encountered in the market raised initial capital through an IPO and their shares are traded on a public exchange. The REIT is a trust, with a separation of legal title and beneficial interest in the property. The trust holds the legal title while beneficiaries, known as “unitholders”, hold beneficial interests in the property. Trustees or REIT manage the portfolio of real property on behalf of the investors/unitholders.

Real estate is perceived as a strong investment as it contains properties of both a stock and a bond, allowing for investment in raw land, residential and commercial. The market crash of 2008 showed that real estate does not always go up, but the long-term trend clearly shows it as an excellent investment vehicle. Besides direct investment, there are 3 means of real estate investing; REIT's, Limited Partnership Agreements & Crowdfunding.

2.3 LIMITED PARTNERSHIPS A Real Estate Limited Partnership is created for the specific purpose of investing in a real estate project with two or more individuals. The standard structure is a seasoned property manager, or development firm forms the general partner, and multiple outside investors act as limited partners. The general partner manages the day-to-day activities of the investment ensuring the project is completed but is also liable in the case of insolvency. In contrast, a limited partner is only responsible for their initial investment but has limited influence over business operations.

2.4 REAL ESTATE CROWDFUNDINGCrowdfunding which has technically been around in America since the 1800’s began to gain traction in 2003 with the launch of ArtistShare a fundraising site for musicians, but really started to take off with the 2008/2009 launch of Indiegogo and Kickstarter. Since then the crowdfunding atmosphere has ballooned to more than $1.76 Billion raised on Kickstarter alone by 2015. The massive success of reward-based crowdfunding has led to the creation of many crowdfunding industries including Charity, Debt, Equity, and most recently Real Estate. Looking into the future the crowdfunding industry is poised to continue its growth as it continues its move from the fringe to a mainstream source of funding.

In the United States companies such as Fundrise and RealtyShares have propelled the concept into the mainstream and have attracted the attention of VC's with each raising over $100M respectively. In just five years the industry has grown from infancy to over $5.5 billion globally; however, most of the current growth has come in the U.S, U.K, and Chinese markets leaving the Canadian and many other nations untapped

Crowdfunding in the Real Estate industry is a relatively new concept that has been growing exponentially in size since 2012, and despite current issues is according to a PWC report estimated to reach $250 Billion by 2020.

$0

$1,375

$2,750

$4,125

$5,500

2012 2013 2014 2015 2016 2017

REAL ESTATE CROWDFUNDING MARKETFIGURES IN ($) MILLIONS

3.0 BLOCKCHAIN TECHNOLOGY

3.1 BLOCKCHAINThe blockchain is a decentralized, immutable, publicly distributed ledger. A blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value. The blockchain is a mechanism that brings accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved. 

Transparency: data is embedded within the network as a whole, by definition it is public. It cannot be corrupted: altering any unit of information on the blockchain would mean using a huge amount of computing power to override the entire network.

While Bitcoin is a revolutionary concept in of itself the underlining technology of blockchain is what can revolutionize the business world. With many major businesses and governments actively working on adopting a blockchain solution we may be on the brink of a digital revolution. Although still in its infancy stage the technology has a reached a point where it is ready to be applied in many real-world situations and as such has since seen its popularity boom.

Blockchain is a relatively new technology that has recently been thrust into the public eye with the use of cryptocurrencies. The uses of Blockchain will continue to grow as its adaptation becomes more widespread. Adapting Blockchain technology to one of the most traditional and sustainable industries (Real Estate) has massive room for growth and development.

BLOCKCHAIN SEARCH TRENDS

3.2 SMART CONTRACTSA Smart Contract is an automated contract where the terms and conditions are held on the blockchain and the outcomes are automatic once the stipulations of the contract are met.

Currently there is two types of distributed ledgers being put into use. A public chain like Bitcoin or Ethereum, or a private chain like Quorum or Hyperledger. Each comes with its own unique set of advantages and disadvantages.

3.3 DISTRIBUTED LEDGER

Public (Permissionless): Allows anyone to contribute data to the ledger and all participants possess an identical copy of the ledger. This works well for completely decentralized chains like bitcoin but takes an incredible amount of computing power to confirm each block, and since each node must agree this increases the confirmation time.  Private/Consortium (Permissioned): The ledger is distributed only to trusted partners and blocks are confirmed by a few selected nodes. This methodology is more suited for applications requiring simplicity, speed, and greater transparency.

