Fleeing Vesuvius. Gillian Fallon

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income has been allocated, 60% is left to pay for ongoing maintenance and management and to give a return on the 300,000 money investment. Let us suppose that a 10% share goes to maintenance and 50% goes to pay the investors. A 4% initial return on investment requires a capital rental of 24,000 in the first year. It would be divided as follows.

      • Management and maintenance charge is 10% or 2,400.

      • The former landowner receives 20% i.e. 4,800.

      • The building manufacturer receives 2,400.

      • Investors receive 12,000.

      The occupiers pay 4,800 per house per annum gross initially. This is reduced by 480 (their equity share), to give an affordable rent of 360/ month each.

      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 100,000. The current value of the two buildings to become 1-bed units is put at 125,000 each and the five other buildings at 100,000. The redevelopment cost is 70,000 per building or 490,000 so the total cost of the scheme, allowing 10,000 contingencies, is 1,950,000.

      The municipality puts in half the value of the land (350,000) and 20% of the value of the buildings (150,000) in return for equity shares. The remaining 1,450,000 is contributed by an investor prepared to accept an initial 3% return or 43,500 per year. This capital rental would be inflation-linked and would therefore provide a real asset-based return of 3% to the investor regardless of movement in interest rates. The 20 occupier members would pay 2,175 each per year in rent, or just under 42 per week.

      Land Rental

      In addition to the capital rental, the equity partnership members agree to include a land rental payment in their EP agreement. 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 50 per week state benefits pay in total	12.50
5 members on 100 per week pay in total	25.00
5 members on 150 per week pay in total	37.50
5 members on 200 per week pay in total	50.00

      The outcome is a total income pool of 125 per week, which is then divided between the 20 members giving a dividend of 6.25 each. This gives a net rebate to those earning less than 125 per week and a net contribution by those earning more. This is intended to subsidize the capital rental payments for those least able to afford them. The contribution rate could be higher or lower than 5%.

      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 1bn nominal value portfolio consisting of 5,000 25-year mortgage loans averaging 200,000 and paying interest at 6% per annum. On average, each borrower must currently repay 1303.77 per month or 15,645.24 p.a. for the life of the loan.

      Under an EP arrangement, a capital rental could be set at an “affordable” level, say, an average 500 per month or 6,000 p.a. This would be index-linked. The total rental income would be 30m in the first year and would rise with inflation. The 5,000 properties would be “unitized” into (say) a million “units” or “millionths”, each consisting of one millionth of the economic interest/“ownership” of the relevant properties. A unit would bring an income of 30.00 in the first year, rising with inflation

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