9: Socratic Ownership of Real Estate

FRANCES HAS MADE HER PITCH to us and told us the advantages we will get from socratic leasehold ownership of the Pastland Farm.  Someone calls for a vote and we approve the measure.  We will try the socratic leasehold ownership system by selling a leasehold on the Pastland Farm to Kathy for $10 million, with a $2 million yearly leasehold payment.

After the meeting ends, Frances meets with Kathy and the investors to sign the documents.  Frances didn’t write these documents or make up their terms. She had them on her laptop; they were the same documents she used for the Hawaii Organic Rice Farm back in the United States.  She has gone through them and changed a few of the names, of course.  For example, the original documents stipulated that the leasehold payments had to be made into ‘the working bank account of Castle and Cooke, Incorporated.’  She changed this to the ‘working account of the treasury of the human race.’  The old documents stipulated that the owner of the document had to follow any rules and regulations that Castle and Cooke posts to protect the land.  She changes this to ‘follow any rules and regulations that the human race posts to protect the land.’   But, other than these minor changes, the terms of the agreement are the same.  

Kathy will have to sign a lot of documents. 

The first set of documents deal with the mortgage loan she will take out to pay the price.  Kathy will be borrowing $10 million from the investors.  The loan documents are designed to protect the investors, to prevent things from going wrong, and to make sure that the investors can step in, if necessary, to deal with any problems that may come up that may possibly place them at risk. 

The first requires Kathy to agree to operate the farm in a responsible, prudent, professional, and businesslike manner, in full conformity with the provisions of her leasehold agreement. It tells her that the lenders will be monitoring her all the time.  (Remember the risk managers?  They are watching her, so they can catch any mistakes she might make early and fix them before they lead to problems.)  If the risk managers see that Kathy is doing anything they think is too risky, they will go out and talk to her to try to see why she is doing it and figure out whether the actions are likely to harm them.  If the risk managers come away from this meeting feeling that the steps Kathy is taking are too risky, they can issue her with a ‘notice of noncompliance,’ stating that she is out of compliance with her agreement (which requires her to operate the farm in a ‘businesslike’ manner) and giving her a period of time to bring herself back into compliance.  If she doesn’t comply, the risk manager can take various other steps. All of these steps are outlined in the loan documents she signs.  There is a lot of small print.  Perhaps you, the reader, have signed mortgage documents in the past and didn’t bother to read the small print.  If you had done so, you would find provisions like the ones in Kathy’s loan documents. 

The investors need to protect themselves.  But they can’t protect themselves without also protecting the human race.  Their very first priority is to make sure that the money that has been promised to the human race gets to the human race.  If this doesn’t happen, they will lose all of the money they invested. They need to make sure this happens. Next, they worry about the rules that the human race has passed to protect the land.  If Kathy violates these rules, she is out of compliance with the leasehold agreement and the human race has the right to take her to court; in the event of a serious violation that offends the sensibilities of the court, the court may cancel the leasehold agreement, without recourse. This isn’t likely to happen, but it can happen, and the lenders want to make absolutely sure it doesn’t happen. The loan documents require her to understand and follow all laws and rules that the human race passes to protect the land.  They (their risk managers, actually) will be watching.  They are being paid to watch. 

The lenders are only protecting themselves.  They don’t want to lose their money.  If nothing goes wrong, they will sit back and get rich, rich, rich: they will collect millions of dollars in interest, over the years, on this loan.  If something goes wrong, they will lose.  The human race has set up a system where the interests of the lenders are totally aligned with the interests of the human race.  They are basically our servants.  If they do a good job protecting us, they will get rich. If not, they will get very poor, very quickly.  Since our interests align with theirs, we will all hope that they get rich.  As long as they are getting rich, we know that we are protected, our world is safe (they will protect it from harm), and our income is safe.

The Ownership Documents

After Kathy signs all of the loan documents, she signs another set of documents that involve her agreement with her landlord.  The human race is not the owner of this land.  We are, however, the dominant species on this planet and the only species capable of organizing efforts to protect it and use it in a reasonable manner. This makes us the rule-makers, landlords, and custodians of the world.

The agreement with us is designed to protect the interests of the landlords.  (In Hawaii, Castle and Cooke was the landlord.  They hired teams of professionals to draw up documents to protect their interests.  Frances knows she won’t be able to draw up better documents here; she doesn’t have anything close to the resources Castle and Cooke had.  So, she will simply use the documents she brought back from the future, changing the names as necessary.) 

The first document she signs is her leasehold agreement.  It is a very simple document.  It states that she has agreed to purchase a leasehold on the Pastland Farm for a price of $10 million with a leasehold payment of exactly 20% of the price she paid, or $2 million a year.  She will own all rights to alter the land and keep increases in production, provided she follows all of the rules of her landlords (which includes her in this case) that are designed to protect the land.  She also has the right to sell the land.  She has the option to sell back to the landlord any time she wants (after the leasehold payment has been made for that year) for $10 million.  She can sell to anyone else she wants for more than $10 million, but the leasehold payment will reset, for the new owner, to 20% of the price that the buyer paid.  

