WiserEarth Suggestions

Introducing the Model

Open Capital***Asset based Partnership Financing****Co-ownership***Open Corporate

We first learned about this model from Chris Cook who has been thinking about this for several years. Chris uses his site OPEN CAPITAL The sharing of Risk and Reward www.opencapital.net as a repository for some of his writings, we encourage you to visit it.

Lets start with some excerpts we put together to form explanation of the model by Chris and adapted to incorporate LLC instead of LLP as we are based in the U.S. and the LLC is very similar to UK's LLP.

 ‘Open Corporate’

An ‘Open Corporate’ is governed under a hybrid system of law partially from company law and partially from partnership law. Under this governance, it offers two innovative concepts. First, it can be considered 'Open' because it allows for infinite flexibility of it's members. Membership of the LLC is initially those who subscribe to the incorporation document. However, any person may become a new member of an LLC with the agreement of existing members and cease to be a member with their agreement as well. These partnerships require no legislation, since they are based upon consensual agreements that individuals and enterprises are free to enter, or not, at their discretion.

Second, is the concept of 'proportional shares'. An enterprise can constitute an infinitely divisible, flexible and scalable form of Capital capable of distributing or accumulating Value organically as the Enterprise itself grows in Value or chooses to distribute it. The open corporate as a whole makes a profit by competing against other businesses, but its members themselves do not make either profit or loss against one another. Rather, the profit of the open corporate as a whole is distributed among the members in accord with their LLC membership agreement. This is facilitated by proportional shares or proportional percentage claims on the revenue stream produced by the enterprise. Why sell ownership and control of assets when it is possible to unitize production or revenues and sell it to stakeholders?

As such, Chris Cook constitutes this ‘Open Corporate’ framework a unique kind of equity.

As in all partnerships, the revenues net of costs external to the enterprise would be divided among Members in accordance with the LLC Agreement. This means that all Members have a common interest in collaborating/ co-operating to maximize the Value generated by the LLC collectively as opposed to competing with each other to stakeholders to maximize their individual share at the other stakeholder expense. Partners do not compete with each other - they collaborate together, sharing risks and rewards, rather than seeking to maximize reward and minimize risk at each other's expense. Therefore, there is no `profit' or `loss' between the Members of a partnership, merely the creation, exchange and accumulation of economic value - in whatever form. Economic value may be the resources that have a 'value of' money or indeed money, the members can choose.

The outcome of these two concepts makes for a supremely simple and remarkably flexible 'Corporate

Partnership' or 'co-ownership' between investors and users of the investment. It allows for the unitization of an asset, held within a new type of legal ‘wrapper’, and based upon partnership principles. It also allows for property to be financed affordably since the occupiers pay to maintain the property but are not repaying a loan. Thus this is an interest and debt free investment.

With all those members, how are decisions going to be made?

The relationship between members is governed by agreement between the members. An LLC Agreement would define the different classes of stakeholder Members and then through suitable provisions covering majorities (>50%) or super-majorities (>say 75%), it would be possible to ensure that certain events, such as amendments to Aims and Objectives, or the disposal of key assets, could not take place without the agreement of all constituencies of stakeholders.

What about taxes?

This framework also allows tax transparency. Income or gains are treated as the income or gains of the members, in the proportions specified in the members' agreement. Revenues pass straight through to the members who are then taxed individually. Capital gains tax applies to members of LLCs as to those in a normal partnership.

So what would this ‘Open Corporate’ look like in terms of Real Estate?

A piece of revenue producing real estate would be held within the framework of the legal  LLC entity. A custodian, property occupiers and financiers would all be co-owners of the real estate asset. This asset held within the LLC would need never to be sold again. It would simply remain in the Trust. The investors / users / managers may change in accordance with the LLC agreement however.

Occupiers would pay an affordable, but index-linked capital rental for the use of the property. This “Capital rental” is set at an affordable level, and comprises the ‘use of the Capital’ which includes the maintenance/ depreciation and related management/ quality control (and possibly heating) of the real estate. This Capital Rental then rises with an agreed indexed measure of inflation. The affordability of the finance means that the investors return is much more certain. Units, or property rentals, in the LLC are then sold to long-term investors.

Any rental paid by the occupier before due date automatically becomes investment / an investor. When an occupier's income as an investor equals the rental due for the use of the property he is - in economic terms - the owner. 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.

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". Through omitting a repayment date, credit evolves into an open-ended form of Equity. A new generation of direct “Peer to Peer” investment in Units of revenues from a productive asset may evolve to complement conventional secured debt and shares in companies.

Who are the players?

• Trustee or Custodian - owns/ holds the asset in perpetuity in accordance with Aims and Objectives expressed in the LLC agreement.

• Investor or Capital Provider - the individuals and/or enterprises who invests money or money’s worth (such as the value of the land) in assets into the partnership.
• Occupier or Capital User - the individuals and/or enterprises which occupy the land and the property on it
• Manager / Developer / Operator - provides development expertise and manages the LLC once the development is complete.

What kind of Return on Investment should investors expect?