June 30, 2023
Even though "fractionalized real estate ownership" sounds like the latest trend out of YC Combinator, it's been possible for decades thanks to the SPV (or Special Purpose Vehicle). In today’s post, we will explore what is a SPV in real estate transactions, how companies and investors are using it and why.
Since the 1980s, banks, developers, and investors have used SPVs to minimize financial and legal liabilities when making money from property-based assets.
In short, SPVs in real estate are independent subsidiary companies established for a specific purpose, which now almost exclusively is to transfer and confer ownership of real estate assets.
Essentially, a building (or set of buildings) becomes its own business under an SPV, and shareholders of an SPV are entitled to the income from those properties.
Many accounting loopholes make SPVs a good choice both for massive financial institutions and small landlords.
The most common is that real estate SPVs let the company pay capital gains tax instead of property sale tax when selling the asset. With an SPV, the parent company sells the subsidiary business rather than the property, which remains under the same ownership (the owner is still the SPV.)
SPVs can also reduce income on paper by offsetting them with mortgage costs and make a bank's balance sheet look healthier by allowing it to sell a property to itself.
The critical thing to understand is that shareholders of an SPV are entitled to the income from properties it owns. Furthermore, expenses and revenue go through the subsidiary company account.
Just like stocks have made the fractionalized ownership of corporations an established facet of our modern world, SPVs have made fractionalized real estate ownership safe and legally viable.
While fractionalized real estate ownership isn't new, the idea of making it available to the masses in a free, open market is.
To better understand what is a SPV in real estate, here’s a deeper look into how we use it here at MetaWealth, our platform for tokenized real estate investment.
MetaWealth transfers its investment properties to SPVs to grant token holders ownership and income from expert-selected real estate investments. By tokenizing property ownership, we’ve made it significantly easier to own, purchase and sell one's share of these assets.
Besides opening the doors to real estate investing to everyone, the blockchain makes activity and trading related to the SPV fully transparent. Anyone can see the movement of tokens by going to the smart contract address of a MetaWealth asset token (such as this one, our first offering in Romania).
All in all, fractionalized real estate is not a risky, untested thing. Investors can rest assured knowing that they are participating in a type of business used by the world’s largest financial institutions for years.
However, as we discussed previously in this article, tokenization has conferred a handful of key advantages that reduce friction in the market in a way that real estate SPVs, on their own, do not.
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