She will not own certain rights. She will not own the right to the first $2 million the farm produces; this production will belong to the landlord. She will not own the right to build a high rise or factory on this land.  The human race has created a zoning plan for all private property. This land is zoned ‘agricultural.’ She must follow this plan.  She will own the right to use the land in accordance with the plan and the rules of the human race, and to keep all revenues the land produces after paying her operating costs and giving her landlord $2 million each year. 

She signs the documents at an office called an escrow office.  The escrow officer is paid a small sum to make sure everything is done properly in the closing.  The escrow officer checks each page carefully to make sure there are no errors. After she finishes checking, she passes them to her assistant, who checks them again, to make sure the first officer didn’t miss anything.  Many escrow offices have a third checker.  It is very, very important to them that all the paperwork is done right.  They will be recording these documents and these offices will be on file for the rest of time.  They are establishing a ‘chain of title’ that people in the future, perhaps thousands of years in the future, can use to determine who owns this property.

Improvements Part One

After she finishes signing the documents, she goes back to her cabin.  The next day she gets up and goes to her computer to check on the cameras on the farm.  She goes back to work. 

At first, she has no reason to change anything she does.

She has always run the farm in a professional manner.

She continues to run it professionally.

But as she is looking at the field though the camera, she thinks about the way it looked back in the future, when it was an even ocean of green poking above the water.  When the land was all level, all the rice plants were the same height and same stage of development.  The land looked beautiful.  Now, it is a bunch of knobs and valleys at all stages of development, depending on the depth of the water.  Some areas have no plants at all; they are too deep.  In other places, the rice is already starting to wilt from the heat, because the water is too shallow.  She takes out some paper and does some calculations.  What will happen if she does level the land?  If production goes up as much as it was back in the future, her income will go up by truly incredible amounts.  She will be rich, probably the richest person on Earth.  

She thinks about how nice it would be to have a mansion down by the river, with her own swimming pool, gardens, and servants.  If she were the richest person on Earth, she could have these things.  She picks up the phone and starts making calls. 

She isn’t going to do the physical work herself, but she starts talking to people who might do it to find out what they would charge.  Several people have the ability to move dirt and tell her that it depends on how much dirt she has to move.  She needs to give them a plan that tells where the dirt is now and where she wants to move it.  She hires a surveyor to make a map of the land and talks to a landscape engineer about creating a plan that the people who will work can use to determine how much work it will take so they can give her prices.

I need some numbers to work with for the sake of example so let’s say that she eventually finds she will have to spend $460,000 to do everything associated with leveling the land.  Her consultants tell her that if she does this, she can expect her harvest and costs to both increase by 20%.  Her operating profits will go up to $2.94 million a year.

Kathy’s leasehold payment will not go up.

She has locked in the leasehold payment of $2 million for the entire time that she owns the leasehold.  It will not change until someone else owns.

 

Why the lenders will be happy to advance the $460,000:

They currently have $10 million loaned out on a property with a market value of $10 million, a 100% loan to value ratio.  If they advance the money and the improvement is made, the market value of the land will go up to $12 million.  They only have $10.46 million loaned out on it and Kathy has $1.54 million in ‘equity’ in the land.  Kathy has a very strong incentive to make sure the leasehold is not repossessed: if it is, she will lose her entire $1.54 million.

What if it is repossessed?  The lenders know that they can sell it for the $12 million even though they only have $10.46 million invested.  They are taking on less risk with the higher loan than with the lower loan.

 

She will have to borrow the $460,000 so her loan balance will go up to $10,460,000 and her interest payment will go up from $400,000 to $418,400.  After she makes these payments out of her profits, she will end up with $521,600 a year for herself.

If she keeps operating the farm like always, she will continue to get $50,000 a year from the land.  But if she improves it, her income will go up to $521,600 a year.

What does she have to do to cause her income to go up by more than 1000%?  All she has to do is call her contractors and tell them to get started.

What would you do?

Of course, Kathy is going to make the call and the property will be improved.

Further Improvements

As soon she finishes the improvement, she starts getting calls from people who want to buy the leasehold. They are making offers that are far higher than the $10 million she paid for the leasehold.

One of the callers, named Kelly, has been studying some old books on organic chemistry that were left in the ship’s library by a former college student.

The books explain that, before chemical fertilizers, people used guano (bird poop) extensively for this very purpose. The books explain how to test the soil to find out if it is deficient in the nutrients.  (Take two pots with soil in them, put guano in one and leave the other natural, plant the same number of seeds in both; then measure the output of both pots.) Kelly has tested this soil and found it to be badly deficient in the nutrients the guano contains.

Some cliffs border the north side of the Pastland Farm.  Many birds make their nests in crevices on the cliff walls.  Over the years, the birds have come down to get rice to eat and to feed their chicks.  Mostly, they poop when they are on the cliffs.  Guano—bird poop—falls to the bottom of the cliffs.  Over the years, many thousands of pounds of guano have accumulated in piles at the bottom of the cliffs.  The guano contains nutrients that were removed from the soil by the growing grain and moved by the feeding birds.  After thousands of years, the soil is deficient in the exact nutrients the guano contains.

