Splitting Rent and Sale Proceeds — An Experiment in Senior and Junior Property Tokens
If a property becomes available in smaller investment units, will investors want to buy it?
We encountered this question while considering income-producing property during the development of Polsto, a security token offering platform. Representing rights to an asset as tokens can make investment units smaller. Smaller units alone, however, do not make the asset's cash flows more attractive.
Consider a property worth KRW 300 million that collects KRW 1 million in monthly rent. Its annual rental yield before expenses is 4%. Whether someone buys the whole property or a fraction of its rights, proportional distribution of the same rent still produces a 4% yield.
Investors may want different kinds of returns. One may prefer regular rental income. Another may be willing to give up current distributions in exchange for a larger share of the gain when the property is sold.
Could we allocate the money from the same asset to suit these two preferences?
This article explores the resulting senior and junior token idea through one numerical example. Security token offerings (STOs) provide the context; the design question is which cash flows and payment priorities investors receive. This is not a product with verified implementation or investor demand.
Start with the return on one property
Assume we purchase the following property and hold it for two years. These are illustrative inputs for explaining the allocation, not market averages or the returns of an actual listing.
| Item | Assumption |
|---|---|
| Purchase price | KRW 300 million |
| Monthly rental income | KRW 1 million |
| Annual rental income | KRW 12 million |
| Holding period | 2 years |
| Sale price in the appreciation scenario | KRW 330 million |
To simplify the calculation, there is no borrowing, and acquisition, holding, and sale expenses and taxes are excluded. All monthly rent is collected, and distributions are not reinvested.
Selling for KRW 330 million after two years produces KRW 24 million in rent and KRW 30 million in capital gain. Total profit is KRW 54 million: an 18% total return over two years on the original KRW 300 million.
Dividing that return by the two-year holding period gives a simple annual average of 9%. This is neither an internal rate of return (IRR) accounting for rental payment dates nor a compound annualized return.
Two different sources of return are combined here. Rent is cash flow during ownership, while the capital gain depends on the actual sale price two years later. If the price does not rise, there is no capital gain. If it falls, the investment can lose money overall despite collecting rent.
Equal contributions, different rights
Now suppose two investor groups contribute KRW 150 million each toward the KRW 300 million purchase. Instead of giving them identical proportional interests, we assign different rights.
| Term | Senior | Junior |
|---|---|---|
| Initial investment | KRW 150 million | KRW 150 million |
| Rent during ownership | Receives all rent | No allocation |
| Distribution at sale | Principal repaid first, up to KRW 150 million | Receives the remainder after senior repayment |
| Price appreciation | No share of capital gain | Receives all capital gain |
| Price decline | Principal losses after junior capital is exhausted | Bears principal losses first |
Sale proceeds flow through senior principal repayment, then the junior residual distribution. This sequence is commonly called a waterfall. The payment order is what makes the senior and junior distinction meaningful.
Separating rental income rights from capital gain rights does not by itself establish seniority. In this example, the repayment order at sale makes the junior group bear losses first. Investor.gov likewise describes tranches in terms of the priority of principal and interest payments. An explanation of tranches and payment priorities
These rules are one possible structure. Other designs could promise fixed interest to the senior group or allocate residual rent to the junior group. Here, only rent actually collected is paid to the senior group, with no promise to make up a rental shortfall later.
Who receives what at a KRW 330 million sale price?
First, apply the appreciation scenario described above.
The senior group receives KRW 24 million in rent over two years and recovers its KRW 150 million principal at sale. Its total profit is KRW 24 million, giving a two-year total return of 16% and a simple annual average of 8%.
The junior group receives no rent during ownership. It receives the KRW 180 million remaining from the KRW 330 million sale after the senior principal is repaid. Its profit is KRW 30 million, giving a two-year total return of 20% and a simple annual average of 10%.
| Result over two years | Senior | Junior |
|---|---|---|
| Rent received | KRW 24 million | KRW 0 |
| Sale proceeds received | KRW 150 million | KRW 180 million |
| Total profit excluding principal | KRW 24 million | KRW 30 million |
| Two-year total return | 16% | 20% |
| Simple annual average return | 8% | 10% |
For the junior group, which receives principal and profit only at the end of year two, a 20% total return is approximately 9.54% on a compound annualized basis. The table's 10% divides the total return by two for comparison.
