🏦 Understanding Escrows in Tokenized Real Estate on SecondaryDAO

📘 What Is an Escrow?

In real estate, an escrow is a reserve of funds set aside to cover future property-related obligations. On the SecondaryDAO platform, escrows serve as financial safety mechanisms that ensure each tokenized property remains operational by covering both fixed and variable costs. This structure helps stabilize investor returns even in periods of uncertainty.

Escrows are not fees or hidden charges. They are planned reserves designed to protect against cash flow interruptions from predictable expenses like property taxes, insurance premiums, maintenance costs, and periods of vacancy.

Escrow Types on SecondaryDAO

Initial Escrow (Funded at Property Raise)

The Initial Escrow is fully capitalized as part of the total investment raise for each property. It includes all anticipated operating obligations and reserve requirements for the first year. This amount is raised in addition to the seller's net offer and is placed in a DAO-controlled wallet.

Formula:
Total Raise = Net Offer to Seller + Initial Escrow

Components of the Initial Escrow may include:

• First-year property taxes (prepaid)

• First-year landlord insurance (prepaid)

• Maintenance reserve (typically 5% of purchase price)

• Vacancy reserve (typically 2% of annual gross rent)

• Deferred maintenance (if applicable)

• DAO listing fee

• LLC setup, admin, and legal filing costs

• Appraisal and/or inspection fees

• Transfer taxes and real estate closing costs

By fully funding these obligations at acquisition, SecondaryDAO ensures the property has sufficient resources from day one, reducing reliance on rent flow to maintain operations early in the holding period.

Normalized Escrow (Required Operating Reserve)

Following acquisition, SecondaryDAO maintains a Normalized Escrow—a minimum balance held throughout the holding period. This operational buffer must remain funded to ensure resilience in the face of financial disruptions or emergencies.

Normalized Escrow typically includes:

• 1 year of property taxes

• 1 year of landlord insurance

• Maintenance reserve (rolling)

• Vacancy reserve (rolling)

This escrow balance is not distributed to investors. It is used only when necessary and must be replenished promptly through a structured build-back process.

What Is Escrow Build-Back?

Escrow build-back is the system's method for replenishing the Normalized Escrow when its balance falls below the required threshold. Before rental income is distributed to investors, a portion may be withheld to rebuild the reserve to its target level.

Example:
If the required escrow is $3,000 and the balance drops to $1,800, the shortfall is $1,200. The DAO will withhold a portion of rent until the escrow is restored.

How the Build-Back Rate Is Calculated

The monthly withholding amount is determined based on:

• The size of the escrow shortfall

• The number of months remaining in the fiscal year

• A system-defined cap that protects investor distributions from excessive suppression

Formula:
Monthly Build-Back = MIN(MaxRate, Shortfall ÷ MonthsRemaining)

Example:
Shortfall = $1,200
Months remaining = 10
Max rate = $200/month
The system applies $120/month until the escrow is restored.

Escrow Withholding Strategy Breakdown

The platform employs a tiered strategy that adjusts withholding intensity based on the severity of the shortfall:

Most Aggressive (Emergency Rebuilding)

• Shortfall: 75% or more of required escrow

• Withholding: 90% of rental income

• Investor Distribution: 10%

• Strategy: EMERGENCY_ESCROW_REBUILDING

Very Aggressive (Current Scenario Example)

• Shortfall: 50–74%

• Withholding: 75% of rental income

• Investor Distribution: 25%

• Strategy: AGGRESSIVE_ESCROW_REBUILDING

Moderate (Standard Rebuilding)

• Shortfall: 25–49%

• Withholding: 50% of rental income

• Investor Distribution: 50%

• Strategy: STANDARD_ESCROW_REBUILDING

Minimal (Targeted Rebuilding)

• Shortfall: Less than 25%

• Withholding: Only the amount required monthly

• Investor Distribution: Majority of rental income

• Strategy: TARGETED_ESCROW_REBUILDING

Fully Funded (No Withholding)

• Shortfall: 0%

• Withholding: 0%

• Investor Distribution: 100%

• Strategy: FULL_RENT_DISTRIBUTION

Application Example

Let’s assume the Normalized Escrow target is $3,000.

Scenario A – Emergency Level Shortfall
Current Balance: $500
Shortfall: $2,500 (83%)
Result: 90% of rent withheld, 10% distributed to token holders

Scenario B – Aggressive Level Shortfall
Current Balance: $1,200
Shortfall: $1,800 (60%)
Result: 75% of rent withheld, 25% distributed to token holders

Scenario C – Moderate Level Shortfall
Current Balance: $2,000
Shortfall: $1,000 (33%)
Result: 50% of rent withheld, 50% distributed

Scenario D – Minimal Shortfall
Current Balance: $2,400
Shortfall: $600 (20%)
Result: Only the required monthly portion is withheld (e.g., $60/month)

Scenario E – Fully Funded
Current Balance: $3,000
Shortfall: $0
Result: No withholding, 100% rent distributed

Why Escrow Matters to Investors

Protects Cash Distributions
Ensures investor payouts aren’t interrupted by maintenance, tax deadlines, or insurance lapses.

Promotes Operational Stability
Keeps properties compliant and liquid, even during vacancies or economic stress.

Enhances Transparency
Escrow balances and rebuild status are visible on-chain and via your investor dashboard.

Supports Regulatory Compliance
Conforms to financial prudence standards and El Salvador’s CNAD DSAP licensing requirements.

How SecondaryDAO Manages Escrows

• Escrow requirements are included in all property offering summaries

• DAO-controlled wallets and smart contracts enforce escrow logic

• Rebuild schedules are automatically enforced based on shortfall severity

• Escrow status is reported through investor dashboards and periodic updates

• All balances are regularly audited and visible for investor assurance

Final Takeaway

Escrows are a cornerstone of risk-managed real estate tokenization. SecondaryDAO uses them to ensure each offering is operationally sound, financially resilient, and investor-aligned from day one. With smart, tiered build-back logic and on-chain transparency, investors can have confidence that their yield is protected by disciplined reserve management — not just assumptions about rent flow.