Kelly realizes that she can replace the nutrients and the land will produce more rice.

Kelly is able to offer Kathy $12 million for the leasehold.  She has arranged financing at a rate of 4%, so her interest will be $480,000 a year. The leasehold payment will reset up to $2.4 million a year (20% of the price she pays), so her total payments will be $2.88 million.  The farm now produces operating profits of $2.94 million a year.  After her payments, she will end up with $60,000 a year.

Kelly has found another farmer with skills who is willing to run the farm for $60,000 a year.  She will hire him, and he will run the farm.

Before making the improvements, Kelly is just breaking even.  The land creates a lot of profit; she has to pay all of the profits out to other people. She gets no personal benefits from buying and owning this leasehold yet.

Why would someone buy a property just to break even?

People do this all the time in our 21st century world.  They intend to make money on improvements.  I have known a lot of people in a business called ‘flipping homes.’ They buy homes that are distressed, often at foreclosure auctions. They then fix up the properties and sell them for much higher prices.  During the time they are fixing the houses, they are always in a big hurry: it costs them money each month to own the property.  They have to pay the bank (most of these people borrow most or all of the price), pay taxes, pay insurance, pay for utilities and, if it is a leasehold property, they have to make the leasehold payments.

But these people have worked through all of the numbers in advance.  They have all the work planned to the day, and they know how much they will have to pay to own the property during this time (called the ‘carrying costs’).  They have already done a marketing analysis to determine how much of a gain they will make on the price from the improvements.

Socratic leasehold ownership is a true ownership system.  It doesn’t grant all of the same rights as freehold ownership systems, but it does grant rights to increases in production and to capital gains.  Kelly expects to make money from this leasehold two different ways.  First, she will improve the land, its profits will go up, and she will be able to keep the extra profits. Second, she will sell the improved leasehold and make a capital gain on the sale.  All the numbers work out if she pays $12 million and she is willing to offer this amount. 

Kelly doesn’t want to risk losing the deal with a ‘lowball’ offer that may offend Kathy, so she offers her the full $12 million she is willing to pay. 

Kathy accepts. 

Who Benefits from the Improvements Kathy has Made?

Kathy uses $10,460,000 of the $12 million to repay the loan she originally took out to buy the property and the other $460,000 she borrowed for the improvement itself. 

This leaves her $1.54 million.

 

We could tax this income.  But why should we?  We live on a bountiful world. We have a system that leaves the great bulk of the bounty unowned and under the control of the human race.  We don’t need the money.  If we tax gains like the one Kathy made, we reduce the incentives that people have to work hard to find ways to improve the ability of the planet to produce wealth.  If we want these incentives to be as strong as possible, we won’t tax these gains.

 

She is now the richest person on Earth.  She is free of responsibility: someone else is in charge of the farm.  She can do whatever she wants.

Kelly has purchased the right to get all money the land generates above the first $2.4 million a year.  She has agreed that she will collect the 2.4 million pounds of grain this money represents and put it into the treasury of the human race (the cargo hold of the ship). 

She will get ‘storage receipts’ for this: we use $1 bills as storage receipts.  She will not own this money; she will have already agreed that she will not own it.  She has agreed to turn it over to the treasurer of the human race as a leasehold payment.

Our income goes up.  We now get $2.4 million a year, rather than the $2.4 million that Kathy had paid us.

It is true that Kathy gets enormous benefits from her improvements.  She is now the richest person on Earth, with funds that will allow her to pay people to build things specifically for her and minister to her needs.  She can build a mansion (if she can get us to sell her a leasehold on the necessary land), she can hire someone to build her a car, she can hire servants.  She gets great benefits. 

But she is not the biggest beneficiary of the improvement.

We, the members of the human race, will get far more than she will get.  She just gets a one-time lump sum payment.  Our income will go up and stay up for year after year after year.  Her gain was $2 million.  We will get this much just from the additional income from the land over the first five years after the sale takes place.  Then, we will get an additional $400,000 a year for as long as the land remains level, which should be for the rest of time. 

This money is not meaningless pieces of paper with numbers on them.  They are receipts for treasure, real value that already exists and is in the treasury of the human race.  Our lives are better. 

Alignment of Interests

In this case, Kathy may have only cared about her own interests.  She may have been making the improvement out of greed.  But if she sells for more money than she pays, in other words, if she makes a capital gain, our income goes up totally automatically.  (Kelly will have to sign the documents and the rule is that the leasehold payment is always 20% of the price the buyer paid for the leasehold.  She offered $12 million and was therefore offering us $400,000 more than we got before.  Our income goes up and Kelly has the same incentives to make sure we get paid as Kathy had.  We will never have to send Kelly a notice because she will lose five times more by not making the payment than by making it; she will make absolutely sure we get our money, even if she has to sell her soul to get it.) 

We get far, far more in benefits than the people who make the actual improvements.

