Introduction
Navigating the complexities of real estate lending can be challenging. But imagine lending securely against tangible real estate assets—solid collateral that not only protects your investment but also offers attractive returns. With Fabrica, you can enjoy attractive returns backed by real land, coupled with the transparency and efficiency of blockchain technology.
This guide will show you how Fabrica bridges traditional real estate with cutting-edge blockchain solutions, offering you secure and innovative lending opportunities.
In this guide (specifically written for lenders), we’ll explain how Fabrica’s system works, address common questions and concerns, and outline the rights and obligations of both lenders and borrowers. Whether you’re new to blockchain technology or an experienced lender seeking to diversify your portfolio, this resource will help you understand the mechanics, benefits, and security measures of lending against onchain real estate assets.
What is Fabrica?
Fabrica is a platform that digitizes ownership of real estate—currently focused on plots of land in the United States—by representing them as property tokens onchain. Ownership of a Fabrica token grants full rights to the underlying property it represents.
In other words, by acquiring the token, you become the legal owner of the real property.
This innovative approach combines the speed, transparency, and efficiency of blockchain technology with the security and legal recognition of traditional real estate ownership.
How Fabrica Works
The Underlying Mechanism
Each property token is linked to a trust—a legal instrument similar to an entity for the purposes of this article. Ownership of the property is recorded at the local jurisdiction (at the county in the USA) in the name of the trust, which serves as a bridge between the token and the property itself.
For instance, consider APN 074-142-22 located in Santa Cruz County, California. The legal title to this property is held by the Fabrica S7BH3N82F5F26 Trust, as recorded at the county recorder’s office. Ownership of the property token—specifically NFT #14544113128183520803—corresponds to beneficial ownership of this trust. By holding this property token, you become the legal beneficiary of the trust that owns Property APN 074-142-22, granting you full rights to the property through the trust, verifiable both on the blockchain and at the county recorder.
Specifics of the trust agreement:
Beneficial Ownership: The beneficial ownership of the trust is represented by and follows the property token.
Transfers: Transfers of the property token act as a full transfer and assignment of beneficial ownership and control of the trust.
Restrictions: The trust agreement restricts the transfer of the real estate out of the trust without first burning the property token, preventing a "double spend".
Notification: On transfer of the property token, Fabrica notifies the county and assists owners in submitting any required administrative documentation.
Termination: The trust can be dissolved at any time by burning the property token and transferring the property out of the trust via deed.
Read more about onchain land ownership
Read more about the Fabrica Trust Agreement
Lending on Fabrica
Real estate has long been a cornerstone of secure lending due to its tangible value and historical appreciation. Lending against real estate provides an investment opportunity, backed by scarce assets. With Fabrica’s onchain properties, you can leverage the benefits of real estate lending combined with the speed, efficiency and transparency of blockchain technology.
How Does Lending Work?
When property owners wish to take a loan against their asset, the property token is used as collateral by the lending protocol and held in a smart contract until the loan is paid off. Upon repayment of the loan, the token is returned to the borrower.
The mechanics of the loan depend on the specific lending protocol used, but the key functionality provided by Fabrica is the secure connection between the token and the underlying property.
Security for Lenders
Fabrica has designed its system to provide lenders with certainty and security:
UCC Article 8: The trust agreement includes an opt-in under Article 8 of the Uniform Commercial Code (UCC). This allows lenders to perfect their security interest in the Fabrica property token without any filing or recording. In the event of default, lenders can have certainty in their ability to take possession of the collateral.
Reliable Collateral: Upon default, the property token serves as reliable collateral for the lender. Depending on the lending protocol, the token is either auctioned to repay the lender or can be instantly claimed by the lender, making them the new owner of the trust and the property. In all cases, the lender is positioned to recover their investment.
Legal Compliance: Fabrica has worked extensively with regulators and multiple law firms to ensure the platform’s compliance with legal requirements.
What Happens in Case of Default?
Different lending protocols handle defaults in different ways:
Direct Transfer: Some protocols will transfer the collateral (the property token) directly to the lender if the borrower defaults, unless borrower and lender find a different agreement.
Auction: Other protocols will auction the asset, use the proceeds to pay off the lender(s) for the amount due (including interests), and return any extra profit to the original borrower.
Options for Lenders After Default
If you receive a property token due to a defaulted loan, you have several options:
Sell the Token: You can list the property on the Fabrica native marketplace or other marketplaces. Land traders are often interested in acquiring properties below market value and typically attend traditional land auctions to acquire such properties.
Hold the Token: If owning land aligns with your portfolio strategy, you can hold the token and decide to sell it at a later time.
Develop or Utilize the Property: As the owner, you have the right to develop or utilize the property, subject to local building codes and regulations.
