Co ownership october-2010

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Co ownership october-2010

  1. 1. Co-ownership – a new funding approach Rental Pools and Unitisation Chris Cook NHF 'Funding Ideas' 12 October 2010
  2. 2. There are two conventional ways of raising finance: credit and investment 16/06/10
  3. 3. Investment is typically through Limited Companies and Trusts 16/06/10
  4. 4. Legal dinosaurs 16/06/10
  5. 5. Or loans secured by legal claims eg mortgages 16/06/10
  6. 6. Conflicting claims over the same assets 16/06/10
  7. 7. 21 st Century problems cannot be solved with 20 th century solutions 16/06/10
  8. 8. In 2001 a white knight came to the rescue The UK Limited Liability Partnership (LLP) 16/06/10
  9. 9. An LLP is a corporate body with limited liability 16/06/10
  10. 10. ...and...errrr...that’s it! 16/06/10
  11. 11. It’s an infinitely flexible 'Open' Corporate 16/06/10
  12. 12. There is not even a requirement for a written agreement 16/06/10
  13. 13. As far as the Tax Man is concerned it is a Partnership 16/06/10
  14. 14. LLPs are now in pervasive use for purposes never intended... 09/03/10
  15. 15. ...even in the Public Sector, where Glasgow has five municipal LLPs 09/03/10
  16. 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. 17. Capital Partnership Custodian Investors Users % % £ 16/06/10 Managers
  18. 18. Equity Shares - % age shares in revenues or production... 16/06/10
  19. 19. Units - redeemable in production or use 16/06/10
  20. 20. Case Study: “The Art of Flirting” – a film incorporated as an LLP 16/06/10
  21. 21. The actors received 'nth’s' of the gross revenues 16/06/10
  22. 22. My share was 5% and the producer the rest 16/06/10
  23. 23. But we needed lights, cameras, pizza, coffee 16/06/10
  24. 24. Two Capital Partners invested £ for 20% of revenues 16/06/10
  25. 25. If there are any 16/06/10
  26. 26. Art of Flirting LLP Custodian Financial Capital (Investors) Viewers % % £ 16/06/10 Human Capital (Actors, Producer, Me)
  27. 27. Everyone was on the same side 16/06/10
  28. 28. A Capital Partnership is not an Organisation 16/06/10
  29. 29. It does not own anything, do anything, employ anyone, or contract with anyone 16/06/10
  30. 30. It is simply a framework agreement within which the stakeholders self organise 16/06/10
  31. 31. Case Study: Albion Trust - a charitable Company Limited by Guarantee 16/06/10
  32. 32. Albion Trust provides affordable office space for social enterprises 16/06/10
  33. 33. Due to demand they bought a disused church next door 16/06/10
  34. 34. ...and planned a £4m development 16/06/10
  35. 35. But if they borrow, the rents will be unaffordable 16/06/10
  36. 36. Solution - an Albion Partnership? Custodian Investors Occupiers % % £ 16/06/10 Managers
  37. 37. Conventional property development is a transaction model: developer as middleman Developer Property Buyer £ £ Property Buyer £ 16/06/10 Land Owner
  38. 38. Borrow, Buy, Build and B...er Off... 16/06/10
  39. 39. Financed by Equity (ownership) and Debt (from credit institutions) 16/06/10
  40. 40. Capital Partnership offers a new approach to financing and funding 16/06/10
  41. 41. Financing - for short/medium term, high risk development of new assets 16/06/10
  42. 42. Funding - for long term, low risk use of newly complete or existing assets 16/06/10
  43. 43. Financing : Land held by/transferred to a Custodian Land Custodian 16/06/10
  44. 44. Land Owners become Investors Land Land Owners Custodian Land Value 16/06/10
  45. 45. Councils invest the value of planning permission Land Councils Custodian Value of Planning permission 16/06/10
  46. 46. Contractors invest at least the profit margin Land Contractors Custodian Profit Margin 16/06/10
  47. 47. Risk-Takers provide £ to pay Contractors’ agreed costs Land Risk-Takers Custodian £ 16/06/10
  48. 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. 49. Result – Co-ownership of a Rental Pool Custodian Investors Occupiers % % Rental 16/06/10 Managers
  50. 50. Rental Pools enable a simple but radical new funding option through Unitisation 16/06/10