Further Improvements

Kelly may or may not be altruistic.  She may or may not be trying to increase the wealth of the human race for the future. But it doesn’t really matter: her interests are aligned with the interests of the human race.  If she gets what she wants, we get what we want.

Before she even made an offer on the leasehold, Kelly worked out the details of her fertilization project and got bids on the job.  As soon as conditions allow, she brings in contractors to do the work.  The next year, the rice is healthier than it had been before, with the plants growing large with heavy heads of grain.  At the harvest, she finds the land has produced 10% more. 

She had to pay her harvesters for their work and, since they took in 10% more, they charged her 10% more. Both her operating revenues and costs were 10% higher, so her operating profit was also higher; it had gone up from $2.94 million to $3.234 million.

Various people come by to talk to Kelly about buying the leasehold.

Why would anyone want to buy a leasehold that has already been improved?  Kathy improved it the first time and quickly became the richest person on Earth.  Kelly came in and made a different improvement; we can see that her income is one of the highest on Earth and she will soon join Kathy as one of the super-rich.

You live in Pastland.

Are you interested in possibly buying?

Why would anyone want to buy the leasehold rights to a farm that has already been improved?

You can’t level it again; the land is already level.  You can’t fix the soil nutrients; Kelly has already done this.  But these are not the only two ways to drive up the amount of wealth the land produces.

You could cut costs by automating production.  You could have computers monitoring the water levels and adjusting them through electronically-controlled gates.  You could get rid of humans in harvesting and have automated, solar powered tractors guided by computers take in the rice and haul it to the granary.  Perhaps the land won’t produce any more rice than it already does, but it will not require as much human effort for production. You won’t have to pay as much, your costs will be lower, your profits higher. 

Buyers will look at the new triple-improved farm and realize they can justify paying a much higher price than former owners of this leasehold paid, and still make good money.

Even you didn’t want to improve the land further, you could justify paying Kelly a price of $13.2 million.  At this price, your leasehold payment will be $2.64 million.  Your interest will be $528,000, for a total yearly payment of $3.168 million.  After all your expenses, you will end up with $66,000 a year.  This is still a lot of money for making a few phone calls and watching a few workers.

If you can find some other way to improve, you can do better than this.  You can join the super rich.

Someone will buy at a price of $13.2 million.  When the property rights sell for this higher price, the income of the human race will reset to a higher level.

If we had kept our natural law society, improvements would almost certainly never be made.  The income of the human race from this land would have remained the same.  Our population would have grown, and we would have divided the same yearly income among more and more people.  Our personal incomes and the per-capita contribution to common projects would have fallen and fallen until eventually we wouldn’t have enough personal income to eat and wouldn’t have enough common income to make much of a difference.

If we had converted to a hundred percent ownability society, selling a freehold on the land or allowing whoever had the biggest army to take and own it, the improvements almost certainly would also be made.  However, none of the wealth the land produces would go to the human race so we wouldn’t benefit from the improvements.  We, the people of the planet Earth, could only sit back and hope that the wealthy hire us to shine their silver and build their mansions so that their increased wealth trickles down to us. 

If they aren’t generous enough to turn us into their servants, we will have nothing and will starve.

The socratic leasehold ownership system can provide a foundation for a society that has something that neither of the two extreme societies can have: prosperity for the entire population of the planet Earth.

The Township

Several people would like to build homes on the land.  There is a 640-acre parcel of land (one mile by one mile) fronting a lake.  One of our people, a former city planner from Shanghai named Chan, has drawn up a plan showing how this would look if it were developed into a master-planned community. 

His rendition includes a map that shows where all of the roads and sidewalks would go, the sizes of the lots, the locations of parks, schools, and other public areas, and the locations that would be zoned for stores, workshops, offices, and other business facilities.

The map shows a total of 100 building lots for single family homes, laid out in a suburban style.  It shows another 100 sites for stores, another 100 for office buildings, and has several other parcels that are designated on the map as sites for apartments and condominiums.  Chan was a city planner back in the future and understands everything finished cities need.  He has put them all on the plan, including maps for the sewer system, the water system, electric system, underground tunnels connecting important areas, parks, and other facilities that we would like to have if only we had land to build on.

Chan says that we can have this town if we want.  We can set up a system where private individuals may buy and own rights to the individual lots; they will develop them.  We can build the common facilities out of the income we get from the owners of the property. 

Kathy raises her hand and asks about a building lot she particularly likes, adjacent to the lake.  She asks how much money we might ask for that lot, if we were willing to sell it.

Frances says that, if we want to benefit from the land forever, we are better off not to sell freehold rights to the land.  We can sell leasehold rights to the building lot, just like we sold leasehold rights to the Pastland Farm. We can use the same system: we can offer it for sale with a leasehold payment that is exactly 20% of the price paid for the leasehold, just as we did with the leasehold on the Pastland Farm. (The original price was $10 million with a leasehold payment of $2 million, exactly 20% of the leasehold price; each sale thereafter resets the leasehold payment to 20% of the sale price.)

How much should we ask?

She says there is no reason for us to even think about this.  We can let people submit bids.  At our monthly general meeting, we can discuss the bids on the various parcels and decide if we like any of them.  If we get a bid on a property that we like, we can accept it.  If not, we can leave things as they are. 

