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 equal to the rent being paid, 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
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