Remove the Property from Fabrica: As the token holder, you can redeem the token at any time to have the property recorded directly in your name, effectively dissolving the trust and burning its onchain representation. The property then reverts to the traditional system, allowing you to sell it using conventional intermediaries like deeds, real estate agents, notaries, lawyers, title agencies, and title insurance providers—though this process may involve additional complexity and expenses compared to the streamlined Fabrica platform.
Potential Benefits in Case of Default
Asset Acquisition Below Market Value: The lender may acquire the property at a value below market, providing an opportunity for profit upon resale.
Positive Equity: In certain loan types, if the property is worth more than the loan amount, the lender might stand to gain the difference upon default, depending on the lending protocol.
Borrower Eligibility
Depending on the lending protocol used and the preferences of the lenders, loan offers can be tailored to specific borrowers:
Only the Current Property Owner: The lender may choose to offer loans exclusively to the current owner of the property. This allows the lender to selectively offer financing to a specific borrower. If the property is sold, the existing loan offer will not be available to the new buyer.
Any Owner of the Property: The lender can make the loan offer available to the current owner as well as any future owners who acquire the property while the loan offer is still active. This provides flexibility for both the lender and any subsequent owners.
A Specific Future Owner: The lender can limit the loan offer to a particular borrower who does not yet own the property but intends to purchase it. This is useful in scenarios where the lender and borrower have a pre-existing agreement or understanding.
Buy Now, Pay Later Option
Loan offers can also be utilized to acquire properties through a “buy now, pay later” arrangement:
Facilitated Acquisition: When a property is listed for sale, the platform automatically determines if the buyer can finance the purchase using one of the existing loan offers.
Down Payment: The buyer is charged only for the down payment at the time of purchase.
Concurrent Loan Initiation: The loan is initiated concurrently with the transaction from the seller to the buyer, streamlining the acquisition process.
This flexibility in borrower eligibility and financing options allows for a more dynamic and accessible lending environment on the Fabrica platform.
Rights and Obligations of Token Holders
Ownership Rights
By holding a property token, you are the beneficial owner of the property through the trust. This grants you:
Full Ownership Rights: You can enjoy, develop, or use the property as you see fit, in compliance with local laws and regulations.
Right to Income: You are entitled to all net income and receipts from the trust’s property.
Obligations
Property Taxes: You are responsible for property taxes and any other obligations associated with property ownership. Property taxes are usually paid once or twice a year and are based on a percentage of the assessed value of the property.
Don’t worry if you’re new to U.S. real estate—Fabrica makes this process seamless for you. We provide a mailbox system that automatically scans and forwards tax bills and other correspondence to you. Our platform monitors tax due dates and assists you in staying compliant, so you can focus on your investment without the administrative burden.
Compliance with Regulations: You must comply with local building codes and regulations when developing or utilizing the property.
Learn more about property maintenance on our help center.
Fabrica’s Assistance:
Mailbox System: Fabrica provides a mailbox system that automatically scans and forwards tax bills and any other regular correspondence to the current token holder and monitors if taxes are paid or due.
Administrative Support: Fabrica assists with any required administrative filings to the relevant county assessor when the property token is transferred.
Redeeming the Token for Traditional Title
At any moment, you can choose to burn the token, effectively terminating the trust and distributing its assets (the property) to you. After that, the token will no longer exist on the blockchain, and the property will be managed through traditional deeds and title intermediaries.
Valuation of Properties
Market Value
Similar to other non fungible asset classes, the market determines the value of a property based on its characteristics, features, location, and many other factors. No two properties are the same.
Estimations Provided by Fabrica
Third-Party Estimators: Fabrica exposes information from third-party estimators (such as Prycd) who use market data, advanced models and algorithms to estimate the property’s value and the confidence of that estimation.
Assessed Value: We also provide the latest known assessed value from the local jurisdiction. This value is used to determine property taxes but should not be considered the market value. In many cases, the assessed value is significantly below the actual market value due to limitations on how and when local jurisdictions can adjust assessed values.
Security and Continuity
What Happens If Fabrica Ceases Operations?
The trust setup is completely independent of Fabrica:
Trust Independence: Fabrica facilitates the creation of the trusts but does not own, operate, or manage them.
Ownership: The trusts are always owned directly by the token holders.
Smart Contracts: The smart contracts are permissionless and can operate independently, even in the absence of the Fabrica interface.
Token Standards: The token contract uses a standard Non Fungible Token (NFT - ERC-1155) that allows operation through other clients, such as OpenSea.
Open Source: The trust agreement and key tools are open-sourced and available on GitHub.
No Custodianship: Fabrica does not operate as a custodian; at all times, the assets are owned and controlled directly by their owners. You are in control, always.
Emergency Tools: Fabrica provides a separate, open-sourced emergency tool to burn tokens (an “escape hatch”) to terminate the trusts and distribute the assets. This tool can be operated directly by token holders.
Learn more about the topic on our help center.
While we’ve designed our system to operate independently in the unlikely event that Fabrica ceases operations, rest assured that we are a well-funded, high-growth startup committed to long-term success.