Frances says that we aren’t really taking any chances by doing this.  We are only allowing people to submit offers.  If we decide not to accept offers, nothing has changed.  We are like the pretty girl at the dance who came to the dance after having decided she isn’t going to dance with anyone, no matter what they say to her.  The boys can come up to her and try to change her mind.  She may stick to her resolution and not dance with anyone. She isn’t hurt by being there, even if she turns down all the guys.  Perhaps a guy will change her mind and she will dance. 

If we don’t accept bids, we are like the pretty girl who sits at home and feels sorry for herself, because she doesn’t feel like dancing, rather than going out and letting the boys try to convince her to change her mind.  If we do accept bids, we aren’t bound to anything until the majority of the members of the human race have been swayed and we have decided we are better off to allow a second leasehold than to refuse the offers.

Even then, we aren’t really bound to anything.  We will get a price and an offer of a yearly leasehold payment.  We can still put the price money into escrow.  Each year, we will get money from the buyer/owner of the leasehold we have agreed to allow.  If we ever decide we made a mistake, we can buy back the leasehold. If the property has not been improved yet, we can buy it back with the money in the buyback fund.  If the property has been improved, we can use this money supplemented by whatever amount is necessary to pay the higher market value of the property, with this excess paid back from the increases in the flows of value the land generates for a few years. 

We can’t really lose from this.

In 21st century Hawaii, people buy leaseholds on vacant lots, build homes on the lots, and then sell leaseholds on the improved properties all the time.  People make money doing this.  People will be able to make money doing it in Pastland as well.

Frances wants us to do this. Again, she points out that we will never be locked into anything.  We can set it up as a ‘trial’ system, just like we set up the leasehold for the Pastland Farm.  We can hold the price in reserve, offering a buyback option for buyers of leaseholds on lots.  If we ever decide we don’t want the land to be private, we can wait until the leaseholds are offered for sale (and this must happen eventually; either people will sell while alive or they will die and their estates will sell the leaseholds to distribute the proceeds to heirs) and buy them back.

After some discussion, we decide that we will let people submit bids on lots they like.  Each bid will include both a price and leasehold payment.  The leasehold payment must always be 20% of the price.  (That is what defines this particular kind of leasehold ownership.) For example, if you bid $1,000 for a lot, you must also bid $200 as a yearly leasehold payment.  You will pay both, just as Kathy did for the Pastland Farm: you pay the 1,000 to become the owner of the property rights and then another $200 a year to remain the owner of the property rights over time.

Every three months from here on, we will hold a meeting where we will go over the bids.  We can consider what we will be giving up to accept a bid and what we will get in return: we give up the right to use this land as common property; we get a lump sum up front, and a yearly payment, and the benefits of growth and improvements.

If we think all of the offers we get are too low, we can reject all of them.  If we like some of the bids, however, we can accept them.

The buyers will pay the price at closing, just as what happened with Kathy and the Pastland Farm; each year they will make leasehold payments to the human race that are exactly 20% of the price they paid for the leaseholds they own.

Why might we want to agree to this?

This is one tiny development on a tiny part of the world that most of us never use for anything.  Since most of us don’t use this land for anything, most of us don’t benefit from its existence in any way.  If we sell leaseholds on a part of the Earth that people aren’t using anyway, from then on until the end of time, wealth will flow to the human race from this land.  The buyers/owners of these leaseholds will have incentives to improve the land and then sell the improved leaseholds, leading to higher and higher incomes for the human race from then into the future, for the rest of the time that the leasehold is private. 

If we ever change our minds and want to take this land back to ‘unowned and unownable’ status, we can wait until the leaseholds are offered for sale and buy them back.  We can benefit from this land as long as we want without taking any risk.

Improvements

In most cases, the land won’t be worth much to the buyers of the leasehold rights until they have made the improvements.  They will still have to make their leasehold payments, however.  They will want the land to begin generating revenue (if they intend to sell or rent it out) or value (if they intend to build something to use personally) as soon as possible, so they will begin work as soon as they can. 

Many of these people will build homes, offices, shops, or other facilities that they intend to sell later.

They naturally want to sell for the highest prices they can get.  We will be happy every time a leasehold owner sells a leasehold for more money than she paid for it: it means that we will get more money from then on from this property.  We always get a yearly leasehold payment that is 20% of the price the current owner paid for the property.

We will start accepting bids and more and more of the land in this 360-acre parcel will be private.  The people will only be buying the rights to develop the land in accordance with the master plan.  If a lot is zoned for offices, the buyer can only use it for offices; if a lot is zoned for a resort hotel, it must be used as a resort hotel. We get the same benefits by allowing partial ownability rights for this land as we got by allowing partial ownability rights for the Pastland Farm.

The investors make money managing risk, and, as long as they do their job well and make money from their investment, our income is safe and secure forever.  We don’t have to worry about things going wrong; others take all the risk and we, the members of the human race, get the great bulk of the rewards.

