HIP 7 - Commercial Real Estate ($CRE1p) as Collateral

Proposals
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HIP 7 - Commercial Real Estate ($CRE1p) as Collateral

This improvement proposal builds upon our strategic partnership with Finance Ventures, seeking to integrate the “CRE1p” token to be integrated as collateral in the Hifi Protocol. The intent is to facilitate Finance Ventures’ ability to extend credit to borrowers using Hifi’s DeFi infrastructure. The proposal sets a collateral ceiling of 20 CRE1p token, a fixed oracle value of $62,500 USD per CRE1p token, and a 125% collateralization ratio (80% loan-to-value).

The CRE1p Token is a digital representation of an operational commercial real estate property, its respective business revenues, and a personal guarantee of its respective owner. Similar to HIP 3 and the VW Micro Bus, Finance Ventures will originate loans to borrowers using this asset as collateral. Capital for the loan will be sourced from Hifi’s Protocol. The CRE1p Token cannot be liquidated on-chain, and so appropriate provisions exist in the contract for liquidation of the real-world asset.

The property is a 93-unit residential building built in 2001. The professionally managed facility is located in Utah, USA. A recent valuation of the property valued it at $7.85M. This proposal seeks to add a $1.25M fractional share of the asset, including personal guarantees from borrowers, to Hifi’s Protocol.

Details

Under the proposed Agreement of Association, Hifi DAO will enable Finance Ventures to leverage the Hifi lending protocol by utilizing the CRE1p Token as collateral to secure credit represented by hTokens.

As per the agreement’s conditions, there will be a collateral ceiling of 20 CRE1p tokens, which will have a fixed oracle value of $62,500 USD per CRE1p Token and a 125% collateralization ratio (80% loan-to-value). The collateral ceiling is set as a cap on the credit extended to Finance Ventures in this agreement.

Upon this proposal’s success, Hifi DAO will execute the necessary variable changes to the Hifi Protocol’s Fintroller. Hifi DAO will also enter into a legally binding Agreement of Association with Finance Ventures, which can be viewed here.

To safeguard Hifi DAO’s interests, Mainframe Group Inc. has been designated to monitor Finance Ventures’ monthly financial updates. Finance Ventures is required to comply with specific loan eligibility criteria to ensure that only high-quality loans are financed and must also provide regular monthly reports.

In case of a default by Finance Ventures’ borrower, an explicit collateral liquidation process is in place to ensure the recovery of the outstanding hTokens. More information about Hifi’s framework can be found on the blog, here.

Benefits

Increased TVL: With the ongoing success of HIP6: Hifi’s Liquidity Bootstrapping Effort, adding our commercial real estate as collateral increases utilization of our growing protocol liquidity and pushes us closer to our goal of getting to $25M in TVL!

Expanding Hifi’s Utility: The expanded partnership with Finance Ventures and integration of commercial real estate as a supported real-world asset extends Hifi’s real-world utility.

Expanding Strategic Partnerships: The partnership with Finance Ventures allows Hifi DAO to continue to expand its reach and engagement within the DeFi sector and traditional finance.

Risk Management: By establishing a collateral ceiling and a fixed oracle value, the proposal provides a balanced risk management approach while ensuring transparency and stability.

Voting

Upon majority approval, Hifi DAO will execute the partnership agreement with Finance Ventures and take the necessary technical steps to integrate CRE1p Token into the Hifi Protocol with the set collateral ceiling and fixed oracle value.

If the majority vote disapproves, no further action will be taken regarding this proposal.

It is recommended that DAO members review the full agreement for a comprehensive understanding before casting their votes.

The proposal is now live. Reminder that there is now a 48 hour voting delay before the voting snapshot is taken and voting begins. Please ensure you have delegation set up on your account if you wish to participate in this governance proposal.

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Is there any debt currently on the asset or any liens?

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Property is owned outright with no debt or liens currently. Great question!

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out of interest, is there further detail on the property that can be shared e.g. more precise location, images etc?