The original annual rental yield was 4% of the whole asset's purchase price; it is now 8% of the senior group's investment. The capital gain was a simple annual average of 5% of the total investment; it is now 10% of the junior group's investment.
The denominator has halved. In exchange, the senior group gave up capital gains, and the junior group gave up rent.
Each group supplies half the total investment, so on a simple annual average basis, 50% × 8% + 50% × 10% = 9%. Their combined profit remains KRW 54 million. Dividing rights changes each investor's return profile while leaving the property's total income unchanged.
A falling price reveals the loss allocation
What happens if the sale price falls to KRW 270 million after two years?
The senior group receives its KRW 150 million principal first. The junior group receives the remaining KRW 120 million. The property price fell 10%, but the junior group lost 20% of its own principal.
The following table applies the same rules to several sale prices. It compares sale proceeds and principal gains or losses only, excluding rent. The junior group has no obligation to contribute beyond its investment.
| Sale price | Senior receives | Junior receives | Junior gain or loss on principal |
|---|---|---|---|
| KRW 330 million | KRW 150 million | KRW 180 million | +20% |
| KRW 300 million | KRW 150 million | KRW 150 million | 0% |
| KRW 270 million | KRW 150 million | KRW 120 million | −20% |
| KRW 150 million | KRW 150 million | KRW 0 | −100% |
| KRW 120 million | KRW 120 million | KRW 0 | −100% |
Junior capital of KRW 150 million absorbs the sale loss first. Once the sale price falls below that amount, the senior group also cannot recover its full principal. In the final row, it loses KRW 30 million of principal.
The accurate description of seniority is therefore “junior capital bears losses first.” This example's 50% cushion follows from assumptions that exclude borrowing and expenses. Other prior claims or disposal costs would change the amount available for distribution to investors.
Rental income needs separate consideration. If vacancy or unpaid rent reduces annual collections from KRW 12 million to KRW 9 million, the senior group's rental yield for that year falls from 8% to 6%. In this model, 8% is the result when all assumed rent is collected, not a guaranteed fixed interest rate.
Why would a junior investor participate?
The senior group's advantages are easy to see: all rent and priority repayment at sale. Who would accept the junior position, giving up rent while bearing price losses first?
The junior group gains exposure to price changes on an asset larger than its own contribution. It invests KRW 150 million and receives all capital gains on a KRW 300 million property. The same arrangement exposes it to the first losses from a decline. Until losses consume the entire junior investment, the percentage change in the property price translates into twice that percentage gain or loss on junior principal.
Whether this is attractive depends on the investor's view of appreciation and the holding period. If the sale price is unchanged after two years, the junior group receives only its principal back. A delayed sale means a longer wait without distributions, and the same eventual gain produces a lower annualized return.
A 50:50 split is therefore an easy starting point for explanation, not evidence that investors will accept it. The rental allocation to the senior group, the junior contribution, and sale timing and decision rights all need to be considered together. Changing the junior terms also changes the senior yield and loss cushion.
The product design question extends beyond the yield shown on a screen: will both investor groups actually accept the two sets of rights on offer? This example explains the allocation but does not establish that demand.
What rights should the tokens represent?
If represented as tokens, the senior and junior positions would refer to the same underlying asset while carrying different cash flows and payment priorities.
Before naming or counting the tokens, the design must specify which expenses are deducted, how reduced rent is handled, and who decides when to sell. It also needs a decision rule for disagreements between senior and junior investors over the sale date.
Those rules make the system's records and checks more concrete: who received rent for which period, how much each group received at sale, and whether the sum matches the amount actually available for distribution. If tokens can be transferred during ownership, the rules must also say whether accrued rental claims belong to the seller or the buyer.
This is a proposed cash flow allocation model. The legal construction and enforceability of rights required for an actual offering need separate review; this article does not determine the legal suitability of a particular structure.
The question during Polsto's development was whether an asset could support an attractive investment product. Working through the numbers makes that question more specific.
Who will accept the asset's income and losses, and on what terms?
Senior and junior structures help make those terms explicit. They can offer different choices to investors seeking rent and those expecting appreciation, provided the rights each group gives up and the losses it bears are explained together. Those allocation rules are what must be completed before the tokens are issued.