What’s the background of using trusts in regards to on-chain properties?
Trusts have been considered as an entity arrangement for putting real estate on-chain since the inception of the modern blockchain. We have explored existing bespoke trust models to create one that can act as a signpost to point to the valid owner, while fulfilling the necessary requirements at the state, county, and IRS level. The fabrica operating agreement model is flexible enough to incorporate any strategy from a jurisdictional perspective
Trusts have a long history of ownership of real estate for various purposes, including estate planning, tax benefits, and community goals. Bespoke trust models, such as the Illinois Land Trust and Massachusetts Business Trust, share similar characteristics with these traditional trusts. The Fabrica trust model is a nominee trust that can act as a signpost or a ledger entry to facilitate its enumerated goals and can be thought of as a not distinct or separate entity from its owner.
The Fabrica Trust is a nominee trust designed to allow the beneficial owner to use on-chain records and an NFT to represent ownership of the trust, which is the title owner of the real estate. Unlike a typical estate planning trust, the trustee has no individual rights or obligations beyond those instructed by the beneficiary. The beneficiary is the beneficial owner of the property, while the trust maintains record title ownership at the county.
When starting out, there were many different models being tested for representing real estate ownership on-chain. The Fabrica Trust model was developed by incorporating elements from research papers on trusts, as well as information from various LLC agreements and a history of nominee trust styles, such as the Illinois Land Trust and Massachusetts Business Trust. The Fabrica Trust model is a unique tool that was developed by morphing these existing styles into a new and innovative solution for representing real estate ownership on-chain.
We’ve used the term “operating agreement” because the Fabrica Trust model is just one example of an operating agreement that can be used to wrap real estate title and facilitate its transfer and use on-chain. The protocol is open source and allows for experimentation with different models and operating agreements, as long as they are validated by a trusted party. While the Fabrica Trust model works in the jurisdictions where the company operates, operating agreements in other countries may look different to fit local laws and practices.
Fabrica decided to go with a bespoke trust model rather than an LLC for two main reasons. The first is cost, for example, LLCs in California that own real property are subject to an $800 annual tax, which can be prohibitive for some users. The second reason is the potential liability that comes with purchasing the interests of an LLC, as the liability could be maintained across transfers and someone may unknowingly assume responsibility for a previous owner's liabilities. We believe the Fabrica Trust model does not have the same characteristics, but this position is open to interpretation and further testing.
After a transfer of an NFT, Fabrica always notifies the relevant county that a transfer has occurred at the dollar value of the transaction. Fabrica has had several hundred on-chain transactions and has received regulatory feedback on its process in some states, such as Colorado and California. After 24 months of back and forth with California counties and the Board of Equalization, Fabrica received a non-binding opinion letter stating that its transfers of trust look like transfers of real property for tax purposes. Fabrica's experience, connections to counties, and commitment to keeping counties updated on ownership of tokens and property are key value adds of its model.
Fabrica was the first company to have a transaction occur completely on-chain where a county record was simply updated with an administrative document after the fact. Typically we see other companies completing a transaction through the county first and then updating the chain to reflect that transaction that has already taken place. The conversation with the BOE (Board of Equalization) around a token transfer and a Fabrica Trust was significant as it affirms that on-chain records can be the source of truth for property records.
One of Fabrica's core principles is treating the chain as the final source of truth for real estate ownership. By doing so, the NFT can more accurately reflect the true title of the property. We are the first company to receive administrative approval of transfers that happened exclusively on-chain, without any recorded or signed deed. Fabrica believes that treating the chain as a mirror of recorded documents and the county record does not add value to the chain but only adds cost to title transactions. The goal is to remove cost from title transactions.
When creating a token that represents real estate ownership, Fabrica takes several processes: We perform title checks, reviewing the chain of title, past owners, and deeds to ensure that the information lines up. We also verify the legal description and geo cords provided by the user, as well as the status and authority of any entities being used. We also check for any encumbrances or outstanding liens on the property and represent them on-chain if necessary. The company checks wallet addresses and usernames against OFAC restrictions to ensure compliance.
Fabrica ensures that the person loading the property is the actual owner through various methods, including identity checks, property searches, and data reports. The company verifies both the person's identity and ownership of the property, even when it's held in an entity like an LLC.
The validator model is a system that allows Fabrica and other entities to act as on-chain title companies and validate the authenticity of tokens. Fabrica is one of the validators, and other sophisticated entities can become validators as well by demonstrating a set of discrete checks that provide confidence and value to tokens. Fabrica provides its own confidence score, while other validators may produce their own models of confidence. The goal is for users to transact with confidence based on the best-in-class comparison of different validators and service providers. Fabrica differentiates itself based on its service, background, and expertise.
If you have a piece of Land that you'd like to bring on-chain you can do so here.
If you don’t own a property, you can see some land that’s already an NFT here.
And to learn more about how Fabrica works you can review our docs here.