The owners can make money improving and then selling the leasehold rights; the more money they make from each sale, the more money we, the members of the human race, will get for the rest of time.  We can hope and pray that the people who buy property rights are greedy: if they are, they will work very hard to make money for themselves, leading to higher incomes for the members of the human race forever.

We don’t have to worry about environmental problems, at least not on private land: all the people who own rights have enormous amounts of money invested.  Each property has a kind of deposit on it that we, the members of the human race, are holding in our treasury.  If they harm the land, we can cancel their leasehold rights, and use the deposit to fix the damage and restore the land to its original condition. We can keep this system for as long as we want. 

If we ever change our minds, or if the needs of the human race ever change in the future and future generations want something else, the system can be reversed without any need for trauma, violence, or without any need to ever take anything from anyone.  We clearly gain far more in benefits by allowing socratic leasehold ownership of the land in the Pastland Township than we give up.

Income from the Township

Kathy buys a leasehold on the lot where she wants to build.  She hires people to build a nice 1500 square foot home with a porch fronting the lake and a dock for her boat.  It is pretty nice, but she is thinking about taking an extended vacation to explore the lands in the west and decides the house will be a burden.  She offers her leasehold for sale and finds a buyer willing to offer $50,000 for it, knowing that he will also have to make a leasehold payment of 1/5th of this amount, or $10,000, to the human race. 

If you have ever taken a cruise, you know from experience that the cabins are cramped.  They make them as tiny as they can so they can get as many people on the ship as they can.  A lot of people would like apartments so they could have some space.  People buy leasehold lots zoned for apartments and build the apartments.  They then split off the titles for the individual apartments and sell leaseholds on them.  (This is very common in Hawaii.) Say that 50 apartments sell for an average price of $20,000.  We get $4,000 a year as leasehold payments on each apartment, a total of $200,000 a year as leasehold payments on all of them.

People build grocery stores, shopping malls, hair salons, and other retail establishments.  These people may not sell the leaseholds on the improved properties right away, but eventually they will sell them, and the leasehold payments will go up.  As time passes, the income base of the human race increases steadily.

The Pastland Forest

A few miles away from the Pastland Farm there is a forest.  This forest has been producing lumber for millions of years.  Before humans arrived, this lumber went to animals: beavers cut trees to make the dams and dens to raise their families.  Deer, moose, woodpeckers, carpenter bees, and other animals browsed and ate the forest plants.  Anything that was left went to huge quantities of termites that have been the most abundant animals on the planet since they first evolved hundreds of millions of years ago.

This forest is bountiful; it pours forth immense quantities of lumber for the benefit of its (animal) inhabitants each year.  The dominant species in any area gets first claim to the things the land there produces and contains.  Humans are here now.  We get the first claim on the bounty of nature.  We can collect the bounty of this forest before it goes to the animals and use it for our benefit.

We could collect this bounty many different ways.

We could hire people to operate the forest just as we hired people to operate the Pastland Farm.  We could hire people to determine the maximum sustainable yield the forest could generate and then have our managers mark trees for cutting and then hire loggers to remove the designated trees. We could then sell the trees and use part of the money to pay the cost of removal of trees and the manager’s salary, leaving the free cash flow of the forest.

We could decide that humans can’t really own forests; since no one owns the forest, no one owns the bounty it produces or the free cash flow that represents the money from the sale of that bounty.  We could have meetings and elections to determine what happens to this free money each year.

That is one option.

We could also decide that we, as the dominant race, are the lords of the land, including the forested land. We could decide that we have the right to use science, logic, and reason, to evaluate land management techniques and determine which one will best meet the needs of the landlords. We could hire a professional in this field to come up with a system that will lead to a permanent, automatic, and risk-free income that we can expect to grow continually, as the people who interact with the forest on a day-to-day basis figure out ways to improve the health of the forest, so it produces more lumber and other things that can bring benefits to humans at lower costs.

Frances has spent her adult life studying and testing various land tenure systems.  She understands all of the options and tells us that the socratic leasehold ownership system she designed for the Pastland Farm creates the most perfect possible alignment between the interests of the people who make day-to-day decisions on the land and the landlords of the Earth (the human race in this case).  It works for farms.  It works for homes.  It works for forests. 

The same system that works for the Pastland Farm will work for the Pastland Forest.  The Pastland Forest is quite large, so she recommends we break it up into several smaller parcels and sell leaseholds on some of the parcels, leaving other parcels unowned and natural.

Frances tells us that the buyers and owners of leaseholds have incentives to improve the properties the leaseholds cover.  The Pastland Forest is just as nature made it, with the trees crowded together in some places, and with various kinds of brush and shrubs competing for water and nutrients.  The leasehold owners can hire people to remove logs in the most crowded areas first, giving the remaining trees more nutrients and increasing their growth rates.  They may find that animals have removed nutrients from the land over the years, and these nutrients need to be replaced.  They may find insect infestations that they can remove with simple, safe, and non-destructive practices.  Leasehold owners will be able to get and keep any increases in cash flows they generate.  They will look for ways to drive up the bounty of the properties under lease.  