A common example used by Nick Szabo is that of a vending machine as a simple smart contract. One party completes their side of the contract by putting money into the machine and choosing their item selection, if the payment is enough for the requested item then one side of the contract is completed and the machine automatically returns your choice of item and the appropriate change. 

4.0 ROADBLOCKS / PROBLEM

4.2 REAL ESTATE INVESTMENT TRUST (REIT'S)

As discussed in section 2.0 to 2.4 there have been many excellent investment vehicles made available for investing in real estate. With the exception of some foreign crowdfunding alternatives, most investment vehicles were created pre-internet without much innovation to the way properties are financed. This has led to a number of problems previously unaddressable. Each form of capital raise and investment is currently limited by; affordability, transparency, liquidity, regulations, wealth diversification, capital restrictions, reach, simplicity, convenience, and trust associated with the investment with varying levels of adaptation and innovation.

When indirectly investing in real estate the most common vehicle is a REIT (Real Estate Investment Trust) that is traded publicly on a stock exchange. While REIT’s can perform exceptionally well and many are very well managed wonderful companies there is an inherent lack of transparency in the investment. You are investing your money in the company as a whole with your only insight into what investments are being made coming during quarterly reports.  You have no control over which investments you would like to participate in and how our money will be used.

4.1 OVERVIEW

TRANSPARENCY

GEOGRAPHIC RESTRICTIONSIn Canada, at least 80% of property managed through REIT must be held in property in Canada. This limits potential returns and investor diversity. Opening up investment to foreign markets and access to Canadian real estate opportunities can improve a portfolio while yielding higher returns and moderating the potential risk.

HIGH MANAGEMENT & TRANSACTION FEESOften REIT's will incur high management and transaction fees. These associated fees ultimately lead to lower payouts for shareholders and investors.

LOW GROWTH OPPORTUNITYBecause of the high fees attributed to REIT's, there is limited room for growth. REIT investors maintain control of all the operational decisions that an individual property owner would make. REIT's also generally exhibit low growth since they must pay 90% of income back to investors or 'unitholders'. Leaving, only 10% of income generated that can be reinvested back into the company.

Lack of a formal marketplace for partnership units make it difficult to transfer your ownership in the case you need liquidity. This can leave investors stuck in the case of unforeseen capital requirements.

With a long average investment timeframe and many legal regulations to navigate real estateinvestment through a limited partnership is a highly illiquid asset. Unlike the stock market where today you can buy and sell shares virtually instantaneously, real estate can very easily require months to exit your investment. In addition, you are faced with traditionally high costs to exit a property, and usually, require selling at a discounted offer.

4.2 LIMITED PARTNERSHIPS

LOW ASSET LIQUIDITY

EXPENSIVE TO SETUP Each partnership agreement requires a mass amount of paperwork and legal intermediaries to set up.These contribute to high initial and ongoing management fees lowering the ROI for all parties. Accurate maintenance of the ownership ledger also adds to this cost and is prone to human error.

ACCREDITED INVESTORS AND LIMITED OPTIONSTo participate in a limited partnership, you are required to be considered an accredited investor limiting the number of potential investors in each property. Also, you must be in a position to access these investments as a marketplace is not readily available.

PRIVACYTo participate in a limited partnership, you are required to be considered an accredited investor limiting the number of potential investors in each property. Also, you must be in a position to access these investments as a marketplace is not readily available.

The majority of crowdfunding sites require you to maintain your investment for the full specified time horizon. You are not able to trade your investment and therefore access liquidity in the case of unforeseen circumstances.

4.3 REAL ESTATE CROWDFUNDING

LIQUIDITY RESTRICTIONS

CENTRALIZED DATABASE A centralized ownership of a digital ledger is fraught with security holes and poses a significant risk to customer data. In the recent past, we have seen massive hacks in Equifax and Yahoo to name a few.

LIMITED LOCAL OPTIONSThere are some foreign crowdfunding sites; however, most do not accept international investors, and there is little to no availability of Canadian companies today.

ACCREDITED INVESTOR REQUIRMENTSTo invest in the majority of crowdfunding sites, you are required to be considered an accredited investor limited the potential market.

5.0 REALSHARE SOLUTION

5.2 BLOCKCHAIN

RealShare aims to combat the major roadblocks that hinder foreign and domestic real estate investing. Through the RealShare system, there will be an incorporation of blockchain technology, smart contracts, crowdfunding, distributed ledgers and real estate transactions that will open up a range of potential real estate markets to the everyday investor. Using emerging technology and strategic partnerships with existing investment channels RealShare will transform the way the world invests in real estate.

