Fleeing Vesuvius. Gillian Fallon
This rental is a pre-distributive mechanism internal to the EP and utilizes two separate parameters: an income pool and a land-use pool.
i) Income pool: Assume a contribution to a “pool” at the rate of 5% of income.
| 5 members on | |
| 5 members on | 25.00 |
| 5 members on | 37.50 |
| 5 members on | 50.00 |
The outcome is a total income pool of
ii) Land-use pool: The land occupied by the EP members would be assessed using Land Rental Units (LRUs). In the example, five properties each occupy three units of land, while the other two are bigger and occupy five units — a total of 25 LRUs. The members agree a value payable per LRU by the occupants of each property into a pool. Again, net-value transfers (payments or receipts) result from those enjoying above-average land use per person to those with below-average land use.
A Comparison with Conventional Refinancing
EPs may be used to refinance existing secured debt through “unitization.” Take a
Under an EP arrangement, a capital rental could be set at an “affordable” level, say, an average
i) At
ii) At
It will be seen that the absence of debt repayment dramatically reduces financing costs.
Improved Affordability and Sustainability
Affordability
The problem in most urban areas is not the affordability of housing but rather the affordability of land, since construction costs are relatively uniform. In essence the issue relates to land rental values, since a land purchase price is simply the capitalized net present value of future land rentals. The issue of supply relates primarily to planning, land use and an absence of incentives to bring land into use. The use of a land rental will tend to incentivize occupiers to bring land into productive use.
The use of the EP allows land-owners to invest the value of their land and to receive an agreed share of the rental value of the developed land. Similarly, local authorities’ participation in EPs allows them to invest the value of planning consents, and to use their resulting share of the rental value of developed land to cross-subsidize affordable property rentals. If local authorities were to specify that development could only take place within an EP framework, then the result could be a major increase in development of affordable housing. This might require legislation. In fact, the structure is similar to the use of statutory Development Corporations in the UK, except that land-value capture is addressed consensually within the EP framework, rather than adversarially within a statutory framework.
In the UK, the statutory “right to buy” in the public sector has seen a transfer of housing from the public to the private sector. The EP gives occupiers both an indefinite “right to rent” and a “right to invest” in the co-owned property in which they live.
They may not only buy equity shares conventionally, but also acquire them as “sweat equity” through:
• self-build or partial self-build;
• carrying out maintenance to agreed standards, to be monitored by the EP operator member.
As occupiers acquire equity, then their net capital rental obligation gradually falls so when their investment reaches a level at which the notional capital rental income equals their capital rental obligation they are, in economic terms, the owner, although the land remains in custody. Moreover an investor/occupier may flexibly release equity at any time simply by selling equity shares.
Governments that give rental subsidies, grants or subsidized loans for property merely increase rents or the price of land. The EP model takes landownership out of the equation by putting the land into the ownership of a custodian, and the land price therefore cannot become inflated because it is never sold again.
Where landowners are reluctant to give up ownership, it is possible for them to retain ownership as the custodian member. In that case, the EP agreement essentially operates as an evergreen lease of indefinite duration — that is, the occupier is entitled to use of the land for as long as he pays the rental. The measure of control, such as restrictions on use, retained by the owner would affect the amount and nature of the return they could expect through the EP, in their other stakeholder role as an investor of the value of the land.
An EP improves affordability by drastically cutting long-term financing costs because:
• there is no return of capital, as there would be with debt, since the capital value is unitized into tradable equity shares in the EP, just like the units in a unit trust;
• the return on capital bears no relationship to interest rates. It gives an index-linked return reflecting the risk of property-based investment.
Stakeholders’ participation means that the need for development finance is minimized. For example, the land is not bought with loan finance but invested in return for equity shares.
Sustainability
In the EP model the developer/operator is a service provider, rather than an intermediary, and need