AFFEERCE

Outsider Review: AFFEERCE

Stephen Villee

October 29, 2023

I met Jeff Graubart at FreedomFest 2023 in Memphis. His booth in the exhibit hall featured a giant banner depicting a dinosaur at someone's doorstep. The dinosaur represented a trebler, someone offering to pay three times the current rent.

The name of Jeff's organization, AFFEERCE, is an acronym for Alternative Families + Free Enterprise + Universal Entitlement + Balance of the Rental of the Commons + Enlightenment. That's quite a mouthful, and it still doesn't really explain what the organization does.

AFFEERCE proposes to coax the world into adopting a variant of Georgism called land-based capitalism. For those not familiar with Georgism, it's an economic ideology popularized by Henry George in his 1879 book, Progress and Poverty. This ideology holds that public services should be funded by a land value tax. What you build on the land with your own labor belongs to you. But the economic rent generated from the land itself should be shared by everyone equally.

Under land-based capitalism, you own your home, but you rent the land it sits on from a commons trust, which uses this ground rent to fund public services. Jeff argues that this rent is better than a land value tax, because it's achieved through voluntary agreement. Supposedly, once AFFEERCE sets up the needed infrastructure, market forces will propel the world toward this model within a few decades, with no coercion. This will end hunger, homelessness and poverty. It will lead to free education, free healthcare and peace on earth. So Jeff says.

I've been carefully studying AFFEERCE for several weeks now. I have some serious reservations about its feasibility, which I'll discuss. But it's a fascinating idea. Jeff has spent many years working on the project, and the website includes a lot of detailed information about his vision. That makes AFFEERCE a perfect candidate for this first installment of our Outsider Review Series.

Ground Rent

Let's start by taking a look at how ground rent works under AFFEERCE. Suppose Alice lives on a property where the land is worth $108,000 and the house is worth $162,000. So the total property value is $270,000. Alice owns the house and rents the land from a commons trust. The first 15 months of her rent might look something like this:

You'll notice that her rent is getting smaller and smaller. Each month's rent is 11/12 of the previous month's rent. Thus, the rent is a geometric series with coefficient $1,125.00 and common ratio 11/12. If you added up her rent over an infinite number of months, you would get the finite sum of $13,500.00.

In fact, Alice pays the entire $13,500.00 up front. The money is held in an advance rent account. Here's another view of the first 15 months of Alice's ground rent, showing the advance rent account balance decreasing:

Another way to look at the rent calculation is that each month's rent is 1/12 of the advance rent account balance at the end of the previous month. For example, the month 7 rent of $667.45 is 1/12 of $8,009.44.

Obviously, a ground rent like this is only suitable for someone who has access to $13,500.00 of capital. There will still be apartment buildings where tenants pay rent in the conventional sense. Alice might even decide to rent out a room in her house, charging whatever rent she can negotiate with her tenant. But Alice herself is more like a traditional homeowner. As mentioned, she truly owns the house. She can think of the ground rent as a replacement for property tax.

Indeed, Alice doesn't have to pay any property tax, because the commons trust has negotiated an agreement with her government whereby they will receive 30% of each month's ground rent in lieu of property tax.

The commons trust never has any problem collecting rent, because the full rent is paid in advance. Alice never has to pay any further rent, unless and until the property gets trebled.

Trebling

After 13 months, the advance rent account balance of $4,355.95 is just under 1/3 of its original value. (You may see some parts of the AFFEERCE website saying that after 12 months, the balance is exactly 1/3 of its original value. This would be true if we tweaked the common ratio of the geometric series from 11/12 = 0.9167 to (1/3)^(1/12) = 0.9125. But for now, let's assume the common ratio remains at 11/12.)

At that point, if $13,500.00 is the fair market value for advance ground rent at this location, the property becomes vulnerable to trebling. Let's say Bob is a trebler. The advance rent account balance is public information, and he observes that after 13 months, Alice's balance has reached $4,355.95. Bob can then offer to pay at least 3 times that, or $13,067.85, as advance ground rent for his acquisition of the property. Alice has 3 days to deposit enough money into her advance rent account to match Bob's bid. For example, if Bob had bid exactly $13,067.85, then Alice would need to deposit $8,711.90 to bring her account balance up to the same level.

In case it's not clear, Bob is welcome to bid more than $13,500.00, and he doesn't have to wait until month 13. For example, after 6 months the balance is $8,009.44, so he could bid $24,028.32 if he feels the land is worth that much. He's limited only by how much capital he has.

If Alice doesn't match Bob's bid within 3 days, then she has 30 days to vacate the property. Her advance rent account balance of $4,355.95 is refunded to her. Also, Bob must pay her 4/3 of the depreciated replacement cost of all structures and other improvements. To keep it simple, suppose there has been no significant depreciation, and Alice has made no improvements to the house. Then Bob would need to pay Alice 4/3 of the house value of $162,000, or $216,000.

The trebling provision is designed to implement the Georgist principle that whoever can make the most efficient use of the land should have exclusive access to it. By offering to pay higher ground rent, Bob is indicating he can make more efficient use of the property. The requirement of at least tripling the rent gives Alice some protection. Also, Alice has an incentive to make improvements to the house, knowing that if the property gets trebled, she'll collect a 33.33% premium on what she spent for the improvements. There's a caveat though, discussed later under Treble Structure Payment in LC's.

