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CHRIS COOK
The conventional way of financing property development entangles those involved in a web of debt and conflicting business interests. A new way of organizing developments promises better buildings, more affordable rents and a stake in the outcome for everyone.
We are accustomed to thinking that property is an object — typically, a productive asset — that may be bought and sold, but as Bentham points out above, this is incorrect. Property is the relationship between an individual — the subject — and the asset, which is the object of the individual’s property. So the productive asset of land is not property but rather the object of a man’s property or something that is “proper” to the man. It follows that property is the bundle of rights and obligations that connect the subject individual to the object asset.
The Land Equity Partnerships that I describe in this chapter (I’ll just call them equity partnerships from now on) are an example of the new types of arrangement that can be made when people think of property in terms of rights and obligations rather than ownership.
Land, or perhaps more accurately location, has a value when it is put to use. Its value may perhaps derive from crops that grow on it, or from animals or fish that feed there. It may also derive from its use by individuals to live there, or to conduct business there, or for use as public infrastructure such as transport. This use value then has a value in exchange; individuals are prepared to exchange something of value in return for the use of land at a specific location.
The bundle of rights and obligations relating to land/location is typically recorded in the form of legally binding protocols, although in less-developed nations the rights and obligations relating to land may be a matter of oral tradition. Some cultures are unable to understand that anyone can have absolute rights over land. Others insist that absolute ownership is God’s alone; but the convention in many societies is that the state has absolute ownership of land and that exclusive property rights may then be granted to individuals or to enterprises with legal personality (corporate bodies).
Conventional private-sector property development is transaction based. Landowners sell land to developers who obtain any necessary permissions, improve or build on the land and sell it to a buyer. Developers typically obtain as much of the development finance as possible by borrowing at interest from a credit institution or investor. Buyers typically finance their purchase with loans secured by a legal charge or mortgage. After a time, they will sell the property to another debt-financed buyer, or find a tenant, and so on through the years.
It is to be observed, that in common speech, in the phrase “the object of a man’s property,” the words “the object of” are commonly left out; and by an ellipsis, which, violent as it is, is now become more familiar than the phrase at length, they have made that part of it which consists of the words “a man’s property” perform the office of the whole.
JEREMY BENTHAM, “AN INTRODUCTION TO THE PRINCIPLES OF MORALS AND LEGISLATIONS” (1789)
In most cases a developer has no interest in high-quality standards or energy efficiency because he will not be associated with the site once the development has been sold. He simply wishes to maximize the transaction profit. He will therefore attempt to ensure that any investment in amenities, infrastructure or transport is made by the public sector rather than by him.
A New Legal Entity
On 6 April 2001, a new legal entity, the Limited Liability Partnership (LLP), came into effect in the UK and, despite the fact that its objective was to protect professional partnerships from the consequences of their own negligence, it made possible a new way of handling and financing property development. Confusingly, an LLP is not legally a partnership. It is, however — like a company — a corporate body with a continuing legal existence independent of its members. Also, as with a limited liability company, members cannot lose more than they invest in an LLP.
An LLP need not have a Memorandum of Incorporation or Articles of Association and is not subject to the laws governing the relationship between investors and the directors who act as their agents in managing the company. The “LLP agreement” between members is totally flexible. It need not even be in writing, since simple provisions based upon partnership law apply by way of default. As a result, an equity partnership set up as an LLP is a consensually negotiated contractual framework for investment in and ownership, occupation and use of land.
An equity partnership (EP) does not own anything, do anything, contract with anyone or employ anyone. In other words, it is not an organization: it is a framework agreement within a corporate “wrapper.” The EP agreement sets out the relationship between the different stakeholder groups, and each stakeholder group may also have its own specific sub-agreement at whatever level of formality (e.g. an organizational constitution) its members agree. The EP encapsulates the entire property relationship within a corporate entity and related framework agreement.
An EP has a minimum of four types of partner:
1. The custodian: who holds the freehold of the land in perpetuity
2. The occupier(s): individuals and/or enterprises occupying the property
3. The investor(s): individuals and enterprises who invest money and/or money’s worth (such as the value of the land)
Potential Partners in an Equity Partnership
| The landowner | The landowner may be a private individual or investor, a local authority or a developer. The landowner transfers the land to the custodian, and becomes an investor in the partnership. |
| The custodian | Holds the freehold of the land in perpetuity on behalf of the partners. The custodian is probably a board of independent experts with legal, financial, property and construction expertise. The custodian sets up a Charter of Cooperation between equity partners. |
| The developer | The developer may be the owner of the land, or he may have set up an agreement with the landowner, or he may be brought in as an investor to contribute his expertise to the development. He may also be the contractor. |
| The manager | The manager is appointed by the custodian to manage the development, its maintenance and transfers of investors. The manager is likely to be a property management company with valuation and property transaction expertise. |
| The local authority | The local authority zones and grants planning permission, which adds value to the land. It also imposes obligations such as Part V and charges for infra structure services. It may be the owner of the land. If not, it may be an investor to maintain a say in the development on behalf of its tenants under the Part V require ments or other community interests. |
| The investors | The investors would include the site owners. They could also include the bank or the housing finance agency funding the local authority, or the bank funding the developer. Once the development is completed and fully let, it would be an ideal, low risk investment for a pension fund or other investment fund, which could buy out the equity shares held by the landowner, and/or the local authority, the developer and the contractor if they wished to sell. |
| The contractor | The contractor may be brought in as an investor by the custodian, the local authority or the developer. He would be expected to invest at least part of his profits from the contract to align his interests with those of the other partners. |
| The insurer | The development will require insurance once it is occupied. This is normally obtained by the manager. The insurance company providing the insurance could be an investor in return for preferential rates. |
| The occupier | The community of individuals who occupy the properties on the land. While the majority of occupiers will be residents, equity stakes can also be built by enterprises operating on the land, e.g. a local shop or hairdresser. The occu pier rents the property at an affordable basic rent. This should be sufficient to cover interest charges due to the investors. The occupier has a right to pay an additional amount to purchase equity shares in the development. Once the income from these equity shares is
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