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A new approach to Property
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Co-ownership

A simple but radical new approach to property investment and tenure could revolutionize the US by removing the burden of unsustainable debt. Our contributor has been working for 25 years in market and enterprise development, for six of them as a director of a global energy exchange. He believes that the direct connections of the Internet require a new approach to legal and financial structures and has created a simple but radical new partnership architecture for 'Peer to Peer' credit and investment. If you, dear reader, would like to submit an article or news report, please do.

by Chris Cook, 6 March 2010

As the economist Professor Michael Hudson bleakly observes, if debt cannot be paid, then it will not be paid, and he goes on to say that the Biblical approach to unsustainable debt was a debt forgiveness or 'Jubilee'. The economists Nassim 'Black Swan' Taleb, and Willem Buiter suggest that a modern day equivalent of a Jubilee might be to convert debt to equity -- which in effect removes the obligation to repay debt, replacing it with a right of ownership.

The approach developed in Scotland by the Nordic Enterprise Trust -- part-funded by the Norwegian government -- is based upon a simple but radical 21st century approach to equity. We have created a new form of co-ownership within a legal framework based upon partnership principles, rather than the conventional Company law frameworks, which date from the early 17th century or Trust law vehicles with even earlier roots.

Equity ... but not as we know it

In Scottish law there is, beyond the conventional absolute verdicts of 'guilty' and 'not guilty', a third indefinite verdict of 'Not Proven'. In a similar quantum space between the conventional absolute claims over land of Equity (freehold) and Debt (a loan secured by a mortgage claim) lies a new form of investment in and tenure of land which is known as 'Co-ownership'.

Property is not a 'thing' or an 'object' but rather the bundle of rights and obligations through which people can occupy and invest in land and other productive assets. By placing this property relationship into a legal 'wrapper' or vehicle based upon partnership principles we may share them between occupiers and investor in a new way to create a new form of equity. In the UK the flexible new Limited Liability Partnership (LLP) is used: in the US the LLP's closest cousin is the Limited Liability Company (LLC).

The best way to understand how Co-ownership works is through an example.

Introducing the Rental Pool

Suppose a bank has a $1bn portfolio of 5,000 distressed 25-year loans averaging $200,000. At an interest rate of 6% pa repayments are $1303.77 per month or $15,645.24 pa.

Each Unit consists of one millionth of the Rental Pool and provided the properties are fully occupied it carries an income of $30.00 in the first year, rising with inflation thereafter.

At a sale price of $1,250 the sale of the 800,000 Units available will raise $1bn -- thereby repaying the entire debt -- and at that price gives an inflation-linked return of 2.4%. At a lower sale price the return is higher, and while the sale proceeds will not then repay the entire debt, they will in all likelihood realize far more than any debt-based solution, the reason being that there is no compound interest in the co-ownership equity model.

What's in it for everyone?

Well, for an occupier, co-ownership is affordable through lower financing costs; flexible, since any payment beyond the due rental makes him an investor; and empowering, because maintaining the property himself will give him 'Sweat Equity' Units.

For investor co-owners Units are firstly, secure -- since the affordability of the rental, by definition, means that it is more likely to be paid; and secondly they are liquid, because there is one single class of undated Units -- rather than many different classes, interest rates and repayment dates -- while even if investors are not prepared to buy, occupiers probably will.

Developers need not risk any capital but bring to bear expertise and experience, with an interest in energy efficient and high quality development because this cuts the cost of occupation and increases the rental value. Managers of developed property receive an equity share in the rental pool and have exactly the same interests as investors.

A Co-ownership Revolution

This simple but radical new approach to property investment and tenure could revolutionize the US by removing the burden of unsustainable debt. Being based upon consensual partnership agreement it requires no legislation and is complementary to the conventional model, rather than a competing alternative.

What are we waiting for?

Also see:

Home prices rise, but is it for real? Is it for our good?
http://www.progress.org/2009/

Bank failures in 3 months = all of 2008
http://www.progress.org/2009/generalm.htm

The data point to a recovery leaving some behind
http://www.progress.org/2009/indices.htm

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