So here's my first concern about AFFEERCE: I wonder who would want to be a trebler. Bob's life must be rather frustrating, because in most cases, the property is worth far more to Alice than it is to Bob. For Bob, it's a place that has value for its location. Maybe it's near a nice beach or a popular shopping center. For Alice, it's all of that, and so much more. It's her home, the place where she feels most relaxed, where she can invite the neighbors over to chill.

Eventually, Bob will come to realize that trebling almost always fails, because the current owner deposits enough to match his bid. All the effort of going through the trebling process and putting that money in escrow is for nothing. After a failed trebling attempt, Alice might even say to herself, That guy Bob must have known that I would match his bid. So why did he bother? He achieved nothing for himself. All he accomplished was to force me to pay more ground rent.

If there's a shortage of treblers because the job is too stressful and depressing, Alice might escape trebling for a few years. Her ground rent might then be close to nothing. She has to be ready to deposit within 3 days enough to match any trebling bid that comes in (usually $13,500 or so), but if no treble happens, she's getting a good deal. That's great for her, but it's not so great for the commons trust that's counting on ground rent at market rate, or for the government that's counting on their 30% share of it.

On a related note, I'm a bit skeptical that the commons trust could negotiate for the government to receive 30% of ground rent in lieu of property tax. The website talks about negotiating with counties, but in New Hampshire, it's towns that collect property tax, and a portion of it goes to the state. So the commons trust would have to negotiate with each town and with the state.

Even if Alice gets a trebling attempt every year, she'll be paying roughly $8,800 a year in ground rent, which is 3.3% of the total property value. 30% of that is just about 1% a year. But the average property tax in New Hampshire is close to 2% a year. So while this might work in states with low property taxes, I don't think it will fly in New Hampshire.

Ground Lease Initiation

Alice has a lease agreement with the commons trust, whereby she rents the ground underneath her house. How might she have gotten into that situation? There are four ways such a lease can be initiated: transfer, treble, ownership conversion and abandonment auction. Let's examine each of these in turn.

Transfer

Alice can purchase the house from someone else. Suppose Cathy is the current owner. Cathy lists the house for sale, in a manner similar to an ordinary real estate listing today. The difference under AFFEERCE is that she's just selling the house, not the land. The ground lease transfers from Cathy to Alice. The amount Alice pays to Cathy is the negotiated price of the house (maybe $162,000 in this example) plus the advance rent account balance.

Note that while the house is listed for sale, the property could be trebled at any time. Indeed, this might be the moment when a treble is most likely to succeed. Cathy would presumably welcome a treble, since it would mean she'd get $216,000 for the house instead of $162,000.

Treble

Alice can treble the property occupied by Cathy. The procedure is as described earlier for Bob: Alice deposits at least 3 times Cathy's advance rent account balance. When Cathy fails to deposit enough to match Alice's bid within 3 days, the treble succeeds, and Cathy has 30 days to vacate the property. Alice pays Cathy 4/3 of the depreciated replacement cost of all structures and other improvements.

Ownership Conversion

This is the first of two ways the commons trust can acquire land in the first place. Suppose Alice owns the property in the usual sense. That is, she owns not only the house but the land also. At some point, she decides to sell her land into the commons trust. Here's how it works.

The commons trust pays market value for the property (maybe $270,000 in this case), and then gives the house back to Alice, provided she enters into a ground lease agreement with 5% of the total property value as the starting advance rent account balance.

By offering to give the house worth $162,000 back to Alice, the commons trust is creating a huge incentive for her to sell them her land. This is a key part of their long term plan to own nearly all land worldwide. Obviously, this will require a lot of capital. They hope to raise this capital through a digital currency, described later.

Abandonment Auction

This is the other way the commons trust can acquire land. They simply look for properties that are listed for sale in the ordinary sense. They'll use this method during the first few years, to cover operating expenses more quickly.

Suppose Cathy owns a property worth $270,000, including both the house and the land. She puts it on the market, and the commons trust offers to pay the full $270,000 for it. Cathy accepts the offer, and vacates the property as usual.

The property then goes to auction, where anyone can bid on how much advance ground rent they're willing to pay. The highest bidder gets the house and any other structures on the land for free. The high bid will likely be significantly higher than a normal treble, because the structures are included at no cost. The budget estimates of the commons trust presume the high bid for such an auction will be about 50% of property value.

Suppose Alice bids $135,000 as her advance ground rent to acquire the property, and she's the highest bidder. Her first 6 months of ground rent look like this:

Alice is getting a house worth $162,000 as part of the deal. It will take 27 months for her advance rent account balance to fall below $13,500, and another 13 months for it to drop below $4,500, so she's pretty happy. 30% of that enormous ground rent is going to the government, so they're getting a nice bonus, too.

This type of auction is called an "abandonment auction", because it also happens if someone paying ground rent abandons the property. Suppose Dan is paying ground rent, and he wants to move somewhere else. He hopes to recover his remaining advance rent account balance, but for whatever reason he thinks it's unlikely the house will sell or the property will get trebled. So he decides to abandon the property. His remaining advance rent account balance is refunded if it's less than the high bid from the auction.

Phases

AFFEERCE hopes to win communities worldwide over to land-based capitalism. The process unfolds over three phases. I'm not going to say much about the details of Phases II and III. The rest of this review will focus on Phase I, because that's where my concerns about feasibility appear.

I'll just mention that a kind of universal basic income called the Earth Dividend becomes available in Phase II. A portion of all ground rent in Phase I goes to the Earth Dividend Subsidy Fund, which partially funds the Earth Dividend in Phase II.

