http://designcomment.blogspot.com/2009/08/builders-land.html

What should NAMA do?

But in some cases unfortunately, like a true pyramid scheme of things, the scandalous complexity of ownership and legal rights associated with our land banks may have began with the third last previous ‘owner’ of the lands.

I believe, my suggestion for what ‘NAMA should do’, is basically what Dublin Airport Authority should have done regarding Hangar no. 6, if they had the foresight, and the personnel on board, who trully understands land and development. BOH.

http://designcomment.blogspot.com/2010/02/who-is-dealing-here-with-whom.html

Isn’t it interesting, how in that case, so much hassle and confusion came about as a result of a ‘legal construction’, and the leasing of the hangar space. Which seems to be of obvious commercial importance to both airlines in question. There is quite a lot in what Hernando De Soto has suggested. That a lot of the problems today, in the first world, are to do with in-ability to trace lines of legal entitlement, ownership etc. That whole system, which became the basis for wealth creation in the first world, has been allowed to fall into disrepair. Advocat of ‘land taxation’ in the UK, David Wetzel described the current crisis, not as a banking, financial or economic one - but as a land crisis. He has put a huge amount of study into how we should tax the rental value of land. (I won’t make the assertion I understand it fully) But there was this question of DAA own-ing the land, Ulsterbank owning the building, Aerlingus owning the lease, which DAA acquired, and a suggestion of a ’sweet heart deal’ between DAA who leased Hangar 6 back to AerLingus. (Who owned the lease to begin with) If this does not smack of financial/legal magic making, I don’t know what does. It goes to the heart of the issues and problems in the western world, I believe. BOH.

Yup! TPTB have completed their preparations so now it is look out below! Greenspan, although I actually prefer Goldspan, is a busted flush but as he was an enabler (!) he clearly would not lie about the downside of the depression…. having caused it, loike! So he is the perfect trumpet …. still useful at his age….

if you’re still there, thanks for that - just getting around to checking on this now. Karl Whelan’s piece on this really clears things up.

http://www.irisheconomy.ie/index.php/2010/02/22/honohan-the-intertwined-recent-experience-of-the-irish-and-uk-economies/#comment-37068

In terms of economic stimulus packages for the depressed Limerick / Willie O’Dea region in Ireland.

BOH.

I just wanted to lay out some real cases for your eyes to see. I have noticed debates here can stray off into a territory, which can only be described as very academic, argumentative etc. Without recourse, to some practical application in reality. That tends to undermine the position of economics in the entire debate, as something with a positive, useful contribution to make. In terms of NAMA, we will continue to thread a very fine line between politics and economics, as we go through that process. Brian Lucey understands that better than anyone here. But I do understand, the sheer difficulty of bringing real world examples into the debate. While on the other hand, running the risk, the debate runs into heavy going, and becomes largely academic. I think, this is what George Lee meant yesterday, when he addressed a church: “An economist is like a man who knows 100 ways to make love, but doesn’t know any women.” I also refer back to Karl Whelan’s post earlier this year, where George Lee acquired proper information, which demonstrated how little employment is offered to economists, working in the state bureaucracy. BOH.

So when the tuna don’t get paid, this stops the sprat and the krill from being paid. It’s sort of demarcation for debt instruments.

You are both off the point that was made by Brian Lucey.

None of what you have quoted suggests that resting in contract gives rise to specific problems for securitisation.

You have both referenced general problems with banks not making sure security was in place. That is a different problem which may have arisen on a case by case basis due to lack of oversight or negligence. It is not the same as an across the board problem which may affect all resiting on contract cases which make up a large block of the development land portfolio.

@Noel/Richard

The Minister has consistently said that he has no ideological oppostion to taking a majority stake in the bank. He accepted some time ago that it is very possible that this will happen as a result of the NAMA valuations.

He has said that the state, for practical reasons not ideological reasons, wishes to avoid wholesale nationalisation meaning taking 100% ownership of the bainking sector, probably meaingin AIB and BoI. However, he has said the state will do so as a last resort if necessary.

Brian Lucey says the Government is avoiding nationalisation for ideological reasons. He should actually say that the Govt is avoiding nationalisation for what what he perceives as ideological reasons based on an ideology which the Govt secretly holds, like a dirty secret, despite having disavowed such ideology in public utterances.

Lucey, O’Hanlon and Goggin
All: well said and done!

===item of evidence 1=====

From an Irish town planner’s blog February 2007 http://buckplanning.blogspot.com/2007_02_01_archive.html:

“Gillian Nelis in the Sunday Business Post tells us that Minister for Finance Brian Cowen has proposed changes to close stamp duty avoidance schemes in which property developers leave site purchases ‘‘resting on contract’’ or enter into licence agreements with landowners.

Minister for Finance Brian Cowen has proposed changes to close stamp duty avoidance schemes in which property developers leave site purchases ‘‘resting on contract’’ or enter into licence agreements with landowners.

The changes were introduced by amendment at the committee stage of the Finance Bill last week and affect both the purchase of land and agreements for leases.

Until now, land purchase transactions could be structured in such a way that developers could pay no stamp duty on the purchase of multi-million-euro properties.

