Communities of all sizes and types have a need for capital to be used for community improvement and the benefit of residents. Communities are frequently able to borrow money, but cannot sell ownership interests in the community to raise money. The communities can borrow directly from institutions and individual investors or by guaranteeing the repayment of money borrowed by companies doing something which benefits the community.
It can also be possible for communities to issue royalties to investors in return for money to be used by the communities. The problem is that communities generally do not produce surpluses and are not able to project the availability of future surpluses. Communities are able to project revenues generated by specific facilities and services, however, such as rents and license fees received from those doing business within the community, water and power provision, waste removal, transportation services, etc. Therefore, communities would be able to sell a royalty investor an agreed percentage of those revenues.
This is not a wholly new idea as turnpikes have been financed with debt having terms benefitting investors from use related fees. Also, communities own land which has been leased on some form of revenue participation basis. What is new is the idea of aggregating the easily identified revenue generating activities of the community for the purpose of sharing a percentage with those investing in royalties issued by the communities.
Of course, royalties could be issued by the communities based on the revenue of any of their specific revenue generating services or facilities. However, the aggregation would allow a larger amount of funds to be raised and the diversification would be attractive to institutional royalty investors.
The bet the royalty investor is making in accepting the community’s steadily rising projection of revenue and therefore royalty payments are population growth and probably rising revenues based on increased costs and pricing. Royalty investors can also benefit from inflation.
However, I am not going to discuss in this essay the results of our study and solutions as to the valuing for royalty calculation purposes of non-revenue or low-level revenue generating facilities and services.
Community issued or assured royalties will enable community development and benefit royalty investors. It is a win/win situation where both of the participants are benefitted. The U.S. investors are most likely to be public and private institutional retirement systems as they have currently unmet long term needs for higher returns.
Arthur Lipper, Chairman
British Far East Holdings Ltd
858 793 7100
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