Land Coins

The commons trust plans to raise the capital needed for land acquisition through a digital currency. Briefly, they'll mint this digital currency, sell it on the open market for US$, and use the revenue to purchase properties. For the first few years, they'll look for properties already listed for sale, and proceed with an abandonment auction for each successful purchase. Later, they'll offer ownership conversions.

Throughout most of the AFFEERCE website, this digital currency is called VIP$, where VIP is an acronym for Voice, Iris, Palm. But in a few places, it's called LC, which stands for Land Coin. I'm going to use the name LC, to emphasize the fact that its value isn't guaranteed to be near $1. The commons trust takes certain actions to try to keep 1 LC worth about the same as $1. But these actions could fail, and in general the LC/$ exchange rate could be arbitrarily high or arbitrarily low.

The primary goal of Phase II is hyperdeflation of LC's. That is, the commons trust wants the LC/$ exchange rate to become very high by the end of Phase II.

Land Backing

Let's start with the major way the LC currency is different from other digital currencies like Bitcoin, Dogecoin and Litecoin: it's backed by land. After a successful property purchase, the commons trust mints a number of LC's equal to the purchase price in $. For example, after purchasing a property for $270,000, the commons trust mints 270,000 LC's and sells them on the open market.

As a result, each LC is backed by the land portion of $1 worth of property purchased by the commons trust. If the commons trust goes bankrupt, holders of LC's receive land title proportional to their holdings. In that event, a REIT would probably be set up to take over the ground leases, and each LC would become a share in this REIT. Note that ownership of the structures remains with the person paying ground rent.

LC's are only minted when the commons trust purchases property, not at any other time. Land makes up 40% of our example property's value, so if this is typical, the value of an LC just based on its land backing is about $0.40. (The figure of $0.33 on the AFFEERCE website is based on the average land share of 33% reported by the American Enterprise Institute, but AFFEERCE plans to focus on properties with elevated land share in the early years. Actually, Jeff has a recent Facebook post arguing that the backing value is even higher for other reasons.)

Advance Rent Payment in LC's

The commons trust will accept advance rent payment in either $ or LC's, assigning them the same value. For example, Alice could pay her advance rent as 13,500 LC's, and it would be treated the same as if she had paid $13,500.

To put it another way, for purposes of paying advance rent, 1 LC is worth exactly $1. This applies to the bid for a treble, the deposit responding to a treble, the advance rent payment for an ownership conversion, and the bid for an abandonment auction.

The commons trust actually tries to keep the market value of 1 LC at a little less than $1. In fact, for reasons described later, they want it to be as close to $0.9905 as possible, without going below that level. This creates an opportunity known as "rental arbitrage", whereby those paying advance rent have an incentive to purchase LC's and use them to make their payments.

Actually, the advance rent account is always in LC's. If a payment is made in $, it's handled as follows:

• If a bid for either a treble or an abandonment auction is made in $, it's kept as $ until a winner is selected. If the bid doesn't win, it's returned in full as originally paid in $. If the bid wins, it's converted to LC's at the market.
• If either a deposit responding to a treble or the advance rent payment for an ownership conversion is made in $, it's immediately converted to LC's at the market.

In either case, if the property is later successfully trebled, the advance rent account balance is refunded in LC's.

Thus, the government always receives their 30% share of ground rent in LC's. They will likely want to convert those LC's to $. How much they ultimately get will depend on the current LC bid price. (Jeff says that in some cases the government might receive their share in $ if someone is paying advance rent in $. I'm not sure exactly how this would work, but here's one possible interpretation: the government always receives their share in LC's, but if someone pays advance rent in $, the commons trust will offer to buy the corresponding LC's from the government at the current ask price instead of the current bid price.)

Treble Structure Payment in LC's

As previously mentioned, a successful trebler is required to pay the current leaseholder 4/3 of the depreciated replacement cost of all structures and other improvements. However, the trebler can make this payment in LC's, where 1 LC is treated as worth $1.

Consider the earlier example where Alice owns a house whose depreciated replacement cost is $162,000. If Bob successfully trebles the property, he's supposed to pay Alice 4/3 of that, or $216,000. But he has the option of paying her 216,000 LC's instead.

I suspect many people will consider this provision unfair, and may be reluctant to bid on properties for this reason. The replacement cost is assessed in US$. If the LC bid price goes below $0.75, then instead of getting a premium the homeowner will actually receive less than the structure value.

Land Fund

The commons trust maintains a US$ fund known as the land fund, which is used to purchase properties. It's seeded with a $7,000,000 initial investment.

26.25% of all ground rent is directed to the land fund. This is always in the form of LC's, and the commons trust will need to convert these LC's to $ for deposit into the land fund.

So there are two situations where the commons trust needs to convert LC's to $ so they can be deposited into the land fund:

• LC's have been minted as a result of one or more properties being purchased.
• 26.25% of some ground rent has been received.

In either case, the commons trust will attempt the following fill or kill orders in sequence until one of them succeeds:

For example, suppose there are 270,000 LC's to be sold. If the first 2 fill or kill orders fail and the third one succeeds, then 162,000 LC's have been sold @ $0.9903. The revenue of $160,428.60 is deposited into the land fund, and 108,000 LC's are sent to the bank.

Sending LC's "to the bank" means the LC's are taken out of circulation until Phase II. If all 5 fill or kill orders fail, then all the LC's are sent to the bank.

