Ground Rents and Partnership Schemes

Abstract

The capital value of a development site as calculated in Chapter 4 can be used in situations where the freeholder of the land retains the land interest. These arrangements are called ‘partnership arrangements’, and often the landowner is a local authority with a land bank or a statutory authority with surplus property or a major landowner wishing to efficiently manage its estate. In these cases the landowners may feel that there is not the development expertise within their organisations to carry out the development alone. The developer together with a funder thus forms one side of a partnership, with the landowner on the other. In the 1980s this was a common form of development arrangement with local authorities. In these arrangements the landowner will retain the freehold and thus retains an interest in the development together with an opportunity to share in the growth of the development. The landowner then grants a lease, usually a long lease of (say) 125 years to the developer to carry out the project. The landowner then receives an annual ground rent for the land rather than taking a capital sum on the sale. This arrangement has enabled major landowners historically to develop their lands and yet still maintain some interest, ongoing return and control. In particular this approach has advantages in town centre situations where land assembly is difficult and risky, or in new development situations where the nature of the market has not yet been established and where risks may frighten off developers, funders and investors. In these situations by partnership arrangements the balance between risk and reward can be traded-off. Partnership arrangements in this trade-off also offer the opportunity for more innovative funding arrangements as in sale and leaseback and finance leaseback situations; these aspects are investigated in Chapters 7–10 on finance, in particular project finance.