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Introducing the Land Partnership
A Co-ownership Approach
Chris Cook
London
23 May 2009
10/04/23
We live in Interesting Times…..
10/04/23
….some say, “the end of the financial system as we know it”
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Most people have now heard of Peak Oil....
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….but in 2007 we reached the point of Peak Credit....
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...when the Irresistible Force of economic growth….
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...met the Immovable Object of finite resources...
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Where did it all go wrong?
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To find out, we need to understand what banks actually do....
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A Bank is a Credit Institution which creates credit as interest-bearing loans....
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... a Pyramid of Credit, on a base of “Regulatory Capital”...
Bank Credit
BankEquity
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...and this Credit constitutes >97% of the money we use....
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..but a Bank does not lend pre-existing money….
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….it creates new money as interest–bearing credit….
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….which is then deposited back into the system
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But a Bank’s true economic function….
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...is as a Credit intermediary or middleman...
Borrower LenderLender£
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...stepping between borrower and lender...
BankBorrower Lender(Depositor)Lender
(Depositor)£ £
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…and guaranteeing that the borrowers’ credit is good…
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Interest is charged for the use of the guarantee
Bank
Interest
BorrowersBorrowers
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..from which Interest is paid to Depositors..
BankBank
Interest
Borrowers
DepositorsDepositors
Interest
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...Defaults and Operating costs deducted...
BankBank
Interest
BorrowersBorrowers
DepositorsDepositors
InterestCosts
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..and a profit to Investors normally results
BankBank
Interest
BorrowersBorrowers
DepositorsDepositors
InterestCosts
InvestorsInvestors
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Demand for Credit has been so high…
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….that Banks began to “outsource” their guarantee to rid themselves of risk.
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…and thus allow Equity to support more credit creation
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Banks outsourced risk totally – through “securitising” debt and sale to investors….
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…temporarily – with “Credit Derivatives” (a time-limited guarantee)….
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…and partially – using credit insurance from insurers such as AIG
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The Result is a bigger Credit Pyramid than Banks alone could sustain…
Investor Equity
Credit
BankEquity
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…and a “shadow banking system” of Investors with “sliced and diced” risk…
Investor Equity
Credit
BankEquity
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This extended Pyramid of Credit funded the “Mother of all Bubbles” in US property prices….
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…and servicing this credit finally exceeded the financial capacity of the US population...
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…..at the point of Peak Credit
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In August 2007, the Bubble started to deflate and attention turned at last to defaults …
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…but by now no-one knew where the risk lay…
Investor Equity
Credit
BankEquity
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Banks started to think, “if this is what our balance sheet looks like…..”
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“…what does everyone else’s look like…..?”
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...and Banks stopped lending to each other
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The Result?
Equity
Credit
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Governments have ensured that there is no shortage of money - liquidity
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The problem is a shortage of credit-worthy people to whom to lend it
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Credit is both scarce and expensive….
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…Central Banks are irrelevant….
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…and further defaults in the shadow banking system…..
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….will continue to drain money out of the system in a “deflationary spiral”....
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….leading inevitably to a Depression....
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So much for the Credit Crunch
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Might the solution lie in investment, rather than debt?
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When we talk about Investment we mean either “Equity” in a Limited Company....
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....a 19th Century legal dinosaur
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....which is what makes the private sector “Private”
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...or we mean Debt secured by legal claims eg mortgages
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...giving two conflicting claims over the same productive asset
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But there’s a new furry animal out there....
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...the 21st Century Limited Liability Partnership (LLP)
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An LLP is a corporate body with limited liability....
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...and...errrr...that’s it!...
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As far as the Tax Man is concerned it is a Partnership
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It’s an “Open” Corporate where we can work with each other
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... even without a written agreement
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…and it is turning up all over the place ...
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...even in the Public Sector, where Glasgow now has 4 municipal LLPs
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The Hilton Deal was the first example I have seen of a “Capital Partnership”...
