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. 

What Is a SPV in Real Estate?

Since the 1980s, banks, developers, and investors have used SPVs to minimize financial and legal liabilities when making money from property-based assets.

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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. 

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Why Are SPVs Used in Real Estate? 

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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. 

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Many accounting loopholes make SPVs a good choice both for massive financial institutions and small landlords.

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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.)

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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. 

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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. 

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What iIs a Special Purpose Vehicle - Key Take-Aways

• A Special Purpose Vehicle (SPV) is a distinct entity established by a company to isolate financial risk and minimize the negative impact on the parent company and its investors. It serves various purposes, such as managing risk, securitizing debt, or consolidating capital for startup investments by venture capitalists.
• Corporations often create SPVs as separate companies with their own balance sheets to ring-fence specific activities or projects. By doing so, they can mitigate potential risks associated with those endeavors, shielding the parent company and its investors from adverse consequences. This allows corporations to pursue ventures that carry higher levels of risk without endangering the overall financial health of the organization.
• Additionally, SPVs can serve as holding companies for the securitization of debt. In this scenario, the SPV acquires a pool of debt assets from the originating company, issuing securities backed by those assets. This process allows the originating company to raise capital by transferring the debt burden to the SPV, reducing its direct exposure to the associated risks.
• Furthermore, venture capitalists utilize SPVs to consolidate capital from multiple investors, creating a pool of funds dedicated to investing in promising startups. This structure enables efficient management and allocation of resources, making it easier for venture capitalists to support early-stage companies and potentially earn significant returns on their investments.
• It is important to acknowledge that SPVs have been subject to misuse in the past. Some companies have utilized SPVs as vehicles to hide financial losses or manipulate financial statements. By transferring assets or liabilities to an SPV and keeping them off the parent company's balance sheet, these entities attempted to obscure the true financial condition of the organization. 
• While SPVs can provide legitimate benefits for managing financial risk and supporting specific investment activities, it is essential to ensure transparency and accountability in their use. Ideal transparency for SPVs can be achieved through open ledgers like the ones provided by blockchain, the way we do it here at MetaWealth. When properly used, SPVs can serve as valuable tools for corporations, investors, and financial markets, facilitating risk management and supporting economic growth, especially in real estate.

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The problem with traditional real estate SPVs

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While fractionalized real estate ownership isn't new, the idea of making it available to the masses in a free, open market is. 

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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. 

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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.

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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).

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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.

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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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