Originally posted in the comments here:
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OK, we are hot shot property developers and a vacant site comes up for auction at the edge of town where we can build a shopping center or something.
The vendor is some sort of pension fund, and the manager doesn't have much of a clue about land values so he just goes to the local estate agents who tout it round and offer a thirty year lease. The manager lets us know that he is best mates with people in the council, so we will get just about any planning permission we apply for and that the land is in a special Enterprise Zone so will be exempt from Business Rates for thirty years.
When the leasehold expires, the pension fund will buy back the building for an agreed % of its original construction cost as agreed between the parties (like they do in Switzerland).
As a special offer, another pension or investment fund manager tells the estate agent that they are prepared to lend the purchaser cheap money, a hundred per cent of the land price, 5% fixed for thirty years.
As aspiring capitalists, we do our sums (estimates of annual rents we can collect minus running costs and amortisation of bricks and mortar) and put in the winning bid of £10 million for the land (we have to pay our minimal search costs ourselves, as did all the other bidders - it is the searcher who pays for this, not the landowner, you do your searching before you buy the land) and we have to repay £650k a year for the amortising loan, at the end we get our construction costs back, ignore those.
So we all meet up to sign the paperwork, the Town Mayor turns up with a photographer from the local newspaper, the investment fund guy hands over a £10 million check to the pension fund guy, champagne corks are popped, secretaries' bottoms are patted and we all feel very pleased with ourselves..................
Alcohol flows and tongues are loosened and the two fund manager guys come over and tell us that we have been scammed.
They both work for the council, there was no pension and no investment fund. The land belonged to the local council in the first place and the money they "lent" us never existed, it was magicked into creation when we signed the purchase agreement - they return us the shredded check as proof.
What is "real" is the fact that we have to get on with building and maintaining the shopping center and getting retailers and customers in (as planned) and that we have to pay £650k a year in quasi-LVT to the local council each year for the next thirty years.
- How is that any different to buying the land from a private purchaser and borrowing the money from a private bank?
- Why would it be any different if the land "belonged" to somebody not using it and the council pays a developer to work out how much he would be prepared to pay and for what type of planning, and then grants planning for whatever use is best and slaps it with the corresponding LVT or Business Rates?
- Why is it in any different if the owner of a nearby existing shopping center already has an annual BR bill of £650k?
In all cases, the same value is released or created, the same activities take place, builders get work, retailers get premises, local people get job and shopping opportunities.
So where is the difference?
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