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Capital Partnership - Hilton Deal 2002
Capital Partnership LLP10 UK Hotels
Gross Revenues
Hilton GroupCapital User
Consortium LLP Capital Provider
Bank PropertyDeveloper
HotelSpecialist
% %
%%%
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This is how it works....
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Firstly, ownership of productive assets is transferred to a “Custodian”....
AssetsAssets CustodianCustodianOwnership
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…then Investors put in Financial Capital in money, or “money’s worth”…
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AssetsAssets
Investors
CustodianCustodianOwnership
Financial Capital
…Managers put in Human Capital of time, expertise and experience....
AssetsAssets
Investors Managers
CustodianCustodianOwnership
HumanCapital
Financial Capital
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…and Users pay for the use of this Capital…
AssetsAssets
Investors
Users
Payment
Managers
% %
CustodianCustodian
Use
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…resulting in a “Capital Partnership”
AssetsAssets
Investors
Users
Managers
CustodianCustodian
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A “Capital Partnership” enables new forms of Equity…
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Equity Shares - proportional (%age) ”n’ths” such as billionths.....
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…..which may be bought and sold, but never redeemed, because there must always be 100%
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Redeemable Units – eg in Kilo Watt Hours;
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...with a value in exchange, but with no continuing rights to production
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Units hold their value because they are asset-based on value provided by the issuer …
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….rather than being deficit-based upon a claim over value issued by a Bank
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How might Radical Routes members make use of a Land Partnership?
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Let’s look at financing an existing Co-operative
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The existing Co-operative entity is the Custodian
Houses CustodianCustodian
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An affordable rental is set and index-linked
Houses
OccupiersOccupiers
CustodianCustodian
Rental
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The beauty of affordable rents is that failure to pay is by definition unlikely
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A Manager may receive a proportional Equity Share in the rentals....
Houses
OccupiersOccupiers
Manager
CustodianCustodian
%
Rental
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....so that with a stake in the outcome he has an interest in doing a good job...
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....the rest is divided into % Equity Shares or “nth’s” and sold to Investors
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Result - a Land Partnership
Houses
Investors
Occupiers
Managers
CustodianCustodian
% %
Rental
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Occupiers may invest in Units simply by paying more rent than is due
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...and then if they wish, they can simply pay their rent in Units, rather than £
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The result is a new form of Co-ownership between Occupiers and Investors
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Co-owner Occupiers who maintain property may be given Units as “Sweat Equity”
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Co-owner Investors receive an index-linked, property-based return...
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..with low risk, since affordability=certainty..
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...perfect for long term investors looking for a low risk investment
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Financial Outcome – Mortgage of £200,000
25 year loan at 6% gives repayments of £15,600 pa
Plus maintenance
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Financial Outcome – Investment of £200,000
Initial Capital Rental @ 3% gives rental of £6,000 initially, rising with inflation
Sinking fund over expected life of the building (land does not depreciate) – say 2% of £100,000 building value = £2,000 initially
Plus maintenancePotential for an additional Land/Location Rental
possibly Income related (cf Corani solidarity scheme)
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A Land Partnership is not an Organisation...
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...it does not own anything, do anything, employ anyone, or contract with anyone...
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...it is a framework agreement within which Members self organise
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For instance, Investors and Occupiers are both interested in Value for Money....
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...but finding a buyer for Units does not concern Occupiers...(unless they are also Investors)...
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...whereas Investors don’t care how loud the Occupiers play music
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Firstly, the Land Partnership agreement sets out the relationship between Member groups
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...then each member group has a sub-agreement “Club Rules” for matters that concern them
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So let’s replace conventional secured debt with a new form of Community Equity...
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...simply by Unitising pools of Rentals
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…and turn the Pyramid the right way up!
Management Equity
Investor
Units
Community Equity
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It’s not Rocket Science
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Thank You
10/04/23
