Sustainable Development &
Financing
Property Rights
Property ownership
rights - whether over land, financial assets, intellectual property - have
evolved in the West into two mutually exclusive absolute categories. In the UK,
the Law of Property Act 1925 gave us freehold (permanent) and leasehold
(temporary) for a defined term.
However, the unique flexibility of the UK legal system has allowed another
body of Law - Trust Law or ‘Equity’ - to develop over a thousand years or more
and permitting rights of use of land to augment these bare tenure rights
provided by statute thereby reflecting reality more flexibly and equitably. The
result is a minefield, which we are able to navigate only with expert legal
assistance.
However, as the Scots verdict of ‘not proven’ illustrates (as opposed to
either ‘guilty’ or ‘not guilty’), we need not deal in absolutes. So it is that a
new form of indefinite property right is now emerging based upon a new
relationship encompassing both rights of use and rights of ownership in a simple
common framework.
This ‘Co-ownership’ property right arises out of the new possibility of a
partnership between the ‘owner’ and the ‘user’ of property where the property is
owned in common by the partnership. The ‘User’ member then pays an agreed
‘Capital Rental’ to the ‘Owner’ member for the indefinite term for which he uses
the property.
This development in both the ownership of, and investment in, Land and
property is one of the unintended consequences of a recent innovation in UK
Partnership Law.
The UK Limited Liability
Partnership
On 6 April 2001 a new legal entity, the Limited
Liability Partnership (LLP), came into effect in order to protect professional
partnerships from the consequences of their own negligence.
Confusingly,
an LLP is not legally a partnership. It is, however - like a company - a
corporate body with a continuing legal existence independent of its members.
Also, as with a limited liability company, you cannot lose more than you invest
in an LLP.
Unlike a company there is no requirement for a Memorandum of Incorporation or
Articles of Association. It is also not subject to the body of legislation
governing the relationship between investors and other stakeholders, and
particularly the directors who act as their agents in managing the company.
The ‘LLP agreement’ between members is totally flexible. It need not
even be in writing, since simple provisions based upon partnership law apply by
way of default. Let us consider how this new legal tool may be applied in
respect of the investment in, and ownership and occupation of, land and
property.
The Community Land Partnership
("CLP")
A Community Land Partnership has four
Members.
(a) a Trustee Member - which holds the freehold of the Land
in perpetuity on behalf of the Community;
(b) an Occupier Member -
which consists of the community of individuals and/or enterprises which occupy
the Land and the property on it;
(c) an Investor Member - which
consists of the consortium of individuals and enterprises who invest money
and/or money's worth (such as the value of the land) in the CLP;
(d) a
Developer/ Operator Member, which provides development expertise and manages
the CLP once the development is complete.
Examples
1:- THE
LONDON OLYMPICS
This serves as an example of a reasonably high profile project. The
Investors are pension funds who are invited to invest in building high
quality and energy efficient homes to be used as the Olympic Village. Their
young members will then be invited to occupy these properties after the Olympics
are over by paying an inflation-linked rental set at an initial level sufficient
to provide a reasonable return on capital. The pension investors therefore
acquire a simple property-backed and inflation-linked rental stream perfectly
suited to match its long-term liabilities.
For
the
Occupiers there is an indefinite right of occupation
for as long as they pay the "Capital Rental": and if they choose to do so they
may choose not to pay in cash, but rather to transfer "equity shares" instead
from savings made previously, since if an Occupier pays rentals ahead of the due
date then he automatically becomes an Investor.
The
Community retains ownership of the Land and the Developer/Operator
obtains a reasonable reward in respect of the delivery and maintenance of a high
quality and energy efficient Olympic Village. The outcome is that that instead
of the council tax-payer funding the Olympic "Legacy" - the Legacy funds the
Olympics.
Example 2:- A COMMUNITY PROJECT
By way of further example a Community Land Partnership may acquire a piece of
land on which is built a school, a hospital or a new bridge. A reasonable
"capital rental" is agreed for the use of the property and the CLP is divided
into "n'ths" which consist of proportional shares in the rental revenues. Again,
such property-backed revenue shares are ideal for ethical investment at a local
level and are a close match for the requirement of pension funds for assets
yielding long term and inflation-linked revenue streams.
