Blockchain technology, originally used for the verification of cryptocurrency transactions, is increasingly finding use cases in commercial real estate transactions where transparency and verification are of utmost significance.
While blockchain has gained infamy for its use in cryptocurrency transactions, its applications and use cases have matured and today blockchain is being used across the world to verify voting ballots, land registries and personal identity.
Gartner had identified blockchain as among the top 10 most transformative technologies available today. According to the firm, blockchain technology is maturing and scaling fast and more tech leaders and innovators should start considering uses cases for enterprise architecture and technology.
What is blockchain?
A blockchain is a digital distributed ledger which records, verifies and maintains transactions across several computers that are linked in a peer-to-peer network. Once a transaction is entered on the blockchain it is permanently recorded and any changes must be viewed and approved by the entire network.
Blockchain technology is highly efficient, secure and extremely transparent. These features make it extremely useful in commercial real estate transactions.
Below are four ways that blockchain-based verification systems can improve the commercial real estate industry.
1. Making the commercial real estate property search process more efficient
Currently existing multiple listing services or MLSs, which provide brokers and buyers access to property-level data such as location, rental rates and capital values, remain fragmented and report inaccurate data due to a lack of standardized protocols for reporting and verification of property details. As a result, misinformation is often passed on to buyer, brokerages and other intermediaries creating delays in decision-making funnel for both landlords and tenants and heightening mistrust about the quality of information available on MLS systems.
A blockchain-based MLS would enable data to be distributed across a peer-to-peer network in a manner that allows brokers to have more control over their data, and its ability to standardize and verify data regarding property features and sales would create greater trust and transparency.
2. Better pre-leasing financial evaluation and due diligence
The leasing and sale process in commercial real estate transactions is inundated with tasks that require verification of physical documents and proof of identity such as supporting the history of ownership, a tenant or buyer’s income, occupancy history and repairs and maintenance records. Currently, multi-year and commercial real estate leases and agreements can span between 200-300 pages based on terms.
The manual verification process which entails reviewing signatures and legal terminology becomes an immense administrative task and is prone to loss of information due to human errors.
By combining Blockchain, artificial intelligence NLP applications and smart contracts the commercial leasing process can be more streamlined, reducing transaction time to minutes from what could typically take months.
Blockchain-based verification processes could expedite sales and pre-transaction activities such as underwriting, financial evaluation, obtaining a mortgage commitment and others.
3. Simplifying and expediting CRE lease management and accounting processes
Among the complexities involved in managing CRE properties are the coordination and tracking of payments and transactions from numerous parties. Not only do payments need to be tracked but an entire group of intermediaries are used to confirm and monitor the financial records on a regular basis. Periodic cash flows for examples are investigated by real estate owners, auditors, banks, financial regulatory authorities, and appraisers.
As a result, real estate companies have rigorous accounting, compliance, and cash flow management needs that could be easily digitized on the blockchain and offer a greater level of transparency of all parties through the use of digitized or smart contracts.
The use of a smart tenancy contract on a blockchain platform would enable transparency in lease terms and transactions. The contract could use rent or bonds for automated payments to real estate owners, property managers, and other stakeholders along with near real-time reconciliation.
4. Improve the quality of data for predictive applications
Due to fragmentation and market localization, there’s a lack of rich real-time data analytics available to commercial real estate owner and brokerages. As a result, CRE management’s decisions are frequently based on data sets which do not provide a real-time view of ongoing activities. The fragmentation of data results in inaccurate decision making on part of owners but also impact the availability of data with AI-based systems are building predictive models for brokerages.
Blockchain technology can provide greater transparency regarding CRE transactions and offer open and shared database for all involved parties, enhancing both data quality and real-time recording and retrieval.