Posted by: cjenscook | 04/08/2009

The REIT Way to Solve the Credit Crunch

The REIT way to Solve the Credit Crunch

Conventional wisdom has it the Credit Crunch may be solved by addressing the unsustainable quantity of interest-bearing credit obligations/money out there.  This means either defaults – which reduces the quantity of money and causes Depression, or by creating more credit obligations, which increases the quantity, but dilutes existing credit, and causes Inflation.

Not a particularly inspiring conventional choice is it?

Perhaps we should address the quality of credit obligations, instead? My proposal is simply to get rid of the repayment date, and linking the return on credit not to some arbitrary politically determined number but rather to the use value of the property itself….a Debt/Equity Swap.

Equity….but not as we know it, Jim…
When people think about Equity,and the “Private Sector” what they have in mind is in fact “shares in a Joint Stock Limited Liability Corporation”.  It is the Corporation which is what makes the Private Sector “Private”.

But an increasing number will know that there’s a lot more ownership vehicles out there beyond  the Corporation.

Some of these have been based not on Company law, but on Trust law – such as Unit Trusts, and the Income & Royalty Trusts that took Canada by storm because they enable pension investors to get their hands on Corporate revenues before the management does…. It’s a shame the tax-man is shutting them down.

More interesting are the new generations of partnership-based vehicles – most hedge funds are Limited Partnerships, for instance – and the Chinese investment ( I hate to intrude on private grief) in Blackstone’s IPO was of course not in Company stock, but in Limited Partnership interests.

My interest has been in developing new asset classes using as investment frameworks the US LLC, and the simple but radical UK Limited Liability Partnership (LLP) whiuch is a close cousin, and is now also available in Dubai, Qatar, India and Japan. The UK LLP is “pass through” or Tax transparent.

I use an LLP or LLC not as a conventional organisation but as a “Capital Partnership” framework for investment which links stakeholders as follows:


  • Custodian – nominally owns the asset in accordance with the agreement;

  • Investor – invests money or money’s worth eg land, materials or sweat equity;

  • Manager – manages/operates the asset

  • User – uses the asset and pays an amount which is shared proportionally between Investor and Manager.

A Capital Partnership enables two types of partnership Equity.

  • Equity Shares – or partnership interests, in a flow of production or revenues;
  • Units – redeemable in production eg Kilo Watt Hours.

Unitisation of Property
Let’s consider how a Pool of distressed mortgages may be refinanced by Unitisation

  • Stage One: transfer the properties to the Custodian.

  • Stage Two: agree affordable rentals and index link them to an agreed measure of inflation;

  • Stage Three: divide the resulting Pool of rentals into proportional Units (or n’ths);

  • Stage Four: allocate a proportion of rentals for maintenance/ management and sell the balance of Units to Investors.

For the Occupier, this is a new form of Rent to Buy – since any amount paid in excess of rental will buy Units.

For the Investor, Units provide a reasonable, index-linked, secure (because affordability = certainty) revenue stream, ideal for risk averse long term investors such as pension funds.

For Banks holding portfolios of distressed mortgage loans Unitisation enables what may be described as a new form of Debt/Equity swap. Moreover, it will be seen that the proceeds from selling such Units will far exceed the proceeds of a conventional debt restructuring into new debt which simply leaves intact the obligation to repay un-repayable capital.

Finally, if a local municipality acts as Custodian, then a separate Land Rental could replace existing property taxes. Moreover, such a rental would be (as it is in Hong Kong to great effect) an exact equivalent of the land value tax – regarded as the “least worst” tax by Milton Friedman – which was advocated by one of the greatest US political economists, Henry George.

The outcome could be a debt/equity swap on a massive scale into a simple but radical new form of REIT Unit. The mountains of un-payable debt would be exchanged for Units carrying a reasonable and index-linked rental, and the risk of non-repayment would become simply the risk that no buyer could be found, which is unlikely since even if no investor wishes to buy, the fact that Units are redeemable for the right to occupy property would mean that property occupiers would underpin the market price.

Pension funds, and sovereign wealth funds would acquire these Units, and one of the attractions to Middle Eastern pools of Petro Dollars would be the fact that these Units are Sharia’h compliant at a deep level, rather than the current Islamic veneer on a distinctly unIslamic reality.



  1. […] negligible equity, or simply wish to release equity – to do so through the simple but radical Co-ownership approach I outlined here. In this way, the income received in respect of affordable occupation of […]

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