As long as there's money in the land fund not being used to purchase properties, the commons trust maintains a limit order to buy LC's @ $0.9900, as many as the land fund can buy at that price. Any LC's bought in this way are sent to the bank.

LC Dividend

During Phase I, an LC dividend is paid out of ground rent to each person holding LC's, in proportion to their holdings. Specifically, 29.75% of all ground rent is divided between the Earth Dividend Subsidy Fund (EDSF) and the LC dividend. The split is based on the current LC bid price.

If the bid price is $0.9525 or less, the entire 29.75% goes to the LC dividend. If the bid price is $0.9950 or higher, the entire 29.75% goes to the EDSF. Otherwise, the EDSF portion varies linearly from 0.00% to 29.75% as the bid price varies from $0.9525 to $0.9950, as shown in the following table:

The LC dividend is designed to give people an incentive to buy LC's and hold them. As the bid price drops, the LC dividend portion increases, giving investors even more of a reason to acquire LC's.

The LC dividend is always paid in the form of LC's.

No LC dividend is paid for LC's that are in an advance rent account, the EDSF, bidder or treble escrow accounts, or have been sent to the bank.

The above description of the LC dividend applies only during Phase I. The rules change in Phase II, and by the end of Phase III, the LC dividend is completely eliminated.

Biometric Identity

The LC currency is also known by the name VIP$, and as the acronym (Voice, Iris, Palm) implies, transactions in this currency are tied to a biometric identity. This includes a full-faced photo ID, left or right palm print (or, in rare cases, left or right foot print), finger prints, signature, voice prints of "yes" and "no", and an iris scan. For those uncomfortable with this, another option is available that uses an e-wallet secured only by a photo ID.

The commons trust encourages merchants to accept LC's for retail transactions. VIP readers are provided at no charge, allowing merchants to authorize transactions by a scan of voice, iris and/or palm. If the merchant accepts LC's at the rate of 1 LC = $1, this creates an opportunity known as "retail arbitrage", whereby customers have an incentive to purchase LC's at the current exchange rate and then use them to make purchases. Of course, a merchant may decide to accept LC's at the current exchange rate, in which case there is no retail arbitrage opportunity.

Ram and Jam

The commons trust plans to purchase properties with its initial land fund of $7,000,000, then mint corresponding LC's and sell them, then use the $ revenue to purchase more properties, and repeat the cycle. The AFFEERCE website uses the name "ram and jam" to refer to this process. I'm not a poker player myself, so I didn't know this phrase means betting and raising aggressively.

Jeff is aware he'll need to register the LC currency as a security. This will be one of the main responsibilities of his legal team, and he knows it'll be challenging. Only a few digital currencies so far have successfully registered with the SEC.

Scenario

I've omitted quite a bit of detail about AFFEERCE here. For example, I've said hardly anything about Phases II and III, where some magical things happen. And what I've referred to as the commons trust is actually implemented by a pair of organizations, one for profit and one non-profit.

But I've sketched out enough information to explain my doubts about the proposal's viability. Let's look at a plausible scenario for Phase I. We'll make these simplifying assumptions:

• There are lots of properties available for the commons trust to purchase.
• All the properties are valued at $270,000, with 40% land share.
• There are plenty of folks eager to bid on abandonment auctions.
• The LC/$ exchange can only transfer an integer number of LC's.
• There are no commissions, escrow fees or transfer taxes involved in a property purchase.

As best I can tell, Phase I isn't sustainable. It requires investors to keep buying and holding lots of LC's, but ram and jam along with other selling keeps the LC bid price low most of the time, so it's hard for investors to make a profit.

LC Market Maker

Clearly the LC currency needs a market maker who will place limit buy and sell orders at all times, to maintain LC liquidity.

The website describes LC's as being "pegged" to the $ at 1:1. To me that's misleading, as it suggests the commons trust is itself acting as a market maker. It's true that LC's are accepted for payment of advance rent at 1:1 to the $. But that's not enough to qualify for a peg in the usual sense. If LC's are truly pegged, investors will be expecting the commons trust to buy LC's outright when the market exchange rate goes much below 1:1, and to sell them when the rate goes much above 1:1.

The only limit order maintained by the commons trust is the order to buy @ $0.9900. But if that order is filled, the LC's bought are sent to the bank. There won't be any attempt to sell them ever again, at least not in Phase I. To keep the ram and jam process going, the commons trust is counting on someone else to act as a market maker, who will place limit orders to buy lots of LC's at a price not less than $0.9905.

The market maker needs to pick a strategy for placing limit orders. In particular, they need to decide what limit orders they'll place at the very beginning. As we'll see, their choice has a profound effect on the success of AFFEERCE. Let's look at some strategies.

The Non-Starter

Suppose the market maker initially places these limit orders:

• buy 1,350,000 @ $0.9900
• buy 1,350,000 @ $0.9899
• buy 1,350,000 @ $0.9898
• buy 1,350,000 @ $0.9897
• buy 1,350,000 @ $0.9896

It should be obvious that under this approach, AFFEERCE never has a chance to get started. The commons trust will buy 25 properties @ $270,000, then mint 6,750,000 LC's and try to sell them via the fill or kill orders. Assuming the only limit orders are the ones placed by the market maker, all five fill or kill orders will fail, so all 6,750,000 LC's will be sent to the bank. Homebuyers may be anxious to bid on the properties, but there'll be no LC's for them to buy, so they'll have to place their bids in $. The commons trust will try to convert the winning bids to LC's, but they can't do that because there are no LC's at all.

