Introducing the Land Partnership A Co-ownership Approach Chris Cook London 23 May 2009 10/06/09

We live in Interesting Times….. 10/06/09

… .some say, “the end of the financial system as we know it” 10/06/09

Most people have now heard of Peak Oil.... 10/06/09

… .but in 2007 we reached the point of Peak Credit.... 10/06/09

...when the Irresistible Force of economic growth…. 10/06/09

...met the Immovable Object of finite resources... 10/06/09

Where did it all go wrong? 10/06/09

To find out, we need to understand what banks actually do.... 10/06/09

A Bank is a Credit Institution which creates credit as interest-bearing loans.... 10/06/09

... a Pyramid of Credit, on a base of “Regulatory Capital”... Bank Credit Bank Equity 10/06/09

...and this Credit constitutes >97% of the money we use.... 10/06/09

..but a Bank does not lend pre-existing money…. 10/06/09

… .it creates new money as interest–bearing credit…. 10/06/09

… .which is then deposited back into the system 10/06/09

But a Bank’s true economic function…. 10/06/09

...is as a Credit intermediary or middleman... Lender £ 10/06/09 Borrower

...stepping between borrower and lender... Lender ( Depositor ) £ £ 10/06/09 Bank Borrower

… and guaranteeing that the borrowers’ credit is good… 10/06/09

Interest is charged for the use of the guarantee Interest Borrowers 10/06/09 Bank

..from which Interest is paid to Depositors.. Bank Interest Depositors Interest 10/06/09 Borrowers

...Defaults and Operating costs deducted... Bank Interest Borrowers Depositors Interest Costs 10/06/09

..and a profit to Investors normally results Bank Interest Borrowers Depositors Interest Costs Investors 10/06/09

Demand for Credit has been so high… 10/06/09

… .that Banks began to “outsource” their guarantee to rid themselves of risk. 10/06/09

… and thus allow Equity to support more credit creation 10/06/09

Banks outsourced risk totally – through “securitising” debt and sale to investors…. 10/06/09

… temporarily – with “Credit Derivatives” (a time-limited guarantee)…. 10/06/09

… and partially – using credit insurance from insurers such as AIG 10/06/09

The Result is a bigger Credit Pyramid than Banks alone could sustain… Investor Equity Credit Bank Equity 10/06/09

… and a “shadow banking system” of Investors with “sliced and diced” risk… Investor Equity Credit Bank Equity 10/06/09

This extended Pyramid of Credit funded the “Mother of all Bubbles” in US property prices…. 10/06/09

… and servicing this credit finally exceeded the financial capacity of the US population... 10/06/09

… ..at the point of Peak Credit 10/06/09

In August 2007, the Bubble started to deflate and attention turned at last to defaults … 10/06/09

… but by now no-one knew where the risk lay… Investor Equity Credit Bank Equity 10/06/09

Banks started to think, “if this is what our balance sheet looks like…..” 10/06/09

“… what does everyone else’s look like…..?” 10/06/09

...and Banks stopped lending to each other 10/06/09

The Result? Equity Credit 10/06/09

Governments have ensured that there is no shortage of money - liquidity 10/06/09

The problem is a shortage of credit-worthy people to whom to lend it 10/06/09

Credit is both scarce and expensive…. 10/06/09

… Central Banks are irrelevant…. 10/06/09

… and further defaults in the shadow banking system….. 10/06/09

… .will continue to drain money out of the system in a “deflationary spiral”.... 10/06/09

… .leading inevitably to a Depression.... 10/06/09

So much for the Credit Crunch 10/06/09

Might the solution lie in investment, rather than debt? 10/06/09

When we talk about Investment we mean either “Equity” in a Limited Company.... 10/06/09

....a 19 th Century legal dinosaur 10/06/09

....which is what makes the private sector “Private” 10/06/09

...or we mean Debt secured by legal claims eg mortgages 10/06/09

...giving two conflicting claims over the same productive asset 10/06/09

But there’s a new furry animal out there.... 10/06/09

...the 21 st Century Limited Liability Partnership (LLP) 10/06/09

An LLP is a corporate body with limited liability.... 10/06/09

...and...errrr...that’s it!... 10/06/09

As far as the Tax Man is concerned it is a Partnership 10/06/09

It’s an “Open” Corporate where we can work with each other 10/06/09

... even without a written agreement 10/06/09

… and it is turning up all over the place ... 10/06/09

...even in the Public Sector, where Glasgow now has 4 municipal LLPs 10/06/09

The Hilton Deal was the first example I have seen of a “Capital Partnership”... 10/06/09

