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Correct.

The owner pays his "Capital Rental" not in cash but in more "equity shares".

If you run the spreadsheets the result is much less toxic than the other options: "reversions" (where the investor takes a punt on how long Granny is going to live) and "roll-up" mortgages at 2% over building society base rate, where the interest rolls up and (at today's rates) the mortgage doubles in 10 years.

So in the perfect world a pensioner could go to his pension fund and have it invest in his home.

For the pension fund it's a REIT clone (LLP's being tax transparent), but simpler and without the management conflicts of the REIT's the Treasury came up with.

Each pension fund could have stakes in a "pool" of its pensioners' properties.

For the pensioner it's the most equitable form of equity release there is.

It's a pity the Chancellor made it impracticable for UK pension funds (I won't bore you with the technicalities).

But that leaves the field wide open for overseas funds - particularly petrodollars looking for a GENUINELY Islamic home - unlike most of the hypocritical crap sold as "Islamic" investment at the moment.

There is over £1 trillion in UK property owned by the over-65's free of mortgage, much of it (unlike public housing rapidly being brought up to "Decent Homes" standards)falling into disrepair because the occupants can hardly afford to live, never mind maintain their homes in good repair.

In Newham, I understand maybe 40% of properties fall into this category.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 26th, 2007 at 06:29:01 PM EST
[ Parent ]
I was pondering the following example.

Suppose you can run a small Yoga studio on the following (average) annual budget:

Revenue: £100k (fees)
Expenses: £85k (£45k teachers' wages, £20 admin costs, £18k space rental, £2k maintenance)
Profit: £15k

Alternatively, you can buy the space for, say, £250k and pay the £18k/yr in mortgage payments.

Is there a non-toxic way to raise the £250?

One could value the business at £750k put it in trust, sell £250k worth of "equity shares" to buy the property, and pay 1/3 of the revenue (the total of "rent" and "profit" above) to the holders of the equity shares.

At the other extreme, one could value the business at £1.39M, put it in trust, keep £210k worth of equity shares for oneself, and sell £250k worth of equity shares to outside investors. This results in paying 18% of the revenue to the external holders of the equity shares, and 15% to oneself.

In the first case, the equity shares have an expected return of 13.3%, and in the second of 7.2%

Am I totally off?

The problem, in any case, is finding people who, collectively, have £250k to spare. The mortgage solution just requires (say) £25k, together with the "bank magic" of (say) 10% "reserve requirement".

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Mon Mar 26th, 2007 at 07:08:27 PM EST
[ Parent ]
  1. you can't just "value" a business at 750K or 1.4MM.  You have to find someone willing to take the other side of such a valuation (ie an investor who agrees that the business is worth that much and buy some % at that valuation).  With a profit of only 15K/year and a building worth 250K, I don't think too many investors will be excited to cough up the rest of those large sums as "goodwill".  Those ROR calcs are meaningless unless you can find someone who will accept the risk on that basis.

  2.  There is no "bank magic".  They are taking titular ownership of the building in exchange for 250K of depositor/bank stockholder cash.  The money doesn't come out of thin air despite what the anti moneylender crowd say.  To create leverage, banks have to borrow too.  Perhaps it's a house of cards, but there is no magic.

What makes borrowing 250K to buy a building from its owner toxic?  Paying interest?  In that case is paying rent to a landlord also toxic?  Getting the use of something without buying it or making it yourself costs something.
by HiD on Mon Mar 26th, 2007 at 09:46:47 PM EST
[ Parent ]

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