Illiquidity has always been a feature (and a bug) of real estate transactions. That prime piece of retail space is one of a kind, and you can’t click “sell” on that multifamily asset the same way you can on a share of a blue-chip company. Tokenization is changing that premise by turning the economics of property ownership into fractional tradable units that can be bought or sold through digital exchanges at the touch of a button.
This shift matters for corporate counsel because once something trades like a security, the market structure becomes an additional risk on top of the investment itself. In thin or micro-cap markets, the “back-end” mechanics of securities trades that are baked into most investor-broker agreements — such as routing, batching, queue priority, and trading halts — can materially affect who gets their orders filled, at what price, and who ends up with control. (This article uses “broker” to mean a securities broker-dealer or trading platform, not a real estate agent.)
Here’s what you need to know before advising clients interested in the tokenized real estate market.
What Is Tokenized Real Estate?
Real estate is said to be “tokenized” when its interests are divided up and the records of ownership are recorded on a blockchain, which is the digital ledger keeping track of transactions. An issuer or platform can issue “tokens” that represent an interest in a legal entity that owns the property and distributes rental income according to ownership.
Real estate tokenization is still very new, which means firms are developing creative ways to divide property into tokens. Right now, there are two common setups:
- Special purpose vehicle (SPV): A standalone entity is formed to hold a single property or a defined portfolio. Investors can purchase interests in the SPV, which actually holds title to the real estate.
- Real estate investment trust (REIT): A subcategory of SPVs that have the benefits of a well-established legal and tax framework. Tokens can represent REIT shares, and the REIT operates like a traditional business, handling the maintenance, financing and ownership of property, while investors remain passive.
The distinction matters because instead of buying a building itself, which comes with its own set of legal risks and obligations, owning a share of a company or fund that manages property comes with a different risk profile. These structures demonstrate why tokenized real estate increasingly behaves like a security, and why it fits naturally into brokerage accounts and other securities-style portfolios.
What Role Does Blockchain or Crypto Have in Tokenized Real Estate?
Headlines tend to conflate tokenized real estate and cryptocurrencies, as if properties are being purchased in Bitcoin. The deeper trend, however, is that they are based on the same infrastructure — a “blockchain” ledger that acts as a public, tamper-resistant record of transactions and “smart contracts” that automatically execute transactions when certain criteria are met.
Smart contracts can be used to set parameters on the transfer of the tokenized assets and enforce security-like lock ups and jurisdiction limits. They can also be used to automate corporate actions typically handled by an exchange, like distributing rental income as dividends, processing buybacks and handling token splits. In an actively managed project, where token holders have a direct role in property development, the smart contracts can tally votes on capital calls, manager replacement, property acquisition and disposition decisions.
This transparency and automation, along with the added liquidity from dividing property and portfolios into retail-investor-sized shares, is why some predict that the global value of the tokenized real estate market will climb as high as $4 trillion in the next decade.
Why Traditional Investor-Broker Agreements Are Ill-equipped for Tokenized Real Estate
When property trades like a security (and according to the SEC, tokenized property might be a security, depending on the arrangement), it will quickly make its way into brokerage accounts and portfolios. These holdings, along with purchase and disposition mechanisms, are governed by an agreement with the brokerage or broker-dealer.
These agreements, however, have evolved broker-friendly tools that reduce operational friction, align settlement windows or manage liquidity and fees. When dealing with large-cap equities, those tools have a minuscule footprint. A $2 million property, traded as 1 million $2 tokens, however, will trade like a micro-cap company that magnifies traditional market risks.
For counsel, it is incredibly important to review these brokerage agreements and ensure that boilerplate language does not place undue risk on individual or corporate investors in tokenized assets.
Routing incentives and conflicts get louder in thin markets.
Modern brokerage involves real incentives around where and how orders are filled. Most brokerages have permission through their brokerage agreements to match orders internally or sequence orders in a particular way, which can increase demand for particular securities — or in this case, tokens. Some fee-free trading platforms may route orders to market makers or venues that purchase order flow or otherwise compensate the broker in return (known as “payment for order flow” or PFOF).
In high-volume markets, the effects of these tools can be imperceptible, amounting to a fraction of a percent on a given transaction. When working with small-cap SPVs or REITs, however, these routine brokerage tools could materially increase the prices at which investors’ orders are filled.
Small market vulnerabilities.
While every securities market is susceptible to manipulation, these risks are minimized in large markets with high liquidity. This is partially because the large market caps make it expensive to acquire substantial or controlling interests in a particular company. Think, for example, of the often-headlined short squeezes or pump-and-dumps that leave even savvy investors with significant losses. Tokenized real estate, on the other hand, is much more vulnerable to manipulation, and brokerage agreements will govern how these risks are allocated.
What Counsel Should Do Before Advising on Tokenized Real Estate.
Whether your client’s organization wants to issue tokens, invest in tokenized real estate or partner with a blockchain platform, it’s important to focus on execution, disclosure and governance issues early. Counsel should:
- Make sure that structures are clear, disclosing (or internally advising) that the investors are purchasing interests in an SPV or REIT (or similar vehicle) and not a deed;
- Negotiate order-handling terms instead of relying on boilerplate provisions, focusing on batching/aggregation practices and the broker’s internal order matching and self-prioritization rights, and
- Anticipate the issues that arise in small market cap equities, including allocating risk of loss from market halt/restart scenarios.
Tokenization may make real estate easier to buy and sell, but it also imports the realities of securities market structures into an asset class that historically avoided them. The firms that lead this space will be the ones that treat tokenized real estate as its own product and rebuild the investor-broker relationship around execution transparency and conflict management, instead of letting brokers default to self-serving tools that evolved in the context of traditional securities.