Is the self-storage industry ready for blockchain technology? Texas-based Pinnacle Storage Properties is betting that it is. The owner-operator is both a founding partner and one of the first sponsors to commit to listing its assets on the Earn.re fundraising platform, which is set to debut later this fall.
Like many growing companies, Pinnacle Storage Properties is always on the hunt for equity. CEO John Manes spearheads those efforts for the company. In fact, the firm has raised about $72 million in private equity over the past three and a half years to fund acquisitions and value-add improvements to assets.
“What excited me about this was the ability to raise capital quickly on a platform that saves me a lot of time, energy and effort,” says Manes.
So, how does it work?
The simple explanation is that Earn.re is building an online platform that allows sponsors to raise capital for projects by dealing directly with capital providers. The platform is built on the Ethereum public blockchain, which provides users with a secure means of investing in U.S. commercial real estate with full transparency and in compliance with U.S. securities and data privacy laws.
One simple way to think about blockchain is that it represents a giant digital ledger that stores transaction documents such as property deeds, mortgages and shareholder agreements.
“Essentially, we are not changing the way (accessing capital) is done, but with the blockchain we are enhancing the way it is done,” says Earn.re CEO Aaron Lohmann.
The underwriting process for the sponsor is similar to what they would go through with any capital provider. For example, Earn.re requires an appraisal on the property and looks at the experience and track record of the sponsor.
Crypto currency fuels transactions
Another important piece to the platform is that it uses a form of crypto currency that can be easily bought and sold by investors in the U.S. and globally. Earn.re generates a security token—a virtual contract—that represents a fractional ownership stake in a debt or equity instrument. Those tokens are offered to qualified accredited investors in the U.S. through a Reg D offering and to qualified international investors through a Reg S offering.
Once created, tokens can be traded on the Earn.re exchange, just as stocks and bonds are traded. The tokens are backed by crypto currency, in this case the Circle Stable Coin, which is the equivalent of $1 US dollar. After money has been contributed to a project, an investor would hold those tokens in their own personal “crypto wallet” held on the Earn.re platform.
Depending on the individual investment, tokens also can generate income similar to shares of stock. For example, if an investor purchases a token interest in a mortgage, that token would earn a pro rata share of the monthly mortgage interest payment along with the repayment of principal at the end of the turn. Or, if it is an equity investment, the token might earn a quarterly dividend.
More liquidity for CRE
Some in the industry believe that blockchain has the potential to redefine how commercial real estate transactions are done.
“What is exciting to me as an investor is that it makes each individual asset liquid, just like a stock,” says Manes.
For example, when Manes has been out raising capital in the past, an investor might invest $100,000 into a property and have to wait, three, five or seven years for Pinnacle to exit the asset to get a return of principle and also recognize profit from a sale. On the Earn.re platform, investors can buy and sell tokens at any point.
The platform also has the potential to help U.S. sponsors tap into a large international market of retail investors.
“There is a tremendous amount of investors in Asia and Europe that are very interested in investing in U.S. commercial real estate projects,” says Lohmann. And unlike other capital sources, Earn.re investors take a passive role. “So, I think the consistency and the ability to remain in control of the project is something that is very appealing to sponsors,” he says.
Earn.re is preparing for a launch of the platform in late September or early October. In addition to Pinnacle Storage Properties, Earn.re is negotiating with a variety of other commercial and multifamily sponsors who are interested in putting projects on the platform. According to Lohmann, the company was approaching about $300 million in committed projects as of mid-July.
Pinnacle is currently assessing assets in its portfolio, which currently spans about $100 million in facilities, to determine which would be good candidates to put on the platform to make them liquid. The company would need to get an approval vote from current investors before listing assets on the platform.
“Even if we could put half of our assets on the platform and perhaps another half of the assets that we buy in the next year, it’s a homerun to us,” says Manes.