Example 3:- PRIVATE HOUSING
Another example is a small housing development of seven properties. Two of
the buildings will be converted into three units of 1-bed each while the other
five properties will be converted into five 1-bed units on the ground floor with
five 2-bed units on the two floors above. In addition to this space there will
be common space and facilities at ground level. In all this produces
accommodation for, say, 20 people in eleven 1-bed flats and five 2-bed flats.
Ground source heating and other energy-efficient features would be
installed.
(a) Finance
Each of the seven plots is worth £100,000 and the current value of the
buildings is 2x£125,000 and 5x£100,000. The rebuilding cost is £70,000 per
building or £490,000 so the total cost of the scheme, allowing £10,000
contingencies, is £1,950,000. The local council contributes £500,000 for a 50%
partnership in the land value (£350,000) and a 20% partnership interest in the
buildings (£150,000). The remaining £1,450,000 is contributed by an Investor
Member seeking an initial 3% return or £43,500 per year. Divided between the 20
occupiers members this is £2,175 each or just under £42 per week. This would be
inflation-linked and would therefore provide a real asset-based return of 3% to
the investor regardless of movement in interest rates.
Any rental above this figure paid by an occupying member would enable her/him
to acquire Equity Shares in the property and in so doing to reduce the rental
due in the future, to take a rental holiday or to build up savings.
(b) Fair Shares and Land Rental Units
In addition to the building rental members would pay a Land Rental under the
Community Land Partnership agreement. This Land Rental constitutes a
pre-distributive mechanism internal to the CLP and utilising two separate
parameters – Income and Land Use.
(i) Income Pooling
Assume a contribution to a ‘pool’ of 5% of income.
5 members on £50 per week state benefits pay in total £12.50
5 members on
£100 per week pay in total £25.00
5 members on £150 per week pay in total
£37.50
5 members on £200 per week pay in total
£50.00 |
The outcome is a levy of £125 per week which is then divided between the 20
members giving a dividend of £6.25 each. This could give a net rebate to those
on less than £125 per week and a net contribution by those earning more. The
effect is for the income component of land rentals to cross-subsidise the
building rentals for those least able to afford them. The contribution rate
could be higher or lower than 5%.
(ii) Land Use Pooling
The land occupied by the CLP members would be assessed using Land Rental
Units (LRUs). In the example five properties each occupy three units of land
while the other two are bigger and occupy five units – a total of 25 LRUs The
members agree a value payable per LRU by the occupants of each property into a
pool. Again net value transfers (payments or receipts) result from those having
most land use per person to those having least.
Members could decide to retain value in the pool to subsidise members in
adverse circumstances and there could be transfers in terms of ‘money’s worth’,
for example services rather than cash. The effect is similar to a form of
land-backed community currency. The methodology is in line with that of the Land
Value Tax proposed by Henry George and others.
|
It is worth noting that this ‘Capital Partnership’ mechanism has been in use
- albeit in prototype form - in the commercial world for over two years. For
instance, in late 2002 the Hilton group entered into a 27 year revenue sharing
agreement with a development finance consortium which invested £350m in an LLP
vehicle which acquired 10 UK hotels. There was no mortgage or interest and
neither was there a ‘sale and leaseback’ of the freehold.
Encouraging Sustainable
Development
Existing modes of development encourage, even
mandate, sociopathic behaviour on the part of property developers. Land is
acquired and developed with borrowed money secured by a mortgage on the
property. The developer is motivated to develop as quickly as possible and as
cheaply as possible with no real regard for the long-term consequences in terms
of the energy efficiency and ‘liveability’ of the project beyond that which he
is mandated to provide.
The CLP model is entirely different. The
developer does not buy and sell the land but instead acquires shares in the
revenues which will flow over time from its successful and sustainable
development and operation. The more energy efficient the development, and the
better the quality, the less money is necessary to pay for repairs and for
heating and the higher the rental value will therefore be.
Conclusion
We see in the new LLP legal
form an innovative mechanism enabling new solutions to be provided in respect of
the problems set out elsewhere in this Memorandum. Through the concept of
‘co-ownership’, and the ‘asset-based finance’ which flows from it, we see the
possibility of a truly sustainable development model where it is in the
interests of developers to develop property that is energy efficient and
sustainable rather than the reverse.
Chris Cook
Originally published as Appendix 15 of the Zacchaeus
2000 Report to the Prime Minister on Unaffordable Housing, in May 2005. Download as Word Document
Ref Open Capital Theory on following link
http://www.opencapital.net/theory.htm
