partnership finance october 2010
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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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