The RealShares Dapp is being built on top of the Quorum blockchain developed for enterprise use by J.P Morgan. This enables all proponents of the property and transaction details to be secured in a completely decentralized and transparent format. Using the blockchain each investor can be certain that not only are their personal details completely encrypted but all project details and ownership are immutable. The use of the blockchain will provide non-accredited and foreign investors an avenue to invest in real estate project around the globe, increasing the range and scope of potential investors. The opportunity for investment becomes much greater than that previously available through traditional means. Ownership of the property will be represented through the blockchain ledger while the tokenized system will be available for private and public purchase removing the capital and geographical restrictions associated with real estate investing. The blockchain will also remove many of the transaction fees and costs associated with real estate investing ultimately increasing the potential returns. The blockchain will not only create new means of investing and raising capital it will simplify and record the transaction process between investors and investees simultaneously.

5.1 OVERVIEW OF TECHNOLOGIES

BLOCKCHAIN IN REAL ESTATETransparent ownership of property and channels of investment Investor liquidity in a previously illiquid asset Remove capital restrictions associated with real estate investing and limited partnerships ICO/Coin return & value of coin on marketplace Secure and encrypted ledger for ownership and transactions Wider market with opportunity for foreign investment

Rather than using the traditional real estate investment channels and having a central administrator such as a bank, or government organization manage the title and ownership, a distributed ledger through the RealShare blockchain has a network of replicated databases, synchronized via the internet that is visible to anyone within the network or property ownership. Blockchain networks within the RealShare exchange can be private with restricted membership/ownership, or public through an exchange or public chain that is accessible to any person.

Each property will have its own ledger. When a digital transaction is carried out on the blockchain, it is grouped together in a cryptographically protected block with other transactions that have occurred. The validated block of transactions is then indexed and added to a chain in a linear, chronological order. New blocks of validated transactions are linked to older blocks within the chain. The chain of blocks shows every transaction that has been made in the history of that blockchain. The entire chain is continually updated so that every ledger in the network runs the same, giving each member the ability to prove who owns what share of any property at any given time.

Following the advancements in blockchain technology and its growing rate of adoption, RealShare will provide solutions to the current problems facing real estate investing, creating new opportunities in partial real estate ownership. By utilizing smart contracts on the Quorum blockchain the RealShare application allows for the ‘tokenization’ of real estate. These tokens can easily be distributed to practically anyone in any location opening up and essentially removing the existing barriers associated with investing in real estate. The RealShare tokens, unlike volatile cryptocurrencies, are backed by physical and tangible property assets, that maintain a more stable value. The RealShare ledgers will store pertinent property information such as ownership and transactions securely onto an immutable distributed ledger. 

5.3 SMART CONTRACTSThe use of smart contracts removes the need for expensive intermediaries further improving the margins for investors and the capital available for developers. The smart contracts will also ensure that all clauses of the deal are carried out as specified automatically and on time so no transaction or payment is ever late. During each fundraise the use of smart contracts securely automates the transfer of funds to the principle or in the case of an unsuccessful raise back to the individual investor. 

Smart contracts through RealShare will help to exchange money, property, and shares in a conflict- free manner that avoids the need for intermediaries. Like a traditional contract, smart contracts through the RealShare application will define the rules and penalties associated with the agreement, but also automatically enforce the obligations that need to be met.

The RealShare platform is being developed on top of the Quorum private chain. Each property's ownership will be cryptographically stamped on a distributed ledger with access only available toregistered RealShare members. A so-called council will be created to verify the nodes and ensure trust in the blockchain. Any member wishing to be a verified node will have the chance to become so.

Using a private chain allows each block to be verified quickly and efficiently without a large amount of computing power. In addition, the ownership ledger of each property will only be available to those that are apart of the RealShare community. 

5.4 REALSHARES PRIVATE CHAIN

Since each project will be crowdfunded investors have the ability to start building a real estate portfolio with as little as a couple hundred dollars. Combined with the wide variety of offerings our platform contains you will have the opportunity to be as diversified or concentrated as you wish. Our investment platform allows investors to build a fully diversified portfolio across not only different types of properties and geographical locations. 

5.5 CROWDFUNDING

CENTRALIZED LEDGER DISTRIBUTED LEDGER

Developers will have access to a global marketplace of investors, without capital and geographical constraints, allowing them to raise capital without costly fees and restrictive conditions that come with a standard bank loan. By automating the middleman we are giving the freedom back to developers and removing costly overhead.