If the owner of the leasehold on the Pastland Forest can increase the free cash flow of the land, she will find her leasehold title is ‘worth’ more money. ‘Worth’ more means that, if she offers to sell it in a market, she can get more money than she paid for the leasehold.  It turns out that this particular owner is greedy. She wants to get as much money as she can.  This motivates her to work very hard. 

Her first priority is to make absolutely sure that the interests of the human race are always protected.  We get every penny of the amount she has promised us as a leasehold payment before she gets a dime.  She has five times the amount of the leasehold payment invested in the property.  (The leasehold payment is always 20% of the price so the price, which is the investment, is 5 times the leasehold payment.  This is always true for every socratic leasehold ownership investment.)

We have created certain rules to protect the forest.  She has to make sure these rules are followed.  Any mistake could cost her millions of dollars: she will make absolutely sure that nothing that she can prevent harms this forest.

After she has met these needs, she can keep any money she makes from the forest.  The more it makes, the more she keeps.  There are a lot of ways to make forests more bountiful.  A higher bounty means more money for her as long as she owns and a huge capital gain when she sells.

We can hope that the buyer of this leasehold is greedy and selfish.  If she is, we know that she will do whatever it takes to make sure that the interests of the currently living members of the human race are always protected.  We want our money. She will make sure we get it. She will also do whatever it takes to make sure that the interests of future members of the human race are protected.  They want the land protected and improved, so it will provide even more wealth for them in the future than it provides for us in the present.   If she can find any way at all to make this happen, she will do it.

The Pastland Quarry

People who want to build houses will need lumber, stones for the foundations, and sand and lime to make mortar. The leasehold owners of forests will make lumber available, but builders also need stones, sand, and lime.

One of our people sees a hill that is made of sand and rocks on one side and limestone on the other side. At a general meeting, she says this would make a good quarry and asks if we would consider creating and selling a leasehold on it.

The human race gains if we agree to this request.

The buyers of the leasehold rights to the Pastland Quarry will own the right to remove gravel, sand, and rocks from the quarry.  (If this is not on the list of potentially harmful changes, they don’t even have to ask permission; if it is on the list, they will have to know for sure that they can get the necessary permits before they will bid on the quarry, because it is worthless without the permits.)

They will get the gravel, sand, and rocks, for the cost of removing them.  They can then sell these materials for whatever the market will bear. Now that the Pastland Township is under construction, there is a huge demand for building materials, so they will be able to sell these materials for very high prices.  Since the owners of the leasehold on the quarry obtain the materials for nothing or virtually nothing, and sell these materials for very high prices, the quarry will generate extremely high free cash flows.

People know this.  They formulate their offers on the property accordingly.  Say that you think that this land will eventually produce a free cash flow of $24,000 a year.  What might you offer for it?  If you offer $1,000 as a price, your leasehold payment will be $200 a year.  Clearly you can justify making this leasehold payment with $24,000 a year to pay it.  You may try to buy the leasehold for this amount and submit this bid, but if you see a pile of envelopes in the bid box, you can be pretty sure that other people have bid more than you and you won’t win.  If you want to win, you will have to make a reasonable offer on this leasehold.

What is the right amount to offer? With this particular free cash flow, you wouldn’t expect anyone to offer more than $100,000.  The leasehold payment on this will be $20,000.  If the buyer borrows the money at 4%, she will pay $4,000 in interest on the loan.  This would make the total payment (leasehold payment plus interest) equal to the free cash flow.  Most likely, no one is going to offer more than $100,000 for this leasehold.

Perhaps several people would like to buy it for less.  If you could buy for $50,000, your leasehold payment would only be $10,000 a year and interest would only be $2,000 a year, for total payments of $12,000 a year, which is half of the free cash flow. The quarry will produce a flow of free money in the amount of $24,000 a year.  If you can buy the leasehold for $50,000, you will be able to keep half of this free money for yourself.  Clearly, the leasehold on the quarry is a very good deal at this price.  You would probably expect this leasehold to sell for a price very close to $100,000.

We gain four ways by agreeing to create this leasehold and sell it:

1.  Every person on Earth will get more money each year than we would have gotten if we hadn’t agreed to the leasehold sale.  Whatever the leasehold payment is on the quarry will be divided among the human race.

2.  We will be able to buy mortar, stones, sand, gravel, rocks, and other quarried products in stores.

3.  People will build homes, stores, condominiums, and other structures. Eventually, the leaseholds on these structures will sell and the leasehold payments that had been very low on the unimproved land will rise to very high levels.

3.  The cost of everything made of mortar, sand, gravel, rocks, and other quarried products will fall, our money will go farther, and we will be able to buy still more.

Other Real Estate

The members of the human race are joint landlords of the world.

If we don’t want any parts of the world to be private, we can simply not sell any rights to any parts of the world.  If we sell a great many leaseholds and then, after some reflection, decide that we sold rights to too much of the land, we can use the money in the buyback reserve fund to buy back any rights that have already been sold.  We can set the degree of ownability of the land to any level we want.  If we want progress for some time, so that we can have factories to make enough machines to allow us to live comfortably and in prosperity, but then want ownability to end, we can make this happen, creating the wealth we need through ownability and then going back to natural law societies for as long as we wish. We, the members of the human race, are in charge.

