Re: Membership sale agreement questions
From: Jim_Snyder-Grant . LOTUS (
Date: Tue, 19 Apr 94 14:31 CDT
(This is my first reply to this mailing list: please let me know by direct 
email if something went wrong with this posting)

Here's a review of how New View's legal & financial agreements changed (and 
will change) over time:

Phase 1) Toss in some mony each to appear serious

In this phase, each of the 7 households agreed to put $1000 each into an 
earnest money fund. The use of the money was described in a one page agreement 
signed by all the members as an earnest money fund: the money could only be 
used by the consensus of all concerned, and it was intended to make us look 
serious to bankers, developers, etc. This phase continued up to about the 12th 
household joining. (We were also billing ourselves for ongoing soft costs by 
having the finance committee prepare assessments: at this stage we rarely got 
over $100/household per month)

Phase 2) Incorporation to protect against liability.

When it looked like we might be in a position to sign a contract with a 
developer (a deal that didn't work out) we hired a lawyer to work with our 
legal committee to incorporate as a non-profit corporation. The over-riding 
goal here was to protect individuals against liabilities of the corporation. 
The corporation is a good shield against liability (at least for stupid 
actions, but not for malicious actions). We also got officers & directors 
liability insurance. (Did you know that Massachusetts is one of the most 
litigious states in the country? It's almost as bad as California..). The 
bylaws also helped us clarify in writing what our operating procedure were: 
consensus with a fallback to voting, committee structure, the flow of money, 
etc. This form has held us up to our present size of 25 households. The form of 
our bylaws did not let us become tax-exempt: but that was not our goal: we 
simply avoid most taxes as a corporation by simply spending about as much as we 
make...Filing as a non-profit corporation also expressed our intent better then 
a regular corporation for such things as having membership dues instead of 
shares, and for allowing us the option of participating in affordable housing 
programs. Plus, filing as a non-profit corp. in Massachusetts is way cheaper 
than filing as a for-profit corporation.

3) Contracts with other entities as a corporation.

We signed contracts with lawyers, with our development consultant, with our 
architect, etc. These we signed as a corporation. We also wrote up little 
membership certificates for households & our recording officer to sign that 
basically acknowledged when households became members & that confirmed that 
households had read our bylaws. We also filed for permits with the town of 
Acton as a corporation. We also have a memorandum of understanding with a 
builder to work with us to develop a formal construction contract to go into 
effect once our permits & plans are complete.

4) The bank wants it all. They always want it all.

Then we closed on our first piece of land. (We had wanted to wait until the 
permits were in place before closing, but this was a smaller parcel we thought 
we needed & the seller did not want to wait...So we set a time limit in the P&S 
and the time limit came to pass). The bank, in lending us the money to close, 
wanted an agreement that placed each of us as a guarantor of the loan, so that 
the bank could go after each of us 'severally & jointly' as the legal jargon 
goes. So, we sent them all our tax forms & financials & they lent the 
corporation the money, but held each of us responsible. 

The bank has been very helpful, actually. They understood & had a good reaction 
to the cohousing concept after we presented it to them (Our development 
consultant, Bob Engler, does most of the meeting with them, but our finance 
committee talks with the bank a lot, too). They understand that we are much 
less of a risk than the standard developer arrangement: For one part, we are 
'presold': we already have the members we need, plus a good waiting list. For 
the other part, we are deeply committed, financially & emotionally: we are not 
like a developor who could afford to go broke on one project, declare 
bankruptcy & start again (as so many developers did in the late 80's / early 
90's). Most of us already have close to a 20% downpayment invested, between 
growing soft costs & huge deposit requirements required by the main land 
seller. We have made a side agreement among all the members to divide any 
possible loss equally: so if it all goes south & the bank goes after the 
richest person, everyone else will be legally bound to chip in & share the 
loss. But so far, even with all the delays, we haven't seen a scenario that 
results in a big loss for all: even if we end up folding, we do have control of 
a piece of land that we could sell off for at least what we paid for it.

5) This is Massachusetts. What's a co-op?

Speaking with many banks, it became clear that becoming a condo was our best 
option by so much that it was not worth pursuing a coop. The main issue is the 
appraisals (and thus the amount we could borrow). Co-ops are appraised around 
here as if they are rental properties, and condos are appraised closer to 
single-family ownership. Since we are already working with an expensive piece 
of land with a limited capacity for units, the lower co-op appraisals meant 
that families would be needing to come up with 30% or more down payments. That 
was out of most of our range. Even being condos, we will be stretching it, with 
average cash invested probably well over 20% at the height of construction.

6) It will be a condo, so the paperwork will be standard.

As New View finally begins construction (we still don't know when: permitting & 
negotiation problems seem to multiply like hydra heads), the corporation will 
be drawing on a line of credit from the bank, with the land & plans as 
collateral (and the usual first-born children, etc., of a bank financing 
agreement). We have a draft of a fairly standard set of condo documents that 
outline the existence & operating rules for the ownership entity: the 
collection of all households that collectively own all the common land & 
facilities. We will write purchase & sale agreements between New View the 
development corporation & the individual households to legally match up 
households with the houses they will be living in, and at the first closing (we 
will build in phases) the first household will become the first member of the 
condo owner's association.

7) Possible exciting confusions. 

One of the permitting options we are working on is a comprehensive permit, 
which would require that we have 25% affordable housing on our site. There's 
lots of interesting details about this that we could talk about later, but in 
terms of the legal & financial history, the interesting point here is that the 
affordable housing commision would be involved for 15 - 30 years (depending on 
the deal we strike) with verifying that new owners of these units fit, as a 
whole, the income guidelines, and that the sale & resale prices stay within the 
affordable housing guidelines. 

8) Condos are Private Property.

Though there is a significant minority sentiment about controlling the overall 
equity growth of individual households, structuring as a condo gives us little 
control over resale values (except for the affordable units, if we have any). 
Thus households will be able to construct P&S agreements at any price if they 
want to sell out after they move in. The condo association will retain the sort 
of limited right of first refusal that is allowable in condo agreements sold on 
the secondary market (FNMA guidelines). Basically, the association can put in 
place an alternate buyer, from our waiting list, for example, but cannot 
interfere with some market-based price-setting (either by an appraisal or by a 
bonafide purchase offer).

9) Out on a limb

But I'm ahead of myself here. We are still in the permitting phase, and much 
could happen between now and then. Good luck to us all...

-Jim Snyder-Grant, New View cohousing.

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