The Cautious Approach

Now suppose the market maker adjusts the starting limit orders as follows:

• buy 1,350,000 @ $0.9905
• buy 1,350,000 @ $0.9904
• buy 1,350,000 @ $0.9903
• buy 1,350,000 @ $0.9902
• buy 1,350,000 @ $0.9901

I've put together a spreadsheet showing what might happen under this strategy. Here are the statistics for month 1:

• 68 properties are purchased and auctioned to homebuyers.
• 18,360,000 LC's are minted.
• 37.73% of the LC's are sent to the bank.

One additional property is purchased at the start of month 2. I assume one investor cautiously buys $300,000 worth of LC's in the middle of month 2. Even so, there are no properties purchased in month 3 at all. That's because the commons trust has to wait for rent to come in, and it's not until month 4 that the land fund accumulates enough from its share of rent to buy one property. And that one property is the only one purchased in month 4.

So by the end of month 4, there are a total of 70 properties, which the commons trust purchased for a total of $18,900,000. Another $821,795 went to the government. Let's take a look at where that $19,721,795 came from:

Jeff's spreadsheet shows a total of $42,000,000 worth of properties in the commons by the end of month 4. Clearly he believes there'll be a lot more investors buying and holding LC's. Let's think through what it would take to achieve the additional $23,100,000 worth of properties in the commons. Homebuyers would provide half of that, or $11,550,000. The other $11,550,000 would have to come from investors buying and holding LC's. It's actually a little more than that, because additional money would have to go to the government.

The Aggressive Approach

For the scenario we'll study extensively, let's suppose a group of investors set up a company called Elsie Ventures, which will act as an LC market maker. They've heard about LC hyperdeflation, and they're confident it will happen eventually in Phase II. Meanwhile, they expect the market exchange rate to bounce around in the range from $0.9905 to $0.9999 for quite some time, and they want to make a profit off the bid-ask spread. They'll also get the LC dividend on their LC holdings as an added bonus.

Elsie Ventures decides the best approach is to keep the bid price at $0.9905 or higher as long as possible, to keep ram and jam going as long as possible. They figure more properties means more opportunities for trebling and more LC dividend potential, which means greater appeal for investors. Let's suppose they initially have $31,696,000 available for buying LC's.

They'll adopt a fairly simple market maker strategy, at least in the beginning: they'll maintain a limit order to buy LC's @ $0.9905, as many as their capital can buy at that price. For example, their initial order will be to buy 32,000,000 LC's @ $0.9905.

Once that limit order is filled, partially or completely, they'll place limit orders to sell 1/90 of their LC holdings at each of these prices: $0.9910, $0.9911, $0.9912, ..., $0.9998, $0.9999. For example, if the partial fill gives them 6,750,000 LC's @ $0.9905, they'll place these limit orders:

• sell 75,000 @ $0.9910
• sell 75,000 @ $0.9911
• sell 75,000 @ $0.9912
• ...
• sell 75,000 @ $0.9998
• sell 75,000 @ $0.9999

When one of these limit orders is filled, partially or completely, they'll place a limit order to buy the amount sold, at a price $0.0004 below the selling price. For example, if the order to sell 75,000 @ $0.9910 is partially filled with the sale of 100 LC's, they'll place a limit order to buy 100 @ $0.9906. If they already have a limit buy order at that price, they'll add to it.

When a limit buy order at a price other than $0.9905 is filled, partially or completely, they'll place a limit order to sell the amount bought, at a price $0.0004 above the purchase price.

In this way, Elsie Ventures will maintain a bid-ask spread of $0.0004, or occasionally $0.0005. There'll be no overhead for them, because the commons trust offers LC transactions with no fee.

Two Types of LC Buyers

There are two types of people buying LC's in our scenario: homebuyers and investors.

The homebuyers are all named Alice. We'll label them Alice 1, Alice 2, and so on. Each Alice is simply looking for a place to live. Of course she's also considering an old-fashioned home purchase, where she'd own both the house and the land. But she's intrigued by the idea of spending just $135,000 to live on a $270,000 property. She understands she won't own the land if she goes this route. But the ground rent strikes her as similar to property tax, and she's confident the property won't be trebled for at least two years. She doesn't want to invest in LC's. The only reason she's buying them is to take advantage of rental arbitrage. She's likely a cash buyer, since she can't even offer the house as collateral for a mortgage until she wins the auction.

Investors buy LC's hoping to make money, either by collecting the LC dividend or by selling at a higher price, or both. The market maker Elsie Ventures qualifies as an investor.

For our scenario, we'll assume there are plenty of homebuyers, but no investors other than Elsie Ventures in the first month. This is a reasonable assumption, since living on a property for half price will appeal to many people, whereas investors will likely hesitate to buy and hold a new digital currency.

Month 1 begins with 17 rounds of ram and jam in quick succession, possibly in just a few days. After that, what little remains in the US$ accounts of the commons trust and Elsie Ventures is wiped out at the start of month 2 when the government sells its 30% share of ground rent. At that point, the LC bid price drops below $0.9900, and the commons trust can't buy any more properties until some investor buys a lot more LC's.