If we want more properties to be private, all we have to do is create more leasehold titles and sell them.

We, the members of the human race, do not consider ourselves to be the owners of the planet.  We are, however, the dominant species.  As such, we are the only species in a position to make rules about the use of the world and enforce them.  (Other species may have great powers and abilities but can never make humans conform to their laws.  Lions can easily kill humans in combat, but they can’t claim certain land for their exclusive use and make and enforce rules that keep us off of the land they have claimed.) Because of our abilities, we are the lords of the land, or the landlords of the planet earth.

Frances wants to set up a system to make it easy for us to put any desires the landlords of the planet may have into action.  She sets up a website where people may request that certain parts of the world be made private. 

The Mansion

Let’s say that you come into money and decide you want a house better than anything that could be built on the township, because of the limited lot sizes in the township.  You find a property that you decide is the ideal property for your mansion.  So we have a name to refer to it, let’s call it the Cliffside lot.

The Cliffside lot has 100 feet of private ocean beach; it has a cliff that overlooks the beach that is solid granite and would be a perfect place to build a home. One side of the home would have the ocean view; the other side looks back on some forested mountains.  There is a freshwater stream flowing through the property, with a waterfall that goes into a pond, which then flows into the ocean.

The forested side has fruit trees and grape vines; you can go to your back yard and pick cherries, apples, pears, peaches, and as many grapes as you want.  Deer come to a meadow near the stream to eat and drink, and butterflies play on the flowers of the fruit trees.  It is a very nice lot.

This land is not private.

It is not owned at all.  It is in the inventory of land that the landlords of the human race have not yet discussed.  All such land is considered to be unowned and unownable, available for the use of everyone, provided they follow whatever rules we decide to pass involving the use of unowned land.

You can go to the website and request that it be made private.  You can describe the land and explain that you want a leasehold to be created on the land and then allow people who are interested in buying this leasehold to submit bids.  The human race will have meetings on a regular basis and will evaluate whether it wants to grant your request. 

On the website, you can explain why granting this request will benefit the human race: you can explain that you will bid on the leasehold and, if you win, you will build your dream home there.  If we approve and sell the leasehold, we will begin getting leasehold money right away on it.  You will not own the home itself; you will only own the right to lease the land and its improvements for the rest of the time you wish to own, up to the end of your life. 

At some point, the leasehold will sell.  Because it will have a mansion on it, it will sell for an extremely high price. The human race will get a leasehold payment that is 20% of this ‘very high price.’  The next owner will probably improve it further, to make more money on it.  The market value (price) will go up each time it is improved. When it sells, this will translate to a higher income for the human race. 

Let’s say we approve your request.

Now you must enter a bid on the leasehold that the landlords are willing to accept.

To bid, you have to offer a price and a leasehold payment, where the leasehold payment will always be 20% of the price you offer.  The computer is set up so it won’t accept your bid unless you fill in two blanks, one for the ‘price,’ the other for the ‘leasehold payment,’ and the number you enter into the ‘leasehold payment’ box is exactly 20% of the number you enter into the ‘price’ box.  For example, if you offer $1,000 as a price for the lot, you also have to offer $200 a year as a leasehold payment, or the computer won’t let you bid.

You really like this building lot.

But after you posted your request, a lot of people saw your glowing description of the land and decided to check it out themselves.  Many people fell in love with this wonderful lot.  Some of them also wanted to build their dream homes there. If you want to win the auction, you will have to compete with these people and outbid them.

Eventually, someone will win this auction.  Whoever wins will have agreed to make a leasehold payment to the human race each year for the right to control this part of the world as private property.  Whoever wins will have agreed to pay the human race more money each year for the right to control this property than any other person on Earth was willing to pay.

This same process will work for every property that we make private.  The human race is agreeing to allow certain parts of the world to be private.  These parts of the world will not be available for the use of other members of the human race, only for the use of the private leasehold owners.  We must give up the right to use these parts of the world.

In exchange, we get money.  We give up the land over time, and we get money over time to compensate us.  We, the members of the human race and landlords of the world, get compensated for each and every day of ‘loss of use’ of each private part of the land.  As long as we believe we are getting enough to compensate ourselves for the loss of use of these parts of the land, we don’t have to do anything: we will get paid over the course of time for every property.  We don’t just get some random amount that is set by some government bureaucrat; we get paid an amount set by a market that pits all members of the human race against each other.  This market only allows one person to control each property: the one person who places the highest value on the right to use that property and is therefore willing to pay more money to use that property than anyone else on Earth is willing to pay.

This will be the same for every property sold with socratic leasehold ownership.

Buyers will offer both prices and leasehold payments.

As prices go up, so must the leasehold payments.  When the bidding ends, the one person who is willing to pay the human race the greatest amount of money each year for the right to take this part of the planet out of the ‘inventory of unowned parts of the planet’ will get the rights to this land.