Compliance and Legal Framework
Nominee Trusts
Fabrica uses nominee trusts as legal wrappers to connect a piece of real estate to an NFT:
Role of Trustee: The trustee holds legal title to the property but acts only on the direction of the beneficiaries (the token holders).
Beneficial Ownership: The beneficiaries (token holders) are the owners of the property held in the trust and are responsible for all property taxes and other responsibilities.
Purpose: The trust allows the beneficial owner to utilize blockchain technology to manage ownership and facilitate transfers.
UCC Article 8 Opt-In
To provide lenders certainty and security, Fabrica’s trust model uses a UCC Article 8 opt-in:
Security Interest: This allows lenders to perfect their security interest in the Fabrica property token without any filing or recording.
Certainty in Default: In the event of default, lenders can have certainty in their ability to take possession of the collateral.
Frequently Asked Questions (FAQs)
What Is a Nominee Trust?
A nominee trust is a legal arrangement where the trustee holds legal title to the property but acts only on the direction of the beneficiaries (the token holders). This structure allows for the separation of legal title and beneficial ownership, facilitating the connection between the token and the property.
How Does the Trust Agreement Work?
Key terms of the trust agreement include:
Mere Titleholder: The trustee has no substantive responsibility other than serving as the titleholder and performing functions incidental to that role. The trustee can deal with the property only as directed by the beneficial owner(s).
Right to Income: The beneficial owner(s) is entitled to all net income and receipts from the trust’s property.
Termination: The beneficial owner(s) may terminate the trust at any time by burning the property token and transferring the property out of the trust by deed.
Ownership for Tax Purposes: The beneficial owner(s) is treated as the owner of the property for all federal, state, and local tax purposes.
Are There Examples of Successful Loan Recoveries?
As the platform grows, we anticipate sharing case studies and success stories of lenders who have successfully navigated defaults and recovered assets. This transparency will help build trust and demonstrate the effectiveness of the system. As of October 27th, 2024, no loans have defaulted on the current version of the protocol.
How Are Property Taxes Handled?
Notification System: Fabrica’s mailbox system automatically scans and forwards tax bills to the current token holder, if they've connected their wallet and provided an email address on our frontend application.
Monitoring: We monitor if taxes are paid or due, helping lenders as well as token holders stay informed and compliant with local tax obligations. Tax status is included in the confidence score that is exposed both on our frontend and as a NFT trait on NFT marketplaces.
Can I Operate Without the Fabrica Interface?
Yes. The smart contracts are permissionless and can be operated directly, even in the absence of the Fabrica interface. The token contract uses a standard (ERC-1155) that allows you to interact with the asset through other clients and platforms.
How to Offer Your First Loan
There are two different approaches to offering loans on Fabrica, each targeted at different types of investors, risk appetites, and levels of understanding of the underlying asset class.
Peer-to-Peer Lending
With peer-to-peer lending, lenders offer loans directly to borrowers. The terms of the loans can be finely tuned to the specific property with great flexibility. Lenders compete on loan offers and often develop advanced strategies by studying the underlying asset and qualifying borrowers.
Fabrica's primary peer-to-peer lending partner is NFTfi.com, one of the first leaders in the onchain lending space, which has orchestrated over $700M in loans.
You can offer a peer-to-peer loan on any property listed on Fabrica, whether it’s for sale or off-market. Simply browse the properties on our website, conduct your due diligence, and click on “Offer a Loan” to create and digitally sign your commitment, specifying the terms you’re offering. The property owner will be notified and can initiate the loan instantly, securely locking their property as collateral. This streamlined process offers a safe and modern way to connect with borrowers.
Pool-to-Peer Lending
With pool-to-peer lending, lenders deposit liquidity into a shared pool. The pool automatically deploys capital to borrowers who request a loan, using the estimated value of the property to set the terms. Lenders can specify their risk appetite by selecting the maximum terms (Loan-to-Value ratio and duration) of the loans they want to participate in. The pool automatically invests the capital on autopilot, efficiently allocating the resources of several lenders regardless of the amount each one deposited.
Fabrica’s primary pool-to-peer lending partner is MetaStreet, an innovative company that is creating efficient onchain capital markets for several asset classes.
To provide liquidity, head over to the Fabrica MetaStreet Pool and select the tranche that best matches your risk profile.
If you’re interested in articles that describe in detail how each protocol works and the strategies adopted by lenders, follow this blog closely and subscribe to updates.
Conclusion
Fabrica aims to provide a secure, efficient, and legally compliant platform to bring real estate assets into the future. By bridging the gap between blockchain technology and traditional real estate, we offer lenders and borrowers new opportunities while ensuring that all parties’ rights and obligations are clear and protected.
For any further questions or detailed discussions, please do not hesitate to reach out to our team on X (formerly Twitter), Discord or using the support chat on the marketplace.
Additional resources
NFTfi peer-to-peer lending
MetaStreet pool-to-peer lending
