1. Co-ownership – a new funding approach Rental Pools and Unitisation Chris Cook NHF 'Funding Ideas' 12 October 2010

2. There are two conventional ways of raising finance: credit and investment 16/06/10

3. Investment is typically through Limited Companies and Trusts 16/06/10

4. Legal dinosaurs 16/06/10

5. Or loans secured by legal claims eg mortgages 16/06/10

6. Conflicting claims over the same assets 16/06/10

7. 21 st Century problems cannot be solved with 20 th century solutions 16/06/10

8. In 2001 a white knight came to the rescue The UK Limited Liability Partnership (LLP) 16/06/10

9. An LLP is a corporate body with limited liability 16/06/10

10. ...and...errrr...that’s it! 16/06/10

11. It’s an infinitely flexible 'Open' Corporate 16/06/10

12. There is not even a requirement for a written agreement 16/06/10

13. As far as the Tax Man is concerned it is a Partnership 16/06/10

14. LLPs are now in pervasive use for purposes never intended... 09/03/10

15. ...even in the Public Sector, where Glasgow has five municipal LLPs 09/03/10

16. Capital Partnership – Hilton Equity Release - 2002 Capital Partnership LLP 10 UK Hotels Gross Revenues Hilton Group Capital User Consortium LLP Capital Provider Bank Property Developer Hotel Specialist % % % % %

17. Capital Partnership Custodian Investors Users % % £ 16/06/10 Managers

18. Equity Shares - % age shares in revenues or production... 16/06/10

19. Units - redeemable in production or use 16/06/10

20. Case Study: “The Art of Flirting” – a film incorporated as an LLP 16/06/10

21. The actors received 'nth’s' of the gross revenues 16/06/10

22. My share was 5% and the producer the rest 16/06/10

23. But we needed lights, cameras, pizza, coffee 16/06/10

24. Two Capital Partners invested £ for 20% of revenues 16/06/10

25. If there are any 16/06/10

26. Art of Flirting LLP Custodian Financial Capital (Investors) Viewers % % £ 16/06/10 Human Capital (Actors, Producer, Me)

27. Everyone was on the same side 16/06/10

28. A Capital Partnership is not an Organisation 16/06/10

29. It does not own anything, do anything, employ anyone, or contract with anyone 16/06/10

30. It is simply a framework agreement within which the stakeholders self organise 16/06/10

31. Case Study: Albion Trust - a charitable Company Limited by Guarantee 16/06/10

32. Albion Trust provides affordable office space for social enterprises 16/06/10

33. Due to demand they bought a disused church next door 16/06/10

34. ...and planned a £4m development 16/06/10

35. But if they borrow, the rents will be unaffordable 16/06/10

36. Solution - an Albion Partnership? Custodian Investors Occupiers % % £ 16/06/10 Managers

37. Conventional property development is a transaction model: developer as middleman Developer Property Buyer £ £ Property Buyer £ 16/06/10 Land Owner

38. Borrow, Buy, Build and B...er Off... 16/06/10

39. Financed by Equity (ownership) and Debt (from credit institutions) 16/06/10

40. Capital Partnership offers a new approach to financing and funding 16/06/10

41. Financing - for short/medium term, high risk development of new assets 16/06/10

42. Funding - for long term, low risk use of newly complete or existing assets 16/06/10

43. Financing : Land held by/transferred to a Custodian Land Custodian 16/06/10

44. Land Owners become Investors Land Land Owners Custodian Land Value 16/06/10

45. Councils invest the value of planning permission Land Councils Custodian Value of Planning permission 16/06/10

46. Contractors invest at least the profit margin Land Contractors Custodian Profit Margin 16/06/10

47. Risk-Takers provide £ to pay Contractors’ agreed costs Land Risk-Takers Custodian £ 16/06/10

48. Developers invest 'Intellectual Capital' of concept and services Land Investors Land-owners, Councils, Contractors, Risk Takers Developers Custodian Value Value 16/06/10

