Co-ownership -
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 moneys 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.
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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
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