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Hi I only have two more questions will Mainframe Group Inc. be in charge of all RWA to do with hifi and who is running Mainframe Group Inc

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Mainframe Group, Inc. is the entity that employs the core team, sometimes referred to interchangeably as Hifi Labs. So ultimately, I am in charge of running Mainframe Group, Inc.

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You probably can understand that the owners were not too keen on wanting to post exact location and specifics as it begins to publicly disclose more sensitive details about their business that they’d like to avoid having more available online. Ultimately, the more important factors are the agreements between Hifi DAO and Finance Ventures, ensuring alignment and best practices. Already we restrict that entity from holding any balance from the protocol for any use outside of lending directly to their customers.

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It is obvious that Real Estate Collateral will totally benefit Hifi, and for that, you can count on me for full support. This is an amazing example of what can be done with RWAs.

However, from a commercial real-estate business perspective, how does this benefits Finance Venture?
What makes a commercial real-estate owner want to go to Hifi instead of somewhere else?

Also, how does Hifi plans to facilitate and market the OTC process for integrating future collaterals of the sort?

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What sort of criteria do you plan to use to assess whether or not the investment has been successful when considering similar investments?

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This is not an investment, it is permission to lend to borrowers using a specific type of collateral, in this case Commercial Real Estate with a personal guarantee from the borrowers. Success for the protocol here is having the loan repaid according to the terms of the loan.

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I’ve got a list of questions that need answers before I can confidently throw my support behind this vote.

Is the property fully residential, or does it have mixed-use elements? Specifically, how much space is dedicated to business versus residential? What’s the current vacancy rate? What is the age of the building, any insurance claims filed since its inception (?), reasons behind those claims.

Understanding the zoning specifics, including any grandfathered zoning rights, is crucial too.

Are there any structural concerns, such as leaks? What materials were used in construction – steel, wood? And let’s not forget about potential pest infestations. The history of the property, including its last sale price and the appraiser’s details, are also vital.

What is the shape of the roof? Is it flat or is there a slant to it?

We’ve been dividing the value Doug presented by the number of units, and while it looks promising on paper, diving deep into these details is essential for us not to repeat past oversights, like with the NFT project.

I’m not here to dwell on the past, though these unanswered questions make it hard to move forward & support without feeling like we might be overlooking key details again.

Feel like we owe it to ourselves to seek this information actively, ensuring our decisions are as informed as possible.

Thoughts?

change my mind I’m an open minded person. I just feel like voting on this with support with the limited information that we have is odd.

imagine you had $10,000 in your pocket and a family member came and asked you for a similar type of loan wouldn’t you wanna know a little bit more about the property?

I get that the owner doesn’t want to share but at the same time we’re giving them a two-year loan that they don’t have to make any payments on for two years at a fixed rate that’s a big deal. I feel like they should be wanting to share a little bit more.

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Have there been any appraisals or inspection reports we can see without seeing the address?

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I guess they do not want to answer any of your questions like they did the others above.

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Sorry for the belated response, I traveled to Oklahoma this week to checkin on the horses and work on some Crown Ribbon related efforts.

These are really good and valid questions @Hollywood41! With our framework we rely on Finance Ventures as the underwriter rather than relying on HIFI token holders to make every single underwriting decision. We are trying to strike a balance between sharing enough broad strokes for the community to be informed, without depending on the community to be the underwriters. It may be helpful to review the framework blog post linked above to understand the different roles and responsibilities within the framework. I can also appreciate your desire to be in the details to make the best decision. As we go forward, collateral will primarily be about keeping balance in the protocol and deciding how much credit to extend to broader categories. Right now we’re basically approving each loan that the core team works to coordinate behind the scenes, but in the future, in order to scale we’ll be approving broader categories with guardrail criteria for the lending partners to follow in their approved issuance of credit. And of corse as we learn by doing, we will iterate and improve our framework for bridging the CeFi world into DeFi.

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Just getting back from travel, that’s all.

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While these reports do exist, our goal here is not to take on the role of the underwriter as a community. Our job is to extend credit to the CeFi loan partner who’s job it is to do the underwriting within the guidelines we set. You should checkout the linked legal docs for more details about our guardrails.