6.0 DEVELOPER ADVANTAGES

6.2 QUICKLY & EASILY RAISE CAPITAL

RealShare will provide numerous advantages to developers and property owners, allowing them to access a new means of capital from previously unavailable investors. Whether it is a private equity firm, commercial builder, community developer or property owner RealShare can help facilitatefunding and ownership.

Through the use of crowdfunding, developers will have the ability to raise funds for new projects faster than conventional methods allow. There have already been numerous cases of traditional real estate crowdfunding sites raising hundreds of thousands of dollars in a matter of days or less as opposed the weeks or months it might typically take. 

6.1 OVERVIEW

6.3 LOWER COSTThrough the use of our distributed ledger and smart contracts, RealShare cuts out many expensive intermediaries. By automating most of the investment process, we can offer our services at a lower cost increasing the potential ROI. 

6.4 ACCESS TO NON-ACCREDITED & FOREIGN INVESTORSUsing the RealShare platform allows developers to access funds from both accredited and non- accredited investors in both foreign and domestic locations opening a much larger market for investment. Increasing the potential capital that can be raised through the platform. 

6.5 ADOPTING NEW TECHNOLOGYMost experts agree that blockchain appears to be a technology that is going to disrupt almost every industry. Coupled with the historic growth crowdfunding Real Estate has already shown, RealShare provides an opportunity to gain an early adopter advantage over firms only utilizing traditional methods of raising capital.

7.0 INVESTOR ADVANTAGES

7.2 REMOVE CAPITAL RESTRICTIONS

RealShare will allow foreign and non-accredited investors a means to invest in previously unavailable assets. The development and growth of blockchain technology has created new ways to invest and control equity. The RealShare platform will create more control while removing the existing barriers that have limited real estate investments.  Previously investors looking to join a limited partnership were constrained by their network or wealth manager. The RealShare platform acts as a simple intermediary between developers and investors. RealShare can do for developers what an MLS systemdid for Realtors.

The majority of Real Estate investment options available today require an accredited investor status. Our platform will allow you to invest without this accreditation and in some instances without a minimum investment. This allows an investor to build a fully diversified portfolio across many asset classes and locations, even with only a small amount to invest.

7.1 OVERVIEW

7.3 GLOBAL REACHThe RealShare platform generates the ability to invest in multiple markets both domestically and internationally. Traditionally investing in various markets was an arduous task filled with many pitfalls.

7.4 CONTROL OVER INVESTMENTOn the platform, you will have full over which real estate projects you choose to invest in. With the RealShare dashboard, investors will now have control to choose their investments based on many aspects including the development firm, asset class, location, and deal type.

7.5 POTENTIAL TO GENERATE HIGHER RETURNSReal Estate projects have the ability to offer a higher yield than in the traditional stock or bond markets. The RealShare platform will make it simple to find, invest, and trade in high yield Real Estateprojects. 

7.6 TOKEN-BASED ON TANGIBLE ASSETAs the tokens used to purchase property on RealShare represent ownership in income-producing assets, they garner an intrinsic value providing a more stable investment.

8.0 GROWTH PLAN

8.2 DOMESTIC MARKET IMPLEMENTATION

RealShare will allow foreign and non-accredited investors a means to invest in previously unavailable assets. The development and growth of blockchain technology has created new ways to invest and control equity. The RealShare platform will create more control while removing the existing barriers that have limited real estate investments.  Previously investors looking to join a limited partnership were constrained by their network or wealth manager. The RealShare platform acts as a simple intermediary between developers and investors. RealShare can do for developers what an MLS systemdid for Realtors.

Canada represents an untapped crowdfunding market with little to no competition and is large enough to scale the platform. The crowdfunding industry has been growing strongly in other major markets such U.S, U.K, and China yet still represents less than 1% of investment in Canada.  RealShare has a strong opportunity to take advantage of this growing market and establish our brand in the industry.

8.1 OVERVIEW

8.3 STRATEGIC FOREIGN MARKET IMPLEMENTATIONBeing able to simply and securely add investment opportunities onto our platform allows RealShare to expand to enable offerings from global markets. Not only does this allow us to provide an avenue for further diversification, but also to increase the breadth of opportunities available. Expanding into emerging markets increases the number possible investment and partner options such as condo- hotels and luxury time-shares.

8.4 PLATFORM FOR LIMITED PARTNERSHIPThe investment process for limited partnerships which has not yet evolved beyond the paper agreement stage is wrought with inefficiencies and potential for human error. Combining our distributed ledger platform with electronic statements and agreements streamlines the process of creating and managing ownership units. Establishing our expertise in representing ownership on a distributed ledger securely and efficiently, RealShare has the opportunity to revolutionize the way limited partnerships are managed. 