Among the changes proposed are that if the holder of an interest in land enters into a contract or agreement for its sale, and payments amounting to 25 per cent or more have been made, an executed conveyance or transfer must be presented to the Revenue Commissioners for stamping within 30 days from the date of the contract.”

===item of evidence 2=====

From the Independent, April 2008: “The Revenue survey found that 40pc of all land deals by value exploited the loophole.”

http://www.independent.ie/national-news/state-loses-8364400m-in-stamp-duty-loophole-1340379.html

===item of evidence 3=====

From Matt Cooper *Who really runs Ireland?* (Penguin Ireland, Dublin, 2009), following a description of how resting on contract worked:

“Although the use of the above tax reliefs [RoC, licensing, long leases] was perfectly legal, the Revenue Commissioners took the view that significant amounts of tax were being lost — €40 million was the estimate for 2006 and over €200 million between 1999 and 2006. The Revenue Commissioners suggested to the Minister for Finance, Brian Cowen, that the relief be removed from the legislation. He agreed and made late changes to the Finance Act of 2007 [...]. But then, following lobbying from the industry, Cowen did not sign the necessary commencement order to put the measure — Section 110 — into law.”

Goodbody were commissioned instead to report on the extent of use of these clever dodges; they found that ths cost to the exchequer was €251 million in 2006 alone and that about 40% of all transactions were structured “to dramatically reduce the amount of stamp duty paid to the exchequer [...]“. I cannot say what proportion of those transactions reduced the security provided to the lender.

This article suggests that there are many problems: http://archives.tcm.ie/businesspost/2010/01/24/story46915.asp

And see also articles about AIB’s defective security, drive-by valuations etc. In short, these are not problems invented by the centre-left coalition of Brian Lucey and Joan Burton.

bjg

Eh, what do you think our banks have been doing? They have been widdling away their recapitalisation money in exactly the same manner - exchanging new dated bonds for old undated ones. (The dated ones require a coupon payment). The reasoning for this? An accounting gain that makes their balance sheet look better. In reality, they have spent money they didn’t need to and made any debt to equity swap more savage and difficult (i.e. it will have to include the agreement of senior bondholders at this stage to have a chance of making solvent companies).

There can be problems with resting on contract form a developers point of view if the vendor dies or will not honour the obligation to transfer title. If a vendor has died then the developer may well have to enforce the contract and take a stampable conveyance of property.

However, from a bank’s point of view, the issue is whether they have the first legal charge over the land. I would be very surprised if banks did not require a first legal charge or mortgage on the property where any substantial consideration was involved.

Note Brian Lenihan’s statement that the valuation can be adversely affected by faulty security. This is what I was alluding to when I said the NAMA process is stopping documents walking out the door.

Whilst I think Brian Lucey might have done better to avoid speculation on this pointed, not having the any specific knowledge or insight himself, it appears that the concerns have been prompted by statements by Joan Burton and Minister Lenihan.

A reasonable interpretation of Minister Lenihan’s remarks might be that in such cases where resting in contract has caused complications then that will have to be cleared up, including by taking a conveyance of the property if necessary. This does not imply an across the board problem of the type suggested by Joan Burton and as further suggested by Brian Lucey’s article.

Having gone back over it again, I think that what Mr. Lenihan was quoted in the Examiner (link above) as saying is actually quite informative:

“Mr Lenihan said: “Each loan eligible for transfer to NAMA will be valued individually by NAMA, with the value placed on that loan taking account, inter alia, of the underlying security to the loan.

“In other words, any doubts or defects in the underlying security will affect the value placed on the loan by NAMA. Therefore developers are having to resolve these resting in contract issues”, he added.

In some cases developers have been declared bankrupt and will not have the money to clear the stamp duty liability. In such cases, the banks would have to sort out the security on the loan and would be paid a fraction of what it was worth, he added.”

Based on what he says:
1) Resting in contract does raise issues over the underlying security, so presumably lenders must often have security over something other than the underlying asset. My guess is that the security might often be over the developer’s interest in the asset.
2) Developers and lenders will be penalised for the defects in their security, to an extent which gives them an incentive to resolve the issues by paying the stamp duty, implicitly meaning that they will typically resolve the matter by taking full ownership of the underlying property asset prior to passing it to NAMA.
3) While there will be a cost to developers and lenders in clearing stamp duty, which could presumably add to recapitalisation requirements, any damage this causes to the public finances will be at least offset by greater stamp duty receipts.

While the security in these cases may be defective legally, the more I think about it the more difficulty I have in imagining that this will turn out to be a major problem in practice. Property developers seem to have been using “resting in contract” and “license to develop” mechanisms without running into major problems, so there can’t be insurmountable legal problems under normal business conditions.

Of course, business conditions are not normal.

I understand from a Goodbody report for the Department of Finance that developers usually take control over “resting in contract” and “license to develop” properties through a power of attorney. I gather from the report that the death of the vendor complicates matters, so that these mechanisms are mostly used for projects that are ready to go, and where the vendor is not elderly. Presumably, with construction seizing up, these complications are becoming more common. However, if the problems are surmountable (as they seem to be) when the number of cases is small, they should presumably still be surmountable when the number of cases increases.

