partnership finance october 2010

Partnership Finance

Chris Cook

Lockerbie 5 October 2010

There are two conventional ways of raising finance: credit and investment

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Investment is either through a Limited Company

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A 19th Century legal dinosaur

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Or loans secured by legal claims eg mortgages

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Two conflicting claims over the same assets

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But there’s a new creature out there

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The 21st Century Limited Liability Partnership (LLP)

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An LLP is a corporate body with limited liability

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...and...errrr...that’s it!

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As far as the Tax Man is concerned it is a Partnership

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It’s an 'Open' Corporate where we can work with each other

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Even without a written agreement

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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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Hilton Deal 2002

Capital Partnership LLP10 UK Hotels

Gross Revenues

Hilton GroupCapital User

Consortium LLP Capital Provider

BankProperty

DeveloperHotel

Specialist

% %

%%%

Capital Partnership

CustodianCustodian

InvestorsInvestors

UsersUsers

Managers

% %

£

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Equity Shares - % age shares in revenues or production...

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Units - redeemable in production

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Example: “The Art of Flirting” – a film incorporated as an LLP

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The actors received “nth’s” of the gross revenues

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I got 5%...and the producer the rest

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But we needed lights, cameras, pizza, coffee

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Two Capital Partners invested £ for 20% of revenues

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If there are any

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Art of Flirting LLP

CustodianCustodian

Financial Capital(Investors)

Financial Capital(Investors)

ViewersViewers

Human Capital(Actors, Producer, Me)

% %

£

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Everyone was on the same side

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Example: Albion Trust...a charity

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They provide affordable office space for

social enterprises

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Due to demand they bought a disused church next door

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...and planned a £4m development

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But if they borrow, the rents will be unaffordable

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Solution - an Albion Partnership?

CustodianCustodian

InvestorsInvestors

TenantsTenants

Managers

% %

£

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Conventional property development is a transaction model: developer as middleman

DeveloperDeveloperLand

OwnerProperty

BuyerProperty

Buyer

£ £

PropertyBuyer

PropertyBuyer

£

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Borrow, Buy, Build and B...er Off...

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Financed by Equity (ownership) and Debt (from credit institutions)

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Community Partnership – a new approach to financing and funding

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Financing...short term, high risk development finance for new assets

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Funding...long term, low risk finance for newly completed or existing assets

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Development FinancingLand held by/transferred to a Custodian

LandLand CustodianCustodian

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Land Owner becomes an Investor

LandLand

Land OwnerLand Owner

CustodianCustodian

Land Value

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Council invests the value of planning permission

LandLand

CouncilCouncil

CustodianCustodian

Value of Planning permission

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Contractors invest at least the profit margin

LandLand

ContractorsContractors

CustodianCustodian

Profit Margin

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Risk-Takers provide £ to pay Contractors’ agreed costs

LandLand

Risk-TakersRisk-Takers

CustodianCustodian

£

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Developer invests “Intellectual Capital” of concept and services

LandLand

InvestorsLand-owner, Council,

Contractors, Risk Takers

InvestorsLand-owner, Council,

Contractors, Risk Takers

DeveloperCommunity plus help

DeveloperCommunity plus help

CustodianCustodian

Value Value

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Result – Community Land Partnership

CustodianCustodian

InvestorsInvestors

OccupiersOccupiers

Managers

% %

Rental

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Investors may keep Units for their own pension...

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...or sell them to Investors or Occupiers who wish to invest in their own homes

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Occupiers maintaining the property themselves may receive “Sweat Equity”

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Everyone has a stake in the outcome....

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....with an interest in high quality, energy efficient housing ....

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....because this lowers the cost of occupation over time ....

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....which makes the Rental value higher and makes Units more valuable

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So we go from a transaction model...

DeveloperDeveloperLand

OwnerProperty

BuyerProperty

Buyer

£ £

PropertyBuyer

PropertyBuyer

£

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...to a service provider model where land is owned by a custodian or steward

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Community partnerships are not a magic bullet

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Conventional finance requires binding contracts

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Partnership finance requires consensual agreement

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But there may be no magnetism

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Communities may find they have the wrong partner

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Sometimes partners fall out

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A Community Partnership is not an Organisation

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It does not own anything, do anything, employ anyone, or contract with anyone

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It is simply a framework within which the stakeholders self organise

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...with a mutual interest in developing land sustainably and affordably.

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Rental Pool creates new options for funding and tenure

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Co-ownership – of Investor and Occupier

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Unitisation – simple but radical funding

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Energy Pool: Community Mega Watts

Energy Pool

CustodianCustodian

InvestorInvestor

CommunityCommunity

Energy Energy

Energy

ManagerManager

Manager receives %age of production

Supplier may invest equipment & materials: must invest agreed % profit

Investors provide development Capital by purchasing redeemable Units

Outcome: turbine funded by selling part of Energy Pool of future production.

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Nega Watt energy savings - the cheapest energy of all – may be simply financed…

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…energy loans in KwH may be repaid via utility bills out of energy saved

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£5k interest-free energy loan = 100 Units of 1 Mega Watt Hour sold @ £50/MWh

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Or 10,000 Units of 10 Kilo Watt Hours @ 50p per Unit

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Reduced energy bill paid to power supplier for energy consumed

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Energy loan repaid through buying Units from the Pool at the market price

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Energy Pool offers a new approach to energy financing

“If you want to keep a cow healthy, you don’t regulate what comes out of it……”

“……you regulate what goes in….”

An Energy Pool enables a Carbon currency based upon the intrinsic value of energy…

..rather than a market in value-less Units of CO2 emissions, imposed by governments …

Thank You

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