I've put together a spreadsheet showing all the steps in the scenario. But to see the crux of the problem, ignore LC's for a moment and just look at US$. Suppose the commons trust buys 200 properties, and successfully sets up ground leases for 200 people. The commons trust needs 200 * $270,000 = $54,000,000 to buy the properties in the first place. The homebuyers are only providing 200 * $135,000 = $27,000,000 of that. The commons trust has $7,000,000, but the remaining $20,000,000 must come from somewhere else, i.e., investors buying and holding LC's. For each new $270,000 property to be purchased and auctioned to a homebuyer, some investor or investors will need to buy $270,000 worth of LC's, but can only sell half of that to the homebuyer.

Let's look at the scenario in detail.

First Batch of Properties

The commons trust begins by purchasing 25 properties at $270,000 each. 6,750,000 LC's are minted, and the first fill or kill order succeeds, because Elsie Ventures has a limit order to buy at $0.9905. So after the first round of ram and jam, the land fund balance is $6,935,875 = $7,000,000 - $6,750,000 + $6,685,875.

Alice 1 is the first homebuyer. She has $135,000 that she wants to use for a bid on advance ground rent for property 1. She could bid the $135,000 directly, but she decides to use rental arbitrage to improve her bid. She buys $135,000 worth of LC's at the market. Her order is filled as follows:

Alice 1 bids the 136,219 LC's on property 1. It's treated the same as if she had bid $136,219.

Alice 2 gets the same idea, so she buys $135,000 worth of LC's at the market. Here's how her order is filled:

Alice 2 realizes that if she bids the 136,195 LC's on property 1, she won't be the high bidder. So she decides to bid the 136,195 LC's on property 2 instead.

In this way, each of the first 25 Alices places a bid on one of the 25 properties, as follows:

Each of these Alices has a budget of $135,000 for bidding, and buys LC's worth that much at the market. Here's how Alice 25's order is filled:

Any further Alices with the same budget realize that at the current ask price of $0.9955, they wouldn't be able purchase enough LC's to make a competitive bid on any of the available properties. So they decide to wait for the next batch of properties.

Example of Lost Bid

Suppose Alice 26 has a higher budget. She really likes property 1, and decides to buy $136,000 worth of LC's to bid on it. Her order is filled as follows:

After Alice 26 wins the ground lease on property 1, what can Alice 1 do with her 136,219 LC's? She could hold on to them, and use them to bid on one of the properties in the next batch. But she does a quick calculation, and realizes that after the next round of ram and jam, Elsie Ventures will be selling more LC's at each price starting at $0.9910. Alice 27 would then get 136,223 LC's for $135,000, enough to beat her bid.

But Alice 1 realizes she can salvage the situation and even come out ahead if she acts quickly. She sells her 136,219 LC's at the market, getting these fills:

Thus, Alice 1 makes a profit of a little over $560, and is ready to try again with the next batch of properties.

Limit Buy Orders by Alices

After Alice 2 wins the ground lease on property 2, she places a limit order to buy 270,000 LC's @ $0.4000. She understands this order probably won't get filled for a long time, if ever. But if it does get filled, she'll own the LC's that are backed up by the ground she's leasing, and that gives her comfort. Then if the commons trust goes bankrupt, she'll effectively have title to her own land, and she will have purchased it at market value.

Likewise, the other Alices that won their bids place limit orders to buy 270,000 LC's @ $0.4000.

Second Batch of Properties

The first month's rent is due immediately. The commons trust proceeds with these steps as rapidly as possible:

1. convert their 26.25% share of the first month's rent from LC's to $ via the usual fill or kill orders
2. purchase properties
3. mint corresponding LC's
4. sell the minted LC's via the usual fill or kill orders
5. hold abandonment auctions for the properties purchased

It's hard to say how long these steps might take. Presumably, the commons trust would have placed offers on properties earlier, and scheduled the close of escrow appropriately.

The total of the 25 advance rents is 3,398,429 LC's. The total first month's rent is 1/12 of that, or 283,202.42 LC's. Here's how that rent is distributed:

The last two rows refer to the two organizations that implement the commons trust. Note that the LC dividend portion is 0.00% in this first round, because the LC bid price is $0.9951. The EDSF gets the full 29.75%.

The commons trust proceeds to sell their 26.25% land fund share. The first fill or kill order succeeds, getting filled as follows:

Then the government sells their 30.00% share, getting these fills:

At this point, the land fund balance is $7,009,845.6429 = $6,935,875.0000 + $73,970.6429. That's not quite enough for 26 properties, so the commons trust buys another 25 properties and mints another 6,750,000 LC's. Once again, the first fill or kill order to sell these LC's is successful. Here's how it gets filled this time:

The new land fund balance is $6,952,877.8105 = $7,009,845.6429 - $6,750,000.0000 + $6,693,032.1676.

Here are the revised limit orders for Elsie Ventures:

• buy 23,739,129 @ $0.9905
• sell 114,009 @ $0.9910
• sell 114,009 @ $0.9911
• sell 114,009 @ $0.9912
• ...
• sell 114,009 @ $0.9998
• sell 114,009 @ $0.9999

Smooth Sailing for a While

Right after round 2 of ram and jam, Alice 1 buys $135,000 worth of LC's, getting these fills:

She bids the 136,223 LC's on property 26. Alice 27 through Alice 50 similarly buy $135,000 worth of LC's each, and bid the proceeds on properties 27 through 50, respectively. Here are the bids for the second month:

To keep things simple, we'll assume Alice 26 was an outlier case, and all the other Alices have a budget of $135,000 for bidding. Of course, in a real life situation there could be many bidders on each property. But the folks who don't win the auction will likely sell their LC's, just as Alice 1 did in round 1. After all, they might decide to ditch the commons trust and buy a conventional property, including the land. For simplicity, our scenario going forward will show just the winning bidder on each property.

