Introduction
Adequate access to affordable housing is a worldwide challenge, and the global housing crisis is one of the most daunting societal dilemmas affecting millions of people around the world. In the United States, according to the National Low Income Housing Association, over 500,000 Americans face housing insecurity any given night, and with a shortage of over 7 million affordable housing units, the housing crisis has reached epidemic proportions.
This article will show how as part of planning the development of a master-planned low-income community, we have determined that the use of blockchain technology, specifically the tokenization of equity and the implementation of a decentralized autonomous organization (DAO), can flip the paradigm of low-income communities by providing transparent and secure opportunities for tenants to build equity ownership in their home, creating a new socio-economic model where residents thrive while giving back to their community.
Across the globe, the demand for affordable housing continues to outstrip supply resulting in several difficult challenges for communities, and the shortage has a disproportionate impact on low-income families, who are often forced to pay more than they can afford for housing, thus propagating this negative cycle throughout low-income communities across the country and around the world.
Real estate is one of the most significant wealth-building assets available; however, marginalized communities have been consistently left out. This lack of affordable housing has a number of negative consequences for low-income communities, including poverty, unemployment, and crime. This absence of affordable housing can force low-income households to spend a larger proportion of their income on housing, which can lead to poverty. Additionally, this disparity can make it difficult for people to find and keep jobs, due to the need to commute long distances or to work multiple jobs to make ends meet. This problem can also lead to increased crime in low-income communities, due to the concentration of poverty and social problems.
Garratt Hasenstab
FIBREE Regional Chair Denver, CO, USA
Enter Blockchain
The development of master-planned, affordable housing communities can be immensely improved through the implementation of blockchain-based technologies such as real estate asset tokenization, smart contracts and DAOs.
Through our own rigorous research and analysis, we have determined that the use of blockchain technology can transform would-be affordable housing residents (renters) into equity owners of their units and their communities, creating a revolutionary new type of “purpose-driven” multifamily affordable housing development where financial and social equity, resiliency, and climate action are built into the ownership paradigm from day one.
New development affordable housing communities that are implementing blockchain tokenization will be designed to provide residents with new economic opportunities, ownership benefits, voting rights, equity growth, realization of appreciation, and other benefits that typical affordable housing residents would never be able to benefit from in traditional community developments. As token holders, tenants would be growing their ownership stake over time, contributing to the development of their neighborhood and earning appreciation on their assets - their home and their broader community.
Tokenized affordable housing communities designed with the needs of its residents in mind, would be located in areas with easy access to public transportation and essential services, such as healthcare and education. The housing units would not only be affordable, but they would be designed and constructed with energy-efficiency at top of mind in order to reduce operating costs as well as the overall environmental impact of the community, and would be designed to meet the needs of families of different sizes and compositions.
In addition, communities such as this would be designed to promote social cohesion and a real sense of community among its residents. Blockchain can help to improve social equity by ensuring that all stakeholders are treated fairly and that there is no corruption or fraud. It can also help to increase transparency and accountability in the construction process. For example, The International Finance Corporation is using blockchain to track the use of labor in construction. This information can be used to ensure that workers are treated fairly and that there is no dishonesty in the financing of community development and construction.
To finance the development of these communities, municipal and government subsidies will be used in conjunction with development capital. Ideally, these communities would be located in government designated “Opportunity Zones”, which provide significant tax benefits such as capital gains deferral and/or capital gains exclusion, as well as greater access to development investment capital.
The simplified process of fractionalizing affordable housing using blockchain tokenization would look something like the following:
- A developer would build an affordable housing community with the intention to onboard residents providing a range of opportunities to develop equity in their residence and their community.
- The developer would fractionalize an ownership stake via the creation of blockchain-based tokens that represent fractional ownership of the community.
- The tokens would be distributed to the community residents in exchange for a variety of different types of contributions that the residents make, such as making on-time rental payments, contribution to the management of the community by serving on the Homeowners Association board or contributing a greater monthly payment than their base monthly rent, among other ways to earn equity in their property and community.
- Over time, the residents would build equity ownership in their home, and their community, and benefit from this ownership in a myriad of ways.
Blockchain-based equity tokenization offers exciting new opportunities for both real estate developers and low-income housing residents through the creation of affordable housing projects.
Benefits of Blockchain in Affordable Housing
There are many benefits that tokenized fractional ownership of affordable housing could provide for its low-income residents. Using blockchain in order to fractionalize ownership of affordable housing will enable low-income families to become owners of their homes, which would provide them with a number of benefits, including:
- Increased financial security: homeowners have a higher net worth than renters, and they are less likely to experience financial hardship. A study by the National Association of Realtors1 found that homeowners have a median net worth of $237,400, compared to $7,140 for renters.
- Improved credit scores: homeownership can help to improve credit scores, which can make it easier to qualify for loans and other forms of credit. A study by the Urban Institute2 found that homeowners have a median credit score of 723, compared to 623 for renters.
- Greater sense of community: homeowners are more likely to be involved in their communities, which can lead to a number of benefits, such as improved social support and increased civic engagement. A study by the Harvard University3 found that homeowners are more likely to: a) be satisfied with their homes and neighborhoods; b) participate in voluntary and political activities; and c) stay in their homes longer, contributing to neighborhood stability.
