My guest today is Michael Flight. Michael is principal and CEO of Liberty Real Estate Fund. Liberty Fund is a net leased property fund curated to create a conservative, safe haven portfolio of long term, Single-Tenant Net-Leased properties. The fund is designed for geographic diversification, tenant credit diversification and industry diversification.
In addition to his leadership expertise in the the triple net world, Michael is also a recognized expert and one of the country's leading pioneers in the world of real estate tokenization.
In today's podcast learn from Michael about both Triple Net investing and how tokenization is revolutionizing how real estate is financed.
What You're Going to Learn
Connecting Tokenization with Crowdfunding
Using Tokens in Real Estate Syndication
Invest in International Real Estate Deal With Tokens
How Blockchain Works in Real Estate Tokenization
Has the SEC Approved Tokenization?
Raising $100 Million in a Closed-End Fund
Security Tokens Protected by Ledger Technology
Why Security Tokens and Cryptocurrency Are Not the Same
Why Security Tokens Offer Huge Opportunities in Real Estate
Security Tokens, Foreign Investors and Tax Laws
Learn More About Blockchain Platforms for Real Estate Tokenization
ADAM GOWER: People think, well what is it? It's a bit wacky. But why is it any different, actually, from the digitization of a piece of paper to a DocuSign? I mean, it looks like a piece of paper on your screen, and you click on it to sign, and it's all digital.
MICHAEL FLIGHT: I don't need to know SMTP and I don't need to know email language, to send an email, and this is the same thing. We keep stressing to people that, we are a real estate fund. And, the only thing that's different about this real estate fund, from your average real estate fund, is this gives you all kinds of extra options. And so, there's really cool options. Number 1 that, there's potential liquidity. So, after a one year lock-up period, if you would do a regular syndication with us, you'd be stuck in our syndicate, and I don't want to say "stuck". That's a bad word, but, you would be in our syndication for five to seven, perhaps 10 years. With this, after a one year lock-up period, which is mandated by the SEC, you could actually list your token on an exchange and perhaps sell your token or you and I could get together and you say, wow, that's a really cool investment. Can I have some? And I'm like, yeah, as a matter of fact, I want to invest part of my money in another deal so I'll sell you half of my tokens. So I give you 50. I put up fifty thousand dollars worth of tokens. If you put up fifty thousand dollars worth of money, the trade goes through automatically. And so, it just gives you a lot more options.
ADAM GOWER: So, it's like a digital contract, is basically all it is.
MICHAEL FLIGHT: They're called digital assets. So, it's basically... it's exactly the same thing. And investors in the US can also choose not to do the token, they can just do the regular 506. They just don't get all the "bells and whistles" of the token.
Invest in International Real Estate Deals
ADAM GOWER: When you say the "bells and whistles", you mean the opportunity to trade it.
MICHAEL FLIGHT: The The token also, you could invest in US dollars and then take your money out in Ethereum, which is a cryptocurrency, or you could get your monthly distributions out in a euro or in a yen. So, there's just all kinds of options that you can do with the token. It really just opens up this whole new world. But the biggest thing, with security tokens, is it opens up the rest of the world to invest easier into the United States. Or, me and you, if we wanted to invest in England, we could invest in a security token in England and it's much, much easier because, as you were pointing at your phone, you could go onto your phone and do the whole thing on your phone and boom, you own a piece of a larger property.
How Blockchain Works in Real Estate Tokenization
ADAM GOWER: Do you find the language of tokenization is a help or a hindrance? Because I know that some people probably say, ew yes, I'm into that and others say, I would not touch that with the butt end of a barge pole. So tell me what your experience has been there.
