the occupier effectively owns the dwelling but not, of course, its site. This feature enables them to buy their dwellings over the years without taking out a loan. Occupiers vacating their dwellings receive the full value of any equity shares they hold.
(Source: James Pike)
4. The developer/operator: who provides development expertise and manages the EP
How An Equity Partnership Works
Landowners invest the agreed value of their land/location in the partnership in exchange for “equity shares” which are millionths of the flow of rentals to be paid by the occupiers when the development is complete. This gives the landowner a share in any development gain. While not every development goes to plan, the partnership model ensures that everyone involved has an interest in ensuring that it does. If the land invested does not have planning consent, the local authority can invest the value of that consent, hoping to receive a greater return on its equity shares than it would conventionally.
The custodian becomes steward over the land in perpetuity, with rights of veto over land use, and also safeguards the EP’s purpose and values as expressed in the EP agreement. The custodian may be an individual, a board of independent experts with legal, financial, property and construction expertise, or a public body such as a local authority.
Investors then invest “money’s worth” or money to allow the development to be carried out, and in return they receive a proportionate number of equity shares. Once the development is complete, the occupiers pay an agreed rental in money or “money’s worth” of services for the use of the capital that has been invested in the location. This capital rental is set at an affordable level initially and may rise according to an agreed index of inflation. The occupiers also make a payment or provision for the maintenance/ depreciation (and possibly heating) of the building. The developer/manager manages the development or use of the building in return for equity share in the rentals. If an occupier pays more than the affordable rental, he invests automatically in equity shares, and thereby acquires a stake in the property in which he lives. Once he has acquired enough shares, the income which he derives from them cancels out the capital rental he has to pay.
The pool of rentals created by development is shared out amongst the holders of the equity shares in proportion to their holdings. This form of EP is essentially a Real Estate Investment Trust (REIT). REITs have become extremely popular recently because rents flow through them without tax having to be paid by it. Instead, any tax due is collected from the shareholders.
Investors, who have seen their income dwindling as interest rates spiral toward zero, should be extremely interested in an investment such as this. Equity shares offer a reasonable, index-linked return based on property. There is a very low risk that the return will not be paid since affordable rentals are by definition more likely to be paid. Equity shares are a perfect investment for risk-averse investors such as pension funds and sovereign wealth funds. In particular, this investment is perfect for Islamic investors since no debt or interest is involved.
Worked Examples
Capital Rental to Develop Five Eco-Houses
A landowner invests land in exchange for a 20% equity share in the rentals from the developed property. A provider of eco-friendly and energy-efficient wooden buildings is prepared to sell five units at a cost of
As 40% of the rental income has been allocated, 60% is left to pay for ongoing maintenance and management and to give a return on the
• Management and maintenance charge is 10% or
• The former landowner receives 20% i.e.
• The building manufacturer receives
• Investors receive
The occupiers pay
Capital Rental and Land Rental to Reconstruct Seven Local Authority Dwellings
Seven existing properties are in municipal ownership. Two of them are to be converted into three units of 1-bed each, while the other five will each be converted to give a 1-bed unit on the ground floor and a 2-bed unit on each of the two floors above. Accommodation for, say, 20 people in 11 1-bed flats and five 2-bed flats will result. A common space and shared facilities will also be provided at ground level and ground-source heating and other energy-efficient features will be installed.
Capital Rental
Each of the seven sites on which the dwellings stand is valued at
The municipality puts in half the value of the land (
Land Rental
In addition to the capital rental, the equity partnership members