(2) banking on ourselves- resolution

Resolution

Banking on Ourselves

Chris Cook Schumacher College

15 November 2012

There are conventionally two types of ownership - Public or Private

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There are two conventional types of investment: Equity and Debt

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Equity: shares in a Joint Stock Limited Company

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The 19th Century legal dinosaur...

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...which makes the Private Sector Private

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Debt: typically credit created by banks secured eg by mortgages

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...giving two conflicting claims over the same productive asset

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But there are new creatures out there

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Equity vehicles: Trusts, ETFs, ETCs, ETPs, REITs, Master Limited Partnerships (MLPs)

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Simple Corporate entities such as the UK Liability Partnership (LLP)

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UK Company Limited by Guarantee

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These enable Open Corporates

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Over 68,000 UK LLPs are now in pervasive use for purposes never intended...

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...even in the Public Sector, where Glasgow has five municipal LLPs

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Capital Partnership – direct investment in productive assets

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Embryonic Capital Partnership 2002 (> £1bn)

Capital Partnership LLP10 UK Hotels

Gross Revenues

Hilton GroupCapital User

Consortium LLP Capital Provider

BankProperty

DeveloperHotel

Specialist

% %

%%%

Generic Capital Partnership

CustodianCustodian

Investors

Payment

% %

Use

Managers

Users

Productive assets are held by a Custodian

AssetsAssets CustodianCustodianOwnership

...who safeguards the asset and accounts

AssetsAssets CustodianCustodianOwnership

Investors provide Financial Capital in money, or money’s worth…

CustodianCustodian

Investors

Financial Capital

Managers provide Human Capital of time, expertise and experience....

CustodianCustodian

Investors

HumanCapital

Financial Capital

Managers

Users pay for the use of Capital

CustodianCustodian

Investors

Payment

% %

Use

Managers

Users

Result: Capital Partnership

CustodianCustodian

Investors

Payment

% %

Use

Managers

Users

Capital Partnership reinvents Equity

Equity Shares - % age shares in flows of revenue or production

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Stock – units returnable in payment for use value eg rentals, Kilowatt Hours

Albion Trust - a charity providing

affordable office space

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Due to demand for affordable space they bought the adjacent disused church...

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...and planned a £4m development

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But if they borrow, rentals will be unaffordable

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Solution? An Albion Partnership

CustodianCustodian

InvestorsInvestors

TenantsTenants

Managers

% %

£

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Unitisation

CustodianCustodian

InvestorsInvestors

UsersUsers

Managers

Stock %

Rental

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Stock - credit instruments returnable in payment for value received.

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Resolution – stock based upon use value of land

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Stock – undated credits returnable in payment for occupation

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Custodian is appointed or incorporated

Houses CustodianCustodian

Affordable rental is set

Custodian

Occupiers

Rental

Proportional Share allocated to Manager

Custodian

Occupiers

Manager

%

Rental

Balance available for unitisation and sale

Custodian

Investors

Occupiers

Managers

% %

Rental

Units of stock are sold to Investors at a discount to the rental value

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The discount determines the return

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The rate of return is literally the rate at which stock may be returned to the issuer

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Debt: £300k pa will fund <£4m debt over 20 years at 5% compound interest

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Stock - £300k (initially) funds £5m @ 6% £10m at 3%; £20m @ 1.5% (index-linked)

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Investors lend 'Peer to Asset' to the land – not to the owner

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Surprise! No compound interest + no principal repayment = drastic cut in funding costs

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Occupiers - may invest simply by paying rent in advance

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Receive 'Sweat Equity' Units if they maintain the property themselves

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Investors – Units of stock are a secure and liquid new asset class

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Secure – credit default risk in respect of capital becomes liquidity risk

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Secure - affordability of rental means income is by definition more certain to be paid

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Liquid – units of stock are not fragmented by date, rate of return or even issuer

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Liquid – even if Investors do not buy Units, Occupiers will buy and return to issuer

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Intermediaries (eg Banks) – transform from a transaction model to service provision

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...and need Capital only for operating costs

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Back to the Future? Stock pre-dates modern banking

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Resolution - exchange of dated land-backed debt for undated land-based stock

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