MICHAEL FLIGHT: I can honestly tell you that, people that are older and close to my age, are more open-minded about it. And, I found out that people in their 30s to 40s are a little bit hesitant about it, because I think they were really scared about what happened with cryptocurrency in 2017 and 2018. And then, younger people are very familiar with it. So let's define. Blockchain is just a distributed ledger. It was made famous by Bitcoin because Bitcoin figured out how to do a blockchain. And also, it's immutable so that once the transaction happens, you can't go back and change the transaction. So, that's the great thing about blockchain. It provides a bunch of security. So, it shows that you bought the security and it's immutable and by being distributed, all the rest of the ledgers in the world have to match up to that ledger. So, like I say, you don't really need to worry too much about the blockchain. And, this is not cryptocurrency. This is a regulated security.
ADAM GOWER: Regulated by who?
MICHAEL FLIGHT: It's an SEC regulated.
Has the SEC Approved Tokenization?
ADAM GOWER: Forgive me for asking blindingly, what may be blindingly obvious questions to you, but if it's regulated by the SEC, does that mean that the SEC has approved tokenization?
MICHAEL FLIGHT: Yes, the SEC has approved it. Because, as long as you're doing it with the exemption, so the regulation CF exemption or the regulation A exemption. Like I said, we're doing a 506(c).
Raising $100 Million in a Closed-End Fund
ADAM GOWER: It is an ownership share in your fund. So, let's say you're doing a hundred million dollar fund. I don't know how big your fund is. And you've got a hundred tokens, each worth a million dollars each, just to make it easy for me.
MICHAEL FLIGHT: Right.
ADAM GOWER: So there will only ever be a hundred of those tokens, in that fund, at any one time. You can trade those. But that's going to be a discrete number of tokens inside there. That's going to be unique. Those tokens will be unique to your fund. Is that right?
MICHAEL FLIGHT: I'm having trouble with the question, but I believe yes. We are doing a closed-end fund. Our initial raise is 30 million. We have a hard cap of a hundred million. The thing that's really capping the fund is, the SEC only allows two thousand investors into the fund. So, the real cap is the amount of investors. If we get two thousand US investors, that's the cap of the fund.
ADAM GOWER: Perfect. So, in oldspeak, you would be issuing shares?
MICHAEL FLIGHT: Yes.
ADAM GOWER: In the fund.
MICHAEL FLIGHT: Yes.
ADAM GOWER: The day you're issuing shares but those shares are represented by tokens.
MICHAEL FLIGHT: That's correct.
Security Tokens Protected by Ledger Technology
MICHAEL FLIGHT: For lack of a better thing, if you used to have, on the subway or you call it "the tube", the tokens that you would put into the thing, or, if you used to go to Chuck E. Cheese, you would get these tokens that you could then redeem. The token is just a representation of your asset.
ADAM GOWER: Is there literally a physical token?
MICHAEL FLIGHT: No. There isn't.
ADAM GOWER: It's digital.
MICHAEL FLIGHT: It's all numbers and you get it. There's various options of, how to keep it safe. But the other thing that, unlike cryptocurrency, whereas, if you type in the wrong number and send your cryptocurrency to some place, it's gone forever. These are security tokens. So, the company securitize, going through the procedures, can reissue. Like so, for example, if somebody stole your tokens, or if you've lost your tokens or something like that, we can reissue. We'll burn the other tokens and reissue you your tokens.
ADAM GOWER: And that's because it's in a closed-loop. You can control whole ecosystem.
MICHAEL FLIGHT: Yes. And, because a lot of people don't know what this is, but, all these tech guys talk about "cap tables", but it's really just, you know, the people that own shares. And so, who owns what? So, we maintain the ledger of ownership and so, if there is an issue, we can then reissue it.
Why Security Tokens and Cryptocurrency Are Not the Same
ADAM GOWER: How would you lose a token? Is that like losing your password?
MICHAEL FLIGHT: Either losing your password, forgetting what the numbers were. There's various ways to do it. For example, like, if you lost your DocuSign documents.
ADAM GOWER: Well, just lost access to them. Like I forgot where they were.
MICHAEL FLIGHT: Right.
ADAM GOWER: Or how to access. I mean, I do it all the time. I bet we all do. And that's why everything says... forgot password? Or, reset password. I've got too many bloody passwords.
