(2) banking on ourselves- resolution
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Resolution
Banking on Ourselves
Chris Cook Schumacher College
15 November 2012
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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
% %
%%%
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Generic Capital Partnership
CustodianCustodian
Investors
Payment
% %
Use
Managers
Users
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Productive assets are held by a Custodian
AssetsAssets CustodianCustodianOwnership
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...who safeguards the asset and accounts
AssetsAssets CustodianCustodianOwnership
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Investors provide Financial Capital in money, or money’s worth…
CustodianCustodian
Investors
Financial Capital
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Managers provide Human Capital of time, expertise and experience....
CustodianCustodian
Investors
HumanCapital
Financial Capital
Managers
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Users pay for the use of Capital
CustodianCustodian
Investors
Payment
% %
Use
Managers
Users
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Result: Capital Partnership
CustodianCustodian
Investors
Payment
% %
Use
Managers
Users
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Capital Partnership reinvents Equity
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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
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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
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Affordable rental is set
Custodian
Occupiers
Rental
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Proportional Share allocated to Manager
Custodian
Occupiers
Manager
%
Rental
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Balance available for unitisation and sale
Custodian
Investors
Occupiers
Managers
% %
Rental
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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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