SAN JOSE — A housing tower in downtown San Jose is pushing ahead with a revamped proposal and a high-tech approach to raise the money needed to construct and complete the residential project.
Tower 27, as the development is called, would be a 24-story, eye-catching addition to San Jose’s skyline.
Dallas-based Alterra Worldwide is the principal owner and developer of Tower 27, a 374-unit residential that would sprout at 27 S. First St. in downtown San Jose if it’s built.
The project’s owners aim to catch the eyes of investors in a quest to raise $100 million to finance the tower’s development by using a security token offering, which is a digital system that enables investors to buy small chunks of ownership in the highrise.
“We believe that digitalization is the future of finance with the convenience, speed and global participation it provides,” said Ali Tuzmen, a board member with Alterra Worldwide and the project manager for Tower 27.
Blockchain technology will be used to track every transaction involving the security tokens held by investors in the project, including the buying and selling of any token that represents an investment stake in the project.
Tower 27 development executives acknowledge that their approach to raising $100 million for the project is an unusual — even unprecedented — approach to raising cash for a real estate endeavor. Alterra Worldwide is calling its investment offering the T27 Silicoin Security Token.
“Real estate security token is a brand-new concept, and we are one of the first adopters,” Tuzmen said. “At $100 million in size, the T27 Silicoin Security Token offering will be, by far, the largest single real estate security token offering ever made in the U.S.”
Perhaps the easiest way to think of a security token investment is that it bears similarities to the liquidity of owning shares in a publicly traded company.
“Security token offerings are essentially the digital representations of ownership of assets such as gold or real estate, or economic rights such as a share of profits or revenue,” Deloitte, the global accounting and consulting firm, stated in a 2020 report.
Still, some financial gremlins might haunt investors who jump into security token offerings, warned Kelly Snider, director of the real estate development certificate program and an urban and regional planning professor at San Jose State University.
“The developer is attempting a crowd-sourced, Go Fund Me style investment strategy, which is risky and unlikely to pass muster with any commercial lenders or insurance company in the U.S.,” Professor Snider said.
In early 2021, StarCity attempted to float a similar financial model to dangle real estate investment opportunities in front of small investors. The endeavor failed to jump off the launch pad. In mid-2021, Common Living struck a deal to buy the struggling StarCity.
“It (Tower 27) may get some traction with foreign investors but based on the size and advertised finishes and amenities, the construction cost will be $200 million-plus,” Snider said. “That’s a lot of Main Street investors and it’s hard to manage that way.”
Yet Tuzmen pointed out that security token offerings offer the ability to buy and sell investments of varying amounts in the project.
“Especially in the real estate market, which is highly illiquid, tokenization offers improved liquidity to investors,” Tuzmen said. “In addition, fractionalization provides investors the opportunity to invest in small amounts in real estate.”
Tower 27 won’t utilize opportunity zone financing for the project, despite the tax advantages offered by these financing vehicles. Opportunity zones are “too cumbersome,” Tuzmen said.
The security token offering for Tower 27 is slated to begin on Oct. 1, according to Tuzmen.
Alterra Worldwide, which is headed by Turkey-born business entrepreneur and real estate executive Mike Sarimsakci, has developed several projects successfully — and struggled to complete some projects.
The successful and completed developments include a luxurious Ritz Carlton hotel in Moscow and two big Dallas projects that might help revive that Texas city’s moribund downtown. Alterra Worldwide, though, has experienced hiccups in two other projects: the redevelopment of a St. Louis residential highrise as a hotel tower and the construction of a new hotel in Dallas.
With Tower 27, Alterra executives say they already have enough money to build the project now.
“We have secured all the funds in traditional financing methods necessary to develop Tower 27,” Alterra states on a website that describes the proposed tower and is soliciting investments. Alterra said that its belief in this new method of financing and desire to be a pioneer in such endeavors has prompted the company to crowdsource the funding.
In addition to hundreds of residences, Tower 27 would add 35,300 square feet of retail such as shops and restaurant spaces. It would tower over nearby structures, including the Bank of Italy historic building and an old bank highrise.
The proposed housing highrise might be so tall that it could dramatically overshadow that part of downtown San Jose, some prospective neighbors of the project warn.
Snider warns that because Tower 27 is an infill project in a neighborhood that features long-time buildings — some them historic — the project could encounter unexpected expenses.
But Alterra Worldwide says it aims to begin construction of Tower 27 sometime in the first half of 2022, complete the project by the end of 2024 and fill the tower with tenants by the end of 2025.
“If this project breaks ground it will be a sign that financing is available for high rise residential on hard to build sites,” said Bob Staedler, principal executive with Silicon Valley Synergy, a land-use consultancy.