MICHAEL FLIGHT: But with cryptocurrency, you can't do that. So, if you forget the password, if you forget the number, if you forget where you wrote it down at, or, like I said, send it someplace. It's gone. With security tokens, like I say, they're a different beast. They're, like I say, they're regulated. They were designed to be legal. They were designed to be more user- friendly. And, what they're now predicting is, at the end of 2021 or 2022, security tokens will be a much larger market than all of cryptocurrency combined. Because, if you look at it, there's two hundred and seventy trillion dollars worth of real estate.
Why Security Tokens Offer Huge Opportunities in Real Estate
ADAM GOWER: Tell me about internationalization. You've talked about distribution in Europe and in here and in there. Wow. I mean, that makes me think, gosh, I should just buy your stuff because the market is so massive. You've created this massive market. Tell me about that.
MICHAEL FLIGHT: Well, the real thing that, as I said before, what problems are we solving for? Number one was liquidity. Number two, ease of access. And number three, it's tough for non-domestic investors to invest in the United States. There's tax laws and other things that were created so that people didn't come up. They were concerned in the 80s about the Japanese buying all of the United States and leaving nothing for Americans. There was all these laws. So, we thought, if you could open up that market. And then, the other thing is, like the returns in certain places. There's negative returns on German bonds right now, you know, and they're investing in real estate at a two and a three percent return. So, if you could open up high quality US real estate to the world. And then, the other thing is, my friend, I don't know if you know Russ Gray from The Real Estate Guys, but, you know, Russell brought up to me, he goes, this is like super huge because somebody that's in certain countries that, you know, they can't actually own real estate, could actually own this.
Security Tokens, Foreign Investors and Tax Laws
MICHAEL FLIGHT: Europeans are earlier adopters than US investors, in terms of being comfortable with security tokens. And so, over in Switzerland, there's this whole crypto valley. They've actually worked out their financial regulations faster than the SEC did. So, the Europeans are interested in this type of thing.
ADAM GOWER: I've had clients approach me and worked with clients. I've actually set up foreign entities, here in the United States, not foreign entities, but I've set up entities that are specifically designed to allow non-American citizens to invest here. They were offshore funds and Cayman Islands and all kinds of very, very complicated and extremely expensive structures to put together, just because of the legal work that has to go into putting these together. But it involves tax law primarily, and how do you get money in and then how do you get it out in the most tax efficient way? So, what I am hearing you saying is that, yeah, but now they can just buy a token. How does that not violate all of those tax laws?
MICHAEL FLIGHT: One of the things that it's taken us close to a year to do this, I think. In the future, for people, it'll be easier. So, if you didn't do the international part of it, it would be much easier. But, since we're doing the international part, there was accounting and legal expenses to set up the Cayman Islands, feeder fund and all the rest of it. But, like I said, I think, at the end of the day, you know, if enough people are doing it, it's going to be streamlined. The costs are going to come down. It's going to be much easier.
Learn More About Blockchain Platforms for Real Estate Tokenization
ADAM GOWER: What are your recommendations for somebody who's listening to this show today, who is interested in investing in commercial real estate through a tokenized offering, but is doubtful or hesitant. What would be your recommendation that they do to learn more?
MICHAEL FLIGHT: There's beginning to be a lot more information on it. I can tell you that we have taken over the Chicago Blockchain Real Estate Collective Meetup. And so, we have brought people on that have not only done tokenization. We've brought people on from Securitize. We've brought on securities attorneys. So, they would learn a lot through the Chicago Blockchain Real Estate Collective, which we also have the replays on our website, LibertyFund.io. And then there's other places. Medium has some really good articles. There's a few podcasts out there. But, you know, if they really have questions, they can reach out to me, too. I've started calling myself a "security token evangelist", next to real estate entrepreneur. And. I think it's the future. Digital assets are going to be the future. So, I'd love to talk to them.