Another 6 rounds of ram and jam proceed in a similar fashion. Here's a list of the first 8 rounds of ram and jam, showing the balances just before that round, along with the number of properties purchased in that round:

Again we'll assume no one is buying and holding LC's in this first month, except for Elsie Ventures. The Alices are buying only as many LC's as they need to place their bids. If there's any retail arbitrage going on, it's on a small scale, and the merchants are promptly converting those LC's back to $ so they can pay their staff and their suppliers.

First LC's Sent to the Bank

In round 8 of ram and jam, the land fund balance is enough to buy 26 properties, so the commons trust mints 7,020,000 LC's. But Elsie Ventures doesn't have enough $ to buy that many LC's. The second fill or kill order is to sell 80% = 5,616,000 LC's. That one succeeds, getting filled as follows:

The other 20% = 1,404,000 LC's are sent to the bank. The new land fund balance is $5,638,423.0518 = $7,093,814.5449 - $7,020,000.000 + $5,564,608.5069.

Winding Down the Ram and Jam

Ram and jam continues for 9 more rounds, until the land fund no longer has enough to buy even one property. Below are rounds 8 through 17 of ram and jam, again showing the balances just before each round, along with the number of properties purchased and the percentage of LC's sold:

On round 17, all of the LC's minted are sent to the bank. Note that although Elsie Ventures still has $277,011.1867 left, $14,973.2060 of that is the profit they've made so far from the bid-ask spread, and they want to keep that. The largest sell order they could accommodate would be the following:

At this point, a total of 6,642,000 LC's have been sent to the bank, just under 9% of the total LC's minted. Recall that each of the Alices placed a limit order to buy 270,000 LC's @ $0.4000. They might now consider revising their orders so that they're buying just their share of the LC's that haven't been sent to the bank. That would be 245,847 LC's @ $0.4393. But then they figure the bankruptcy judge would probably view even those LC's that were sent to the bank as assets that should be sold in order to pay creditors. So they keep their limit orders as they are.

Start of Month 2

We'll assume all 17 rounds of ram and jam happen in the first month. That would certainly require an aggressive schedule, with precision timing of each close of escrow. But it allows us to aggregate the ground leases so far as if they were started at the same time. A total of 275 properties were purchased and auctioned to homebuyers in the first month. For simplicity, we'll consider all the second month's rents as being paid together. Here are the first two months of rent for the aggregated leases so far:

The first month's rent was already paid as part of each round of ram and jam, so now 2,859,466.65 LC's are distributed as follows:

The commons trust sells their 26.25% land fund share. The first three fill or kill orders fail, but the fourth one succeeds in selling 40%, getting filled as follows:

That brings the land fund balance up to $534,580.4973. It almost looks as if the commons trust could buy one more property. But then the government sells their 30.00% share, and Elsie Ventures can only buy 94,120 LC's as follows:

The commons trust ends up buying 539,980 LC's via their limit order @ $0.9900. That reduces the land fund balance to $0.2973.

The remaining 223,740 LC's go to Alice 2 via her limit order @ $0.4000.

Mexican Standoff

Once a limit order to buy @ $0.4000 is partially filled, the LC market is in a strange situation. The bid price is $0.4000, but the ask price is still $0.9910. Recall that Elsie Ventures is holding 32,147,462 LC's, and according to their strategy they still have these limit orders in place:

• sell 357,194 @ $0.9910
• sell 357,194 @ $0.9911
• sell 357,194 @ $0.9912
• ...
• sell 357,194 @ $0.9998
• sell 357,194 @ $0.9999

Elsie Ventures hasn't given up. They think this is just a temporary setback. They're confident someone will come along and buy more LC's soon.

Thus, the LC market has a very wide bid-ask spread: $0.5910. Elsie Ventures is no longer functioning effectively as a market maker. But they're the only ones holding any LC's outside of advance rent accounts, and the last thing they want to do is lower their limit selling price to something below $0.9900. That would be giving up.

Likewise, the Alices are standing firm on their limit buying price of $0.4000. Remember, they're not investors. They want to buy at that price simply as a hedge against bankruptcy of the commons trust.

A few people might consider placing a limit buy order somewhere between those two prices. They fall into two categories:

• Someone hoping to jump start ram and jam again. Their order would have to be @ $0.9901 or higher, and for maximum efficiency, it should be @ $0.9905.
• Someone looking to acquire LC's at a good price for a treble, e.g., $0.4001. Such a limit order probably wouldn't be filled until next month, when the government sells their 30% share of aggregated rent.

Investor Fred

Suppose Fred is an investor who feels good about LC's. He observes the Mexican standoff situation at the start of month 2, and decides to do something about it by investing $5,000,000 in LC's. He could place a limit order to buy @ $0.9905, but then it wouldn't be filled until month 3. He's concerned that others may buy at the market, and his order might never be filled. So he buys at the market.