  51. 51. Units – redeemable in payment for property occupation 16/06/10
  52. 52. Funding - Equity Release by creating Rental Pools from existing portfolios of houses 16/06/10
  53. 53. Existing owner becomes the Custodian Custodian Houses
  54. 54. Affordable index-linked rental is set Custodian Rental Houses Occupiers
  55. 55. Proportional Share allocated to Manager Custodian % Rental Houses Occupiers Manager
  56. 56. Balance of Rentals to Investors % % Rental Custodian Investors Occupiers Managers
  57. 57. Units redeemable in payment for rentals are created and sold to investors 16/06/10
  58. 58. Example – Pool of 1,000 houses has affordable rents of £4m pa 16/06/10
  59. 59. After (say) 25% for maintenance etc £3m pa is available for funding costs 16/06/10
  60. 60. Debt : £3m pa will fund <£40m debt over 20 years at 5% compound interest 16/06/10
  61. 61. Units - £3m (initially) funds £50m @ 6% £100m at 3%; £200m @ 1.5% (index-linked) 16/06/10
  62. 62. N.B. - Wessex Water raised £250m of 50 year index-linked bonds at 1.49% in 2009 16/06/10
  63. 63. Surprise! No compound interest + no principal repayment = drastic cut in funding costs 16/06/10
  64. 64. Units – value proposition for Investors not dissimilar to a REIT 16/06/10
  65. 65. Except that, crucially, Units are redeemable in payment for rent 16/06/10
  66. 66. Risks - Inflation; Security; Liquidity; other issues eg tax and regulation 16/06/10
  67. 67. Inflation - Debt loses value with inflation unless it is index-linked 16/06/10
  68. 68. Units – capital value and dividend income keeps pace with inflation 16/06/10
  69. 69. Security – Debt has repayment risk in respect of both principal and interest 16/06/10
  70. 70. So the riskier the loan; the higher the interest rate; the lower the affordability 16/06/10
  71. 71. But the lower affordability increases the risk, creating a Vicious Circle 16/06/10
  72. 72. Units – risk of non-payment is only in respect of rental income eg voids, defaults 16/06/10
  73. 73. The more affordable the rent, the more certain by definition it is to be paid 16/06/10
  74. 74. The more certain the income; the lower the risk, justifying a lower return 16/06/10
  75. 75. The lower the return; the more affordable the funding cost 16/06/10
  76. 76. A Virtuous Circle : but with a limit.... a zero return is infinitely affordable! 16/06/10
  77. 77. Liquidity – Debt is fragmented by issuer, rate of interest, and duration/ 'tenor' 16/06/10
  78. 78. Buyers are financial Investors, with a herd instinct – and liquidity may dry up 16/06/10
  79. 79. Liquidity – a Rental Pool is a single continuum of liquidity in undated Units 16/06/10
  80. 80. A Rental Pool will have a 'common bond' – geographic or otherwise 16/06/10
  81. 81. Occupiers are natural buyers and acquire Units simply by paying rent in advance 16/06/10
  82. 82. Units priced @ 4% yield: 25 years' worth of rental Units buys 100% economic interest 16/06/10
  83. 83. But @ 2% yield Occupier needs 50 years' worth of rental Units for 100% economic interest 16/06/10
  84. 84. The other side of that coin is that the lower the yield; the more affordable the rent 16/06/10
  85. 85. While Occupiers who maintain the property themselves receive 'Sweat Equity' Units 16/06/10
  86. 86. If financial buyers demand excessive returns, then the price of Units falls.... 16/06/10
  87. 87. ...to a level at which Occupiers will buy them for use 16/06/10
  88. 88. Any UK investor receiving poor 'real' returns except (tax reasons) pension investors 16/06/10
  89. 89. Overseas Investors - $/£ trillions receive negative real returns on US and UK debt 16/06/10
  90. 90. Many require a Sharia'h compliant investment 16/06/10
  91. 91. Sharing of risk and reward in Partnerships is completely consistent with Islamic Values 16/06/10 Musharakah
  92. 92. Issues: taxation, regulation 16/06/10
  93. 93. NET addresses these issues by imaginative use of a Company Limited by Guarantee 16/06/10
  94. 94. Which is NET's (semi) secret sauce! 16/06/10
  95. 95. Thank You 16/06/10

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