Community Land Partnership for Rural Housing in Scotland
Scottish Parliament. Rural Affairs & Environment Committee. Submission to Rural Housing Enquiry by the Nordic Enterprise Trust, March 2008
"In this Response we will outline a new form of financing and tenure framework we term the “Community Land Partnership” (“CLP”) and we will compare and contrast this enterprise model with the current suite of more or less conventional forms of tenure and finance currently available and under development.
We believe the potential policy outcomes of the CLP are compelling, and include the following:
• Financing at a fraction of the cost of conventional finance, and requiring no Treasury permission. • A new asset class ideal for long term investment • A “Right to Invest” • A “sustainable” development model, within which it is more profitable to develop to high standards of quality and energy efficiency than to do otherwise • A policy which requires minimal, and probably no, legislation to implement
In addition, we believe that the CLP opens up consideration of potential breakthroughs in many areas of social policy, which we will outline.
We suggest that if Councils were to specify – possibly mandated by Central Government, which would require legislation – that development could only take place within a CLP framework, the result could be a major increase in development of affordable housing, and in fact, the structure renders s75 redundant because the issue of land value capture is addressed consensually within the CLP framework, rather than adversarially within a statutory framework, as now.
The Community Land Partnership opens up a range of new policy options in respect of affordable housing which require to be developed and NET’s approach is to do so through the implementation of demonstration “pilot” schemes.
The principal benefits of the CLP model are:
• Financial – resulting from the combination of drastically reduced financing costs with a new asset class of property rental units, which itself constitutes a major opportunity for the Scottish financial sector;
• Environmental – resulting from the “sustainable development” outcome of an enterprise model wherein developers operate as service providers rather than as transaction–focused intermediaries.
The CLP is also attractive in terms of policy formation, since it is:
• A Devolved Approach – requiring no Treasury permission, since no borrowing is involved;
• Consensual – requiring no legislation, which is an important factor for minority government;
• Flexible – offering the Scottish Government a simple new tool for policy formation."
"The Community Land Partnership
On 6 April 2001 a new legal entity, the Limited Liability Partnership (LLP), came into effect in order to protect professional partnerships from the consequences of their own negligence.
Confusingly, an LLP is not legally a partnership. It is, however - like a company - a corporate body with a continuing legal existence independent of its members. Also, as with a limited liability company, you cannot lose more than you invest in an LLP.
Unlike a company there is no requirement for a Memorandum of Incorporation or Articles of Association. It is also not subject to the body of legislation governing the relationship between investors and other stakeholders, and particularly the directors who act as their agents in managing the company.
The ‘LLP agreement’ between members is totally flexible. It need not even be in writing, since simple provisions based upon partnership law apply by way of default. This new legal tool may be applied to create a framework for investment in, and ownership and occupation of, land and property.
A Community Land Partnership has four Members:
• Trustee Member - which holds the freehold of the Land in perpetuity on behalf of the Community
• Occupier Member - which consists of the community of individuals and/or enterprises which occupy the land and the property on it
• Investor Member - which consists of the consortium of individuals and enterprises who invest money and/or money's worth (such as the value of the land) in the CLP
• Developer/Operator Member, which provides development expertise and manages the CLP once the development is complete.
When the development is complete, the Occupier pays an agreed rental for the use of the Capital which has been invested in the property.
This rental is set at an affordable level initially, and comprises both a provision for maintenance/ depreciation and related management/ quality control (and possibly heating) of the building and a "Capital Rental" paid for the use of the Capital.
This Capital Rental then rises with an agreed indexed measure of inflation.
The Alchemy in this model arises from the fact that the land - which is an increasing proportion of a property's value these days -does not depreciate in value and no loan capital is being repaid.
ie this is "Equity" investment not "Debt"
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 100%, the income which he derives from the investment cancels out the rental he is due to pay, although he still must pay to maintain the property.
For an investor this is a reasonable - maybe 3 or 4% - return where the capital - unlike in a bank or building society deposit - is protected from inflation.
For the Occupier, it is affordable housing, because there is no capital repayment cost.
Most radical, in this model, Occupiers may change, Investors may change, and the Developer/Operator may change, but the property need never be sold again. Occupiers moving elsewhere may sell their "Equity Shares" to fund a purchase, or leave them in place and rent somewhere else."
1: A Critique of the Conventional Enterprise Model
Tenure: The subject of tenure relates to the rights of occupation of land, and putting to one side the finer points arising from the distinct Scottish legal heritage, essentially distinguishes between a permanent right of “ownership” eg freeholds and a temporary right of more or less exclusive “use” for a defined term eg leaseholds and tenancies.
Other – contractual – mechanisms allow the exclusive use of property, such as Housing Cooperatives. Here, a Corporate body (essentially a collective) owns the property, and the individual rights of occupation are conferred by the contractual arrangements set out in the Cooperative’s governing agreement.
In recent years there have been new hybrid mechanisms such as the “Co-ownership” leasing arrangements in common use in Northern Ireland since 1978, and many schemes to share equity, “rent to buy” and so on.
More radically, there is the “Community Land Trust” (“CLT”) which originated in the US, and is currently being adopted in England. In this model – which is very close to the rural “Community Right to Buy” legislation in Scotland – the land is held in trust for the Community and leases granted to occupiers.
Financing and Development: In all cases, financing comprises either grants (which may be repayable) or lending from a credit institution, such as a bank or building society, secured by a charge or mortgage over the freehold.
Developers operate on a transactional basis as “intermediaries”:
• acquiring land; • building houses on the land -typically financing the development with a mixture of share capital (“Equity”) and secured debt; and • selling on the developed property to buyers who again use mortgage loans for the purpose.
The issues arising from the conventional enterprise model are widely recognised, and have over the years been the subject of many and varied Reports, policy initiatives and legislation.
The uplift in land values conferred by the granting of planning permission constitutes a major part of developers’ profits. The “capture” of some or all of this uplift is the subject of ongoing guerrilla warfare between the housing industry and government, not just in Westminster and Holyrood but in most countries with conventional property rights.
The availability of land, which is often “banked” by developers and then fed into the market at an optimally profitable rate, is a major issue, and the subject of much recent consultation and discussion.
The “sustainability” of development has emerged in recent years as perhaps the most contentious issue in this conventional “transaction-based” model, where land is bought and sold on by a developer.
Since the developer wishes to maximise his profit on sale, he has an incentive to minimise costs and the standards of quality and energy efficiency – and therefore cost of ownership over time – will always be secondary to the primary purpose of profit generation."