49. Result – Co-ownership of a Rental Pool Custodian Investors Occupiers % % Rental 16/06/10 Managers

50. Rental Pools enable a simple but radical new funding option through Unitisation 16/06/10

51. Units – redeemable in payment for property occupation 16/06/10

52. Funding - Equity Release by creating Rental Pools from existing portfolios of houses 16/06/10

53. Existing owner becomes the Custodian Custodian Houses

54. Affordable index-linked rental is set Custodian Rental Houses Occupiers

55. Proportional Share allocated to Manager Custodian % Rental Houses Occupiers Manager

56. Balance of Rentals to Investors % % Rental Custodian Investors Occupiers Managers

57. Units redeemable in payment for rentals are created and sold to investors 16/06/10

58. Example – Pool of 1,000 houses has affordable rents of £4m pa 16/06/10

59. After (say) 25% for maintenance etc £3m pa is available for funding costs 16/06/10

60. Debt : £3m pa will fund <£40m debt over 20 years at 5% compound interest 16/06/10

61. Units - £3m (initially) funds £50m @ 6% £100m at 3%; £200m @ 1.5% (index-linked) 16/06/10

62. N.B. - Wessex Water raised £250m of 50 year index-linked bonds at 1.49% in 2009 16/06/10

63. Surprise! No compound interest + no principal repayment = drastic cut in funding costs 16/06/10

64. Units – value proposition for Investors not dissimilar to a REIT 16/06/10

65. Except that, crucially, Units are redeemable in payment for rent 16/06/10

66. Risks - Inflation; Security; Liquidity; other issues eg tax and regulation 16/06/10

67. Inflation - Debt loses value with inflation unless it is index-linked 16/06/10

68. Units – capital value and dividend income keeps pace with inflation 16/06/10

69. Security – Debt has repayment risk in respect of both principal and interest 16/06/10

70. So the riskier the loan; the higher the interest rate; the lower the affordability 16/06/10

71. But the lower affordability increases the risk, creating a Vicious Circle 16/06/10

72. Units – risk of non-payment is only in respect of rental income eg voids, defaults 16/06/10

73. The more affordable the rent, the more certain by definition it is to be paid 16/06/10

74. The more certain the income; the lower the risk, justifying a lower return 16/06/10

75. The lower the return; the more affordable the funding cost 16/06/10

76. A Virtuous Circle : but with a limit.... a zero return is infinitely affordable! 16/06/10

77. Liquidity – Debt is fragmented by issuer, rate of interest, and duration/ 'tenor' 16/06/10

78. Buyers are financial Investors, with a herd instinct – and liquidity may dry up 16/06/10

79. Liquidity – a Rental Pool is a single continuum of liquidity in undated Units 16/06/10

80. A Rental Pool will have a 'common bond' – geographic or otherwise 16/06/10

81. Occupiers are natural buyers and acquire Units simply by paying rent in advance 16/06/10

82. Units priced @ 4% yield: 25 years' worth of rental Units buys 100% economic interest 16/06/10

83. But @ 2% yield Occupier needs 50 years' worth of rental Units for 100% economic interest 16/06/10

84. The other side of that coin is that the lower the yield; the more affordable the rent 16/06/10

85. While Occupiers who maintain the property themselves receive 'Sweat Equity' Units 16/06/10

86. If financial buyers demand excessive returns, then the price of Units falls.... 16/06/10

87. ...to a level at which Occupiers will buy them for use 16/06/10

88. Any UK investor receiving poor 'real' returns except (tax reasons) pension investors 16/06/10

89. Overseas Investors - $/£ trillions receive negative real returns on US and UK debt 16/06/10

90. Many require a Sharia'h compliant investment 16/06/10

91. Sharing of risk and reward in Partnerships is completely consistent with Islamic Values 16/06/10 Musharakah

92. Issues: taxation, regulation 16/06/10

93. NET addresses these issues by imaginative use of a Company Limited by Guarantee 16/06/10

94. Which is NET's (semi) secret sauce! 16/06/10

95. Thank You 16/06/10