Real estate hybrid funds challenge DATs with mix of property and Bitcoin

Most crypto treasury companies today lack an operational business that generates cash flow to finance additional digital asset purchases.

Real estate investor Grant Cardone is expanding its multifamily housing fund strategy that pairs a traditional commercial property with Bitcoin allocations, offering a hybrid approach to real estate and digital asset exposure.

The company recently launched its fifth commercial multifamily investment property, a 366-unit multifamily housing complex that was purchased for about $235 million, with $100 million in Bitcoin (BTC) added to the fund, Cardone told Cointelegraph.

Real estates low volatility, tax benefits, income generation and stable value combined with the high volatility of Bitcoin gives the fund the best of both worlds, allowing it to funnel rental income into more BTC purchases, Cardone said. He added:

“The goal is to take that vehicle public and turn it into shares. We believe the real estate and the bitcoin combined as a stock, trading as a public company, is like digital asset treasuries. But we have a real product, a real asset, real income, real tenants, real customers. We have free cash flow.”

Projections for the 10x Boca Raton Bitcoin Fund. Source: Cardone Capital

“That property will do $10 million worth of net operating income a year that we can use to buy more Bitcoin,” he said.

This combination could allow the incorporation of new strategies into real estate investment trusts (REITs), portfolios of physical properties listed on stock exchanges that provide investors with passive exposure to real estate.

Related: Metaplanets Bitcoin gains fall 39% as October crash pressures corporate treasuries

Crypto treasuries with no operating business pose structural vulnerabilities

Most crypto treasury companies raise funds through issuing corporate debt and equity to finance purchases, but do not have an operating business that generates cash flow.

“If the company's just bitcoin, why am I investing in that company？ Real estate is the best treasury company you can build because it's not a product that is discretionary — you have to buy housing,” Cardone said.

The Boca Raton property. Source: Cardone Capital

The lack of operational businesses is one reason only a handful of treasury companies will survive the next crypto market downturn, according to venture capital firm Breed.

Treasury companies experienced a broad downturn in September as the multiple on net asset value (mNAV), or the price premium above a companys total asset holdings, collapsed.

When mNAV is above one, these treasury companies can borrow more funds to finance purchases, but when mNAV contracts to 1 or less, access to financing dries up.

This can lead to a situation in which overleveraged companies, unable to meet their debt servicing costs, are either forced to offload their cryptocurrencies on the market to pay down debt — driving down asset prices further — or declare bankruptcy.