9.0 APPLICATION

The RealShares platform is a decentralized application that allows you to invest in new crowdsale opportunities, manage your active investments, and access our marketplace to buy/sale ownership tokens. The platform will be able to be used for investing in projects, as well for those seeking to have funding for a Real Estate project.

9.1 OVERVIEW

9.2 INVESTINGThe crowdfunding stage of investment will be very similar to the experience of using past crowdfunding sites such as Kickstarter, gofundme, etc. Users will scroll through active deal tiles which provide a high-level overview of each project. Embedded within each deal will be a full prospectus of the project including the financials, expected life, pictures, and a comprehensive profile of the developer proposing the deal.

Using a payment gateway such as coin-payments investors will have the opportunity to pay through their preferred cryptocurrency or in certain jurisdictions with their local fiat currency. This payment will be held in an escrow smart contract until the deal is fully funded in which case the funds will be transferred to the appropriate account for the purchase of the property. In the case that the deal is not fully financed the funds will be transferred back automatically to your account to use in a new deal. 

As with all Real Estate deals, there needs to be a single principle for the sake of holding the land title. RealShares will be addressing this in two stages. To start, we will be creating a special purpose vehicle to act as a holding company on behalf of investors. This entity will be the title holder for the properties and responsible for maintenance and providing regular updates to the property. Upon successful execution of the purchase of property, all relevant paperwork will be loaded to the blockchain to create an immutable record of ownership.

Once the platform is ready for the Candian market, we will partner with capital firms wishing to use the RealShare platform to raise funds. They will be able to bring their deals to the RealShares platform and raise money through crowdfunding, and the property will be held in a joint trust. To ensure that only top quality deals are placed on the platform, we will use a three-pronged approach. 

We will work with capital firms with a successful track record and a strong management team

Each deal will need to meet specific requirements to be eligible for crowdfunding.

The principal is repsonsible to load property documents and provide updates to keep investors informed.

 In addition to these three steps, the interactive social aspect of each deal will keep everyone honest. Direct chat and historical project ratings provide investors strong peer-reviewed details of the developer and access to communicate with them. 

9.3 PROPERTY PRINCIPAL

While we would prefer to enact the entire transaction on the blockchain given current infrastructure and regulations some aspects will have to be completed off the chain. All activities involving the actual transaction on both the buy and sell side will need to be off-chain. We will also be offering the option for developers to select either a pre-funded deal or to wait for the crowdfunding. Pre-funding will come at a higher interest rate to the developer but would allow them to receive the funds upfront and use the platform to crowdfund while the project is already underway.

In the future, we envision the ability to handle the exit of a property entirely on the blockchain and by the time the first properties are sold this may even be a possibility. If not then similar to the purchase of property, the sale as well will inevitably be handled off-chain. The process will be as follows: Once an offer is made, that satisfies the projected IRR of the project we will initiate the sale of the property. After the close of sale, all relevant documentation will be loaded to the blockchain and proceeds (Sale amount - Taxes - Closing Costs/Platform Fees) distributed based on ownership percentage of tokens held. Proceeds will be paid out in a readily convertible cryptocurrency such as ether (or currency of similar properties).

9.3 OFF-CHAIN ACTIVITIES

In order to determine the total price for each listing, there will need to be a number of factors considered.

9.4 PRICE DETERMINATION

Purchase Price: The actual value (or estimated value) for the purchase of the property. Acquisition Cost: As with any transaction, there are numerous closing costs that must be accounted for. The estimated costs will be added to the listing price.Reserve Fund: An additional 20% of the listing price will be added in order to account for the everyday fees of owning the property. These include taxes, property management fees, unexpected maintenance etc.. Any remaining funds upon exit will be lumped back into the proceeds for distribution to investors.

9.5 MARKETPLACEThe third stage will be to develop an internal marketplace to trade ownership tokens with other users. This will allow an investor to gain liquidity in their investment, as well as enabling RealShares users to enter a deal after the initial crowdfunding stage. At first in order to remain sheltered from the volatility of the crypto market at large property tokens will only be available to trade on our marketplace. While this may affect short-term gains we believe this is the strongest solution to build the strength and security of the RealShares marketplace. Since each token is backed by a tangible asset we will be providing one of few tokens with an intrinsic value not based on speculation. This provides our users with the ability to build a strong diversified portfolio that is not subject to the wild swings of the crypto market.