Capital Partnership - Hilton Deal 2002 Capital Partnership LLP 10 UK Hotels Gross Revenues Hotel Specialist % % % % % 10/06/09 Hilton Group Capital User Consortium LLP Capital Provider Bank Property Developer

This is how it works.... 10/06/09

Firstly, ownership of productive assets is transferred to a “Custodian”.... Assets Custodian Ownership 10/06/09

… then Investors put in Financial Capital in money, or “money’s worth”… 10/06/09 Assets Investors Custodian Ownership Financial Capital

… Managers put in Human Capital of time, expertise and experience.... Assets Investors Custodian Ownership Human Capital Financial Capital 10/06/09 Managers

… and Users pay for the use of this Capital… Assets Investors Payment % % Custodian Use 10/06/09 Users Managers

… resulting in a “Capital Partnership” Assets Investors Custodian 10/06/09 Users Managers

A “Capital Partnership” enables new forms of Equity… 10/06/09

Equity Shares - proportional (%age) ”n’ths” such as billionths..... 10/06/09

… ..which may be bought and sold, but never redeemed, because there must always be 100% 10/06/09

Redeemable Units – eg in Kilo Watt Hours; 10/06/09

...with a value in exchange, but with no continuing rights to production 10/06/09

Units hold their value because they are asset-based on value provided by the issuer … 10/06/09

… .rather than being deficit-based upon a claim over value issued by a Bank 10/06/09

How might Radical Routes members make use of a Land Partnership? 10/06/09

Let’s look at financing an existing Co-operative 10/06/09

The existing Co-operative entity is the Custodian Custodian 10/06/09 Houses

An affordable rental is set and index-linked Occupiers Custodian Rental 10/06/09 Houses

The beauty of affordable rents is that failure to pay is by definition unlikely 10/06/09

A Manager may receive a proportional Equity Share in the rentals.... Occupiers Custodian % Rental 10/06/09 Houses Manager

....so that with a stake in the outcome he has an interest in doing a good job... 10/06/09

....the rest is divided into % Equity Shares or “nth’s” and sold to Investors 10/06/09

Result - a Land Partnership Custodian % % Rental 10/06/09 Houses Investors Occupiers Managers

Occupiers may invest in Units simply by paying more rent than is due 10/06/09

...and then if they wish, they can simply pay their rent in Units, rather than £ 10/06/09

The result is a new form of Co-ownership between Occupiers and Investors 10/06/09

Co-owner Occupiers who maintain property may be given Units as “Sweat Equity” 10/06/09

Co-owner Investors receive an index-linked, property-based return... 10/06/09

..with low risk, since affordability=certainty.. 10/06/09

...perfect for long term investors looking for a low risk investment 10/06/09

Financial Outcome – Mortgage of £200,000 25 year loan at 6% gives repayments of £15,600 pa Plus maintenance 10/06/09

25 year loan at 6% gives repayments of £15,600 pa

Plus maintenance

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 maintenance Potential for an additional Land/Location Rental possibly Income related (cf Corani solidarity scheme) 10/06/09

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 maintenance

Potential for an additional Land/Location Rental possibly Income related (cf Corani solidarity scheme)

A Land Partnership is not an Organisation ... 10/06/09

...it does not own anything, do anything, employ anyone, or contract with anyone... 10/06/09

...it is a framework agreement within which Members self organise 10/06/09

For instance, Investors and Occupiers are both interested in Value for Money.... 10/06/09

...but finding a buyer for Units does not concern Occupiers...(unless they are also Investors)... 10/06/09

...whereas Investors don’t care how loud the Occupiers play music 10/06/09

Firstly, the Land Partnership agreement sets out the relationship between Member groups 10/06/09

...then each member group has a sub-agreement “Club Rules” for matters that concern them 10/06/09

So let’s replace conventional secured debt with a new form of Community Equity... 10/06/09

...simply by Unitising pools of Rentals 10/06/09

… and turn the Pyramid the right way up! Management Equity Investor Units Community Equity 10/06/09

It’s not Rocket Science 10/06/09

Thank You 10/06/09