You may recall in last summer’s edition; we explored how Bitcoin adoption could reshape real estate—the world’s largest asset class—and concluded that the two will coexist in a mutually beneficial relationship. Real estate investors can approach this from two perspectives: treasury (cash) management or collateral. I’m looking forward to addressing collateral, but for now, my focus is on treasury/cash management. 

In recent years, as investors grapple with inflation and changing economic dynamics, commercial real estate investors are increasingly exploring strategies to optimize their holdings. One critical yet often overlooked pillar in long-term real estate success is treasury management. Many property owners already focus on physical improvements, energy efficiency, technology, and amenities to drive value. However, an evolving economic landscape necessitates a fifth area of focus: strategic treasury management. This approach includes diversifying a portion of cash reserves into assets like Bitcoin instead of holding them exclusively in U.S. dollars, a move that has gained traction among investors looking to protect and potentially grow their capital.

The U.S. dollar has long been a mainstay in treasury reserves, but with persistent inflation eroding its purchasing power, relying solely on cash reserves may no longer be prudent. Since the 1970s, the U.S. dollar has steadily depreciated, largely due to the inflationary nature of the fiat monetary system. In 1971, when the Gold Standard was suspended, the dollar ceased to be backed by a tangible asset, transforming it into a purely fiat currency. This transition paved the way for unlimited money supply expansion, contributing to an average 6.8% increase in the U.S. money supply each year since 1971. If you zoom in on the period from 2009 – today, the monetary base has expanded 9.8% per year. Meanwhile, commercial real estate assets have appreciated at an average annual rate of 4.4%, with residential real estate slightly higher at 5.7%. Despite these two appreciation rates, they fall short of the rapid increase in the cash supply, highlighting the real challenge: while property values rise, they fail to outpace the diminishing value of cash itself. 

This backdrop underscores a fundamental problem for property owners who rely on fixed lease escalations to offset rising operational costs. Standard annual escalations in commercial leases are typically set at 2-4%, which, while helpful, fails to keep pace with true inflationary pressures. In real terms, property owners are losing purchasing power over time, as these escalations are insufficient against both the cost increases tied to inflation and the continual printing of dollars. Holding significant cash reserves solely in U.S. dollars may therefore represent an unintentional erosion of your wealth. This is particularly relevant for real estate investors who depend on steady cash flow from their properties. Without proactive measures, they may face a decline in the net operating income (NOI) that directly impacts asset performance and long-term viability.

Bitcoin, with its unique properties as a deflationary asset, offers a compelling solution for real estate investors seeking to safeguard their capital and wealth. Since its inception, Bitcoin has shown remarkable resilience and growth, achieving a compounded annual growth rate (CAGR) of 70.77% from May 2013 to May 2023. Unlike fiat currencies which are subject to more cash being printed, Bitcoin has a finite supply capped at 21 million, a feature that fundamentally distinguishes it as a store of value. This limited supply means that as demand grows, Bitcoin’s value can appreciate in a way that fiat currencies cannot. By allocating a portion of your cash reserves into Bitcoin, property owners can potentially counterbalance the effects of inflation and accomplish three primary objectives: increase purchasing power, maintain adequate reserves and improve creditworthiness. 

For investors contemplating this approach, two distinct strategies emerge. First, for those with a consistent cash flow, a portion of free cash flow can be directed toward Bitcoin holdings. The exact percentage may vary, with some investors comfortable with an allocation as low as 5% and others as high as 50%. This allocation largely depends on the specific financial structure and cash flow needs of each property, but the primary criterion is identifying a portion of the cash flow that can be designated as long-term savings. 

Example: Office building with $500,000 in annual cash flow. By allocating 10% to Bitcoin, you retain $450,000 for immediate needs. Over 5 years, assuming Bitcoin’s 5-year historical CAGR of 55%, your Bitcoin treasury could appreciate to $1,580,000 versus the $250,000 you would have in dollar-denominated reserves. 

The second approach is tailored to property owners with assets that are free and clear of debt. In this scenario, an owner might consider leveraging their property by taking out a loan and using the proceeds to purchase Bitcoin. This strategy may sound unconventional, but it capitalizes on historically low interest rates in real estate financing and Bitcoin’s potential for appreciation. Key considerations in this approach include evaluating the loan-to-value (LTV) ratio, amortization period, and the investor’s tolerance for risk. Although this strategy requires careful planning, the potential benefits are significant. 

The decision to incorporate Bitcoin into treasury management is not just about capital preservation; it’s also a smart and strategic move to mitigate specific risks inherent in real estate investing. Liquidity risk is one such challenge. Real estate assets, while valuable, are illiquid by nature. During economic downturns, liquidating property can be time-consuming and costly. By holding Bitcoin, investors create a form of liquid reserve that can be accessed quickly if needed, thus providing a prudent layer of financial flexibility. This approach also addresses the rising costs associated with leasing. Securing a new tenant can be expensive, often eating up to 20-25% of the lease income due to marketing, tenant improvements, and broker commissions. Moreover, the leasing process can take anywhere from six to twelve months, during which the property may not generate income. By maintaining a diversified treasury that includes Bitcoin, investors are better positioned to weather vacancies and operational costs. 

In a practical sense, property owners must maintain sufficient reserves to cover monthly carrying costs, which include debt service, taxes, insurance, and maintenance. A best practice is to maintain a nine-to-twelve-month cash reserve of these expenses to ensure resilience against unexpected financial strains. By incorporating Bitcoin into these reserves, investors can preserve and grow their purchasing power, creating a buffer against inflationary pressures that continue to affect these operational costs.

Moreover, Bitcoin presents unique advantages from a tax and asset protection standpoint. Traditional treasury assets held in U.S. dollars are susceptible to inflation, taxation and congressional intervention—all of which erode value over time. Bitcoin, on the other hand, offers an alternative that, if held correctly, can mitigate these issues. Capital gains on Bitcoin can be strategically managed, and in some jurisdictions, holding periods can significantly reduce tax liabilities. Furthermore, Bitcoin provides a safeguard against the risk of confiscation, an aspect that has gained relevance as governments around the world reconsider wealth and tax policies. With Bitcoin held in self-custody, investors have direct control, ensuring a degree of security that is particularly attractive in uncertain economic times or shifts in political climates. 

As the global economy grapples with persistent inflation and monetary expansion, real estate investors must embrace innovative solutions to preserve and grow wealth. Bitcoin offers a forward-thinking approach to treasury management, providing liquidity, inflation protection, and tax advantages. In the next edition of CRE Insiders, we’ll explore how Bitcoin can enhance the capital stack, further integrating this digital asset into a comprehensive real estate strategy. 

Previous Editions:

• Summer 2024: Real Estate Risks & Opportunities in the Age of Bitcoin
• Winter 2023: Commercial Real Estate in an Exponential World
• Summer 2023: Future Proof Your Future

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