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Absolutely, I voted as I did & intend to demonstrate my respect for you and the team (helping to meet quorum); voting against — it’s not because I’m against the concept ( the concept is great ). I just want more information and as a DAO — would love it if people would stand with me and ask for more you know, in this instance, where you sit, depends upon where you stand; so this is where I stand. if nobody is gonna ask for more information, then I would probably do the same thing as what is being presented — if I were in your position. Though genuinely, I’ve got to imagine at some point maybe on your drive home from work or something you have to giggle a little, thinking that everyone here is voting in support — without knowing anything about the property, lol! It could be the emperors new clothes and everyone just is supporting. if nobody is willing to stand up, like me, and demand more, so be it. Anyway, I believe that having someone who disagrees in a respectful and classy manner actually adds beauty and authenticity to the DAO, showing that we’re not all just blindly following but are a collection of diverse thinkers (even if I am a lone wolf representing my voters). I really appreciate you taking the time to respond. I did notice the difference in the amount of information provided compared to the Volkswagen vote (appraisals, location, photos). It leaves me a bit in the dark about what we’re voting on this time around — are we voting on the idea? or that the building is worthy as collateral. How can we vote without knowing anything!? & It’s even crazier to me that everyone is OK with it. Doesn’t anyone here think it’s like a little insane that everyone here is voting and support without knowing the address or seeing a profit and loss. I mean it’s 1.25 million dollars. You’ve gotta understand where I’m coming from even if you’re on the other side with a different point of view. However, I respect the majority’s decision and am completely on board with the team. I genuinely enjoy being part of this and am grateful for it. Just know that my disagreement comes from a place of respect.

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But the deadline hasn’t passed yet. So they did answer before

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@Diavolos Please disregard my previous message. I thought voting ended last night around 9pm. Not this morning at 9:39am.
Guess I need to go back to school and learn to read since I obviously cant.

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Appreciate the respect and willingness to participate in the vote and engage in discussions about the vote. There is a difference between this proposal and the VW Microbus, mainly because we wanted to do more story telling with it being our first real world asset, not because we expect that crowd sourcing underwriting of assets to token holders is a smart or scalable approach to RWAs.

What has been highlighted for me in our conversation is that there is a disconnect between your understanding of what is being voted on and what we the actual proposal is voting on. It may be nuanced or subtle, but I think it’s an important distinction.

It is the job of our lending partners, Finance Ventures in this case, to do the actual underwriting of the assets and we are voting to extend credit to them. We are not wanting or expecting token holders to do this assessment, that won’t scale. Imagine token holders needing to pay gas fee’s for every RWA loan that happens, we do not want that to be the case.

Going into RWAs we knew that our lending partners would not be willing to share details about their customers or much detail about specific collateral. Which is why we put in place, reporting requirements, audit provisions, and have designated Hifi Labs (Mainframe Group, Inc.) to represent the DAO’s interests if we find ourselves in a circumstance of needing legal representation or enforcement actions.

So as we progress, the credit we extend to our lending partners will look like a more broad definition of the terms under which they are allowed to lend DAO sourced funds.

In this particular case, since the asset being used as collateral was debt free property, an operating business, and a personal guarantee; we felt comfortable allowing for an 80% LTV. The personal guarantee in particular gives our lending partner and us, through our designee the right to pursue all the borrowers assets in the event of default and failure to repay the debt.

Ideally, we’d be able to say to our lending partners, anything that fits this same criteria you can lend up to XXX amount. Then they can source deals and pull money from the protocol without the need for a vote as soon as they have a borrower that meets our criteria. Our designee, monitors and represents the DAOs interests and holds lending partners accountable as needed.

Eventually, we hope that voting is just updating terms we are willing to lend against and adjustments to collateral caps to keep our protocol balanced with its overall exposure to specific collateral types.

I hope all that makes sense, you can see this come together if you read the legal docs that accompanied this proposal found here.

Happy to answer other question if you have them, and I’ll probably share parts of this in discord so others can learn from our discussion as well. We may need to do a breakdown as a blog post once I can better grasp where there are knowledge disconnects in the community.

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