Other investors say to themselves, let's hold off and see what happens to Fred's investment. Wise thinking, because Fred's investment suffers the same fate as the $31,696,000 investment by Elsie Ventures: it's consumed by ram and jam along with other selling. By the start of month 4, the Mexican standoff situation has returned. The details are shown in the spreadsheet mentioned earlier, starting on row 355. At the start of month 3, the commons trust sells its 26.25% share of aggregated rent, triggering another 13 rounds of ram and jam:

So 26 more properties have been purchased and auctioned to homebuyers.

At the start of month 4, the commons trust sells their 26.25% land fund share of aggregated rent. The first three fill or kill orders fail, but the fourth one succeeds in selling 40%.

Then the government sells their 30.00% share, with part going to Elsie Ventures, part going to the commons trust, part going to Alice 2, and the final part going to Alice 3. So the LC bid price is back down to $0.4000.

Our earlier observation about the crux of the problem predicted this. Roughly speaking, each new investment of $135,000 enables at most 1 new property to be purchased and auctioned to a homebuyer. So the initial $7,000,000 land fund enables at most 51. The $31,696,000 from Elsie Ventures enables at most 234. Fred's $5,000,000 enables at most 37. The actual number of properties is somewhat less, because some of the money has to go to the government as their share of rent.

Trebling for Structures

Jeff says that once the LC price drops below a certain point, all the properties become vulnerable to trebling due to the discount on structures. There's some truth to this, so let's take a look.

Consider Alice 25, who bid 135,625 LC's on property 25. After 9 months, her advance rent account balance will be 61,978.73 LC's. Suppose Bob is a trebler with his eye on this property. He would need to bid three times that, or 185,936.19 LC's. He would also need to pay 4/3 of the depreciated replacement cost of the structures, but remember that he's allowed to pay this as 216,000 LC's. So altogether he would have to pay 401,936.19 LC's for a successful treble.

Ordinarily this wouldn't be a good deal for Bob, but if he can buy those LC's @ $0.4001, his total cost is $160,814.67. That's less than the structure value of $162,000.

In the Mexican standoff situation, the ask price is $0.9910, so Bob can't get this wonderful deal if he buys the LC's at the market. But he could place a limit order to buy 401,937 LC's @ $0.4001. In month 9, the government will sell their 30% share of aggregate rent, amounting to 519,051.47 LC's. So if there are no other limit buy orders, Bob will collect his 401,927 LC's.

How will Alice 25 respond? She has 3 days to add 123,957.46 LC's to her advance rent account, and at the ask price of $0.9910 this would cost her $122,841.84. So most likely she would take her refunded advance rent account balance of 61,978.73 LC's plus the structure payment of 216,000 LC's, a total of 277,978.73 LC's, and sell it at the market, i.e., to some of the other Alices @ $0.4000. She'd end up with $111,191.49. She initially paid $135,000, so she could look at it this way: she got to live there for 9 months at a cost of $23,808.51. How that compares to an ordinary rental of the property is an interesting question.

Note that the government is the only one selling at the market, and they're only selling 519,051.47 LC's. That's not enough for any other investor to get this deal, at least in month 9. So it's inaccurate to say that all properties would be trebled. Only one investor each month could do a treble like this.

Investment for LC Dividend

What about the LC dividend that's now based on 29.75% of all ground rent? Won't that encourage people to buy LC's and hold them? Elsie Ventures is offering 358,577 LC's @ $0.9910 in month 4. The fourth worksheet in the spreadsheet shows what happens to an investor who takes them up on their offer, and then collects 13 months worth of this unusually large LC dividend.

The investor collects nearly 57,000 LC's over the 13 months, which is 15.87% of 358,577. Annualized, it's 14.65%, which would be a decent return, except that those LC's (including the original investment) need to be converted back to $. If the Alices have the best price @ $0.4000, it means a loss of about $189,000 as shown in the worksheet.

But if the investor places a limit order to buy the original LC's @ $0.4001, and the order is successfully filled through government selling, the investor will indeed get something very close to that 14.65% annualized return. But once again, the government is the only one selling at the market, and their 30% share of aggregate rent is finite, so only a handful of investors can take advantage of this technique.

Conclusion

As best I can tell, the fundamental problem with AFFEERCE is that it's trying to get people to buy and hold LC's at $0.9905 or higher, when they're only worth about $0.40 based on their land backing. The argument that it's higher because of LC's sent to the bank assumes the bankruptcy judge won't order those LC's to be sold.

The commons trust uses various techniques to encourage LC purchases, including rental arbitrage and retail arbitrage. But these measures only entice folks to buy LC's temporarily, not as a long-term investment.

Jeff has a spreadsheet (S033.ABC The First 20 Years.xlsm) which shows ram and jam generating over $3 billion in month 14. Homebuyers are only providing half of that, or $1.5 billion. The other $1.5 billion has to come from people buying and holding LC's. That's more than Bitcoin's market capitalization in May 2013, 3 years after it was launched.

So here's my challenge to you, Jeff. Put together a spreadsheet similar to mine, showing the details of the first few months, transaction by transaction, including the balances of the land fund and the market maker's $ account. Say a few words about the market maker's strategy for placing limit orders.

The spreadsheet you provided shows the first 20 years, but all the figures are in $, as if LC's and $ are interchangeable. Investors will want to see lots of detail about the first few months, and they'll want to see that you understand LC's and $ are not interchangeable.

Incorporate whatever properties, homebuyers and investors you think are realistic. If vacant land properties are important for achieving success, then include a few of those.

Who knows? Maybe you really can get people to buy and hold $1.5 billion worth of LC's in 14 months. I wish you the best of luck.