What could be a bigger issue would be if the developer’s cooperation was required to exercise the power of attorney, or to otherwise exercise his/her interest in the property on behalf of the lender. I would hazard a guess that this may be part of the reason why NAMA is keen to resolve resting in contract cases prior to taking over any loan. It might also provide a business reason for forbearance on the part of lenders in dealings with defaulting developers.

I heard you on Today fm.

While I agree with what you are saying, I don’t think phrases like “no for equity holders to maintain a positive valuation” or something like that appeal to Joe Soap.

I think it should be made clear that the choice is who pays, the taxpayer or the shareholder, and this point must be hammered home.

been here for more than a day.

Agree with you re the article. Bye

Which one of you appears thin skinned?

@All

I think the article does come across as alarmist. Some of the conclusions are extrapolations based on innuendo and very little data - obviously the government has fed speculation by its refusal to be transparent about the whole thing, but I’m not convinced by Brian Lucey’s conclusions.

High time to take planning out of the hands of the local clientelist politcos ……….. I …er … agree with the GP on this one …….

@property gal

Aw c’mon - we’ve had enough of the georgeleese - at least he lasted most of a year - to huff’n'puff in less than a day doesn’t do much for your cred - fight your corner - then again, anonymity has its advantages.

“Property development is not ‘evil’, but is a necessary part of the re-cycling system for cities and for capitalism.”

Ah, thats what people were at: recycling….
Ah… No!

But if local planning authorities had grasped this nettle years ago, then maybe we could have recycled urban areas.
Berlin provides an interesting slice on this:
http://www.guardian.co.uk/world/2010/jan/10/berlin-anarchists-torch-cars

Oh ya,, Economics
Al

From the blog entry I linked above,

“The ‘the build-ers’ undertook a sort of clean treatment of waste material. Build-er(s) would convert places such as Sheriff Street into ‘yuppie territory’. In the process of doing so, Sheriff Street would disappear from the map. The name was never used on any developments, for fear of association.

That is what men such as Pat Honohan do need to understand about property development in Ireland. Property development is not ‘evil’, but is a necessary part of the re-cycling system for cities and for capitalism.”

You are not asking the right question Zhou. The point is, the ‘assets’ had to be removed from the balance sheets of ‘old money’ Irish companies. Things like paper mills in Glasnevin, sugar plants in Carlow and so forth. That in turned would enable to the ‘old money’ capitalists of the Irish financial scene to release funding, so that they could re-invest in more lucrative projects. The point is to get your sequence correct in time, otherwise, you can see nothing clearly. All of what I describe happened prior to the collapse of the property bubble. It is comical now to suggest, that NAMA is now going to be the bad bank. The ‘bad bank’ has already been set up, and the dozen or so, biggest Irish property were it. Like I said, follow the trail, and understand the correct sequence. BOH.

Thanks for the link. However, there is nothing in that article as to what the banks are supposed to have required or accepted in terms of security in those cases.

@Brian Lucey

Can you clear this up for us? Do you have information on the types of security which banks required in resting in contract cases?

Hmmm, constraint liquidity. From my blog entry linked above.

“I remember how farmers in my childhood years, would realise their excess manure into a water course in times of high flood-ing. Property developers became the ’stream’ through which junk assets were released from ‘old money’ Irish companies. The land speculation bubble was merely the distraction and the flood.

Us poor, pathetic, punters on the river bank with our mortgages were like people with fishing rods hoping to land a salmon!”

BOH.

then why do you advocate a policy that a) will likely constrain liquidity even further and b) front load the recap unto the current period.

You write the same article periodically with a slightly differant slant and yet when anybody points out the shortfall or problems in your thesis you appear thin skinned and dismisses the counter arguments with little quips. I am begiining to think that honest difference is not welcome on this website anymore. Group think now is required.
Accordingly, I formally sign off and return to a forum with relatively speaking more rational and reasoned debate. By which I mean politics.ie.I will still read Colm McCarthy.

http://www.examiner.ie/business/stamp-duty-loophole-threatens-to-reduce-nama-payments-to-banks-112374.html#ixzz0fmOXgGQh

“That appears not to be the case (I presume you mean to say ‘recourse’?). We can only go on appearances, but, like the LTV issue, the suspicion has abounded since the troubles at the Irish banks became evident, that the collateral underpinning the loans was poor.”

I mean to say limited-recourse, i.e. Developer buys from Farmer resting in contract. On getting his money the farmer grants a limited-recourse mortgage to Developer’s bank. It is limited-recourse because it does not allow the bank to go after any of the farmer’s assets other than the lands.

I agree that security can be worse in bubbles. Banks may not ask for the level of security they should ask for or they may not take care to make sure itis actually in place. However, until Brian Lucey tells us whether he has information to suggest (a) that banks did not require adequate security or (b) that the banks asked for the requisite security but did not get it, we will not know what he is on about (or indeed if he himself knows what he is on about).

We are depressingly undifferent to any other country that has had a fiscal crisis and a banking crisis and a property bust at the same time. We are not even unique or different in having all three at the same time.