Additionally, there are many benefits that tokenized fractional ownership of affordable housing could provide to the greater community in the realm of social equity, including:
- Transparency: blockchain is a transparent and immutable ledger, which means that all transactions are recorded and visible to all participants. This helps to further instill the sense of community by ensuring that all stakeholders in the development are treated fairly and that there is no corruption or fraud.
- Efficiency: blockchain streamlines the development process by automating via smart contracts many of the tasks that are currently done manually. This includes the purchase and acquisition of construction materials, the timely and accurate payment of manufacturers and subcontractors, the protection of transaction histories, and the support of operations and maintenance of the project through construction and beyond. Implementing blockchain-based smart contracts provides great benefit not only to construction lenders and developers throughout the process of development, but also the time and cost savings can be seen as a benefit to the community residents, as costly errors and delays are avoided, resulting in a more efficient onboarding process and lower costs passed down to the residents.
- Access to capital: blockchain makes it easier for low-income communities to access capital for other development projects within the community. Since community development capital is stored as tokens on the blockchain, the risk of fraud or manipulation is greatly reduced, since these funds are not controlled by intermediaries. Additionally, blockchain-based community investment is democratized and thereby transparent to all participants, enabling decentralized management through the voting rights of the community residents.
- Community engagement: blockchain can be used to engage low-income communities in the self-management process. This helps ensure that the needs of these communities are truly met and that they have a real say in how their communities are managed.
Some current real world examples of how blockchain is being utilized in this way, include:
- The Provenance blockchain platform is being used to track the construction of affordable housing units in the United States. This platform allows developers to track the materials used in construction, the labor costs, and the energy efficiency of the units. This information can be used to improve the quality of affordable housing and to make it more affordable.
- The Sikka blockchain platform is being used to provide financial services to low-income communities in Nepal. This platform allows people to access loans, savings accounts, and other financial services without having to go through a bank. This can help to improve financial inclusion and economic opportunities for low-income people.
Blockchain can also improve environmental, social and governance issues associated with the development of new construction affordable housing communities, including:
- Environmental benefits: blockchain can help to reduce the environmental impact of construction by tracking the use of materials and energy. This information can be used to make more sustainable choices in the design and construction of affordable housing units and communities overall.
For example, The Energy Web Foundation is using blockchain to track the use of energy in buildings. This information can be used to make more efficient use of energy and to reduce the carbon footprint of buildings. Additionally, the World Economic Forum is using blockchain to track the use of materials in construction. This information can be used to ensure that only sustainable materials are used in construction.
- Social benefits: blockchain can help to improve social equity in affordable housing development by ensuring that all stakeholders are treated fairly and that there is no corruption or fraud. It can also help to increase transparency and accountability in the development process.
For example, The International Finance Corporation is using blockchain to track the use of labor in construction. This information can be used to ensure that workers are treated fairly and that there is no forced labor or child labor in construction.
- Governance benefits: blockchain can help to improve governance in affordable housing development by providing a secure and tamper-proof record of all transactions. This information can then be used to improve decision-making and to hold those responsible for their actions accountable.
Challenges
There are also challenges that would need to be addressed in order to implement blockchain-based fractional equity ownership in the affordable housing development space. These challenges include:
- Regulation: The regulation of blockchain and tokenization is still in its early stages. It is not yet clear how these technologies would be regulated in the context of affordable housing moving forward.
- Cost: The cost of fractionalizing affordable housing would need to be affordable for the funders and developers to implement as well as any pass-along costs to residents. This could be a challenge, as the cost of blockchain and tokenization technology is still relatively high.
- Acceptance: It is not yet clear how widely fractional ownership of affordable housing would be accepted by low-income families. Some families may be hesitant to rely on an unfamiliar technology, and they may be concerned about potential risks involved.
- Funding: Seeking out private investment capital and government-based financial support while educating these entities on the opportunities and benefits that this type of cutting-edge affordable housing development paradigm provides could prove to be a challenge as this is not only a new technology, but also a new paradigm in the real estate development space, and would need to be thoroughly researched and explored.
- Management and maintenance: This type of community is a large and complex project, and requires a significant amount of management and maintenance. The non-profit organization / home owners association / decentralized autonomous organization that would be charged with managing the community responsible for the day-to-day operations of the community, including maintenance, repairs, and security would need to understand how the community blockchain functions and how the smart contracts are implemented in order to ensure a smooth process.
Despite these challenges, fractional ownership of affordable housing has the potential to be a valuable tool for addressing the housing crisis. By providing low-income families with a stake in their homes, this technology could help to improve their financial security, their credit scores, and their sense of community.
Conclusion
Blockchain-based equity tokenization offers exciting new opportunities for both real estate developers and low-income housing residents through the creation of affordable housing projects. Fractional ownership of affordable housing using blockchain and tokenization is a viable solution to the housing crisis. Community members can take part in fractional ownership while uplifting their own neighborhoods through affordable housing, social equity and asset appreciation. Blockchain technology can help in the reimagining of the housing finance ecosystem, which can unlock value for developers, residents, financial institutions, and other industry participants. We hope to see advances in this space in the near future and look forward to taking on the challenges of developing new, fruitful opportunities for low-income housing residents.