Re: Request for Guidance re Equity and other Finance Issues
From: Sharon Villines (sharonsharonvillines.com)
Date: Fri, 24 Aug 2012 09:33:39 -0700 (PDT)
On Aug 23, 2012, at 10:45 AM, vaness32 <vaness32 [at] earthlink.net> wrote:

> 1.  What types of payments should be considered equity and therefore
> creditable to the ultimate home purchase?  So far we've collected full and
> associate member fees, membership dues, and workshop fees.  We're preparing
> to make a request for a significant investment for due diligence.  Should
> member dues be considered equity?

It depends on what agreements you made with the people paying the money. If you 
don't have clear agreements, I would suggest you write them before taking on 
new members. 

Otherwise it depends on what the funds were used for and how much new members 
will be charged. For example, if the funds were used to provide meals for 
current members, you probably don't want to apply them to equity. If they were 
used for legal fees and other professional fees necessary to get the group 
together and in a position to hire a developer, then yes they should. The basis 
for these decisions is ethical as well as what is reasonable financially. What 
can can you clearly explain to new members.

I would also recommend that you set a base amount of $500 or $1,000, depending 
on what you have already invested and all new members have to invest that 
amount. They can do it in payments. It isn't fair, in my thinking, for the 
first joiners to pay monthly toward fees and then people come on board months 
or years later and pay the same monthly fees. Set up books so you know what 
each person has invested/paid so far and expect the same amount from new 
members. When you need more money levy it equally across households. 

Using "households" rather than "adult members" gets people thinking in terms of 
"units sold". But some communities do use adult members as their measure. 

The point is to set up a structure that doesn't reward people for not joining 
and rewards people for being there from the beginning. One way to reward people 
for being there from the beginning is to make an ordered list based on either 
first money paid or first commitment to purchase. Those earliest on the list 
get to choose their unit first. This doesn't mean that people have to follow 
that order and not consider the desires of others for certain units but it does 
mean they get first choice. As you go along, you will find this to be an 
important motivator to sign up "now."

> 2.  Should associate member dues be required or optional?

You have to be serious about money AND participation. Have clear agreements. 
Everyone should pay something to support the group and move it along toward a 
target -- getting built. There are many people who like to hang around and 
sometimes argue about policies that they are not willing to commit to.

Don't be lured into thinking that if you allow them to participate without 
paying money that they will come around later. You don't need it. You can be 
nice and welcoming for a certain time but then they have to pay.

> 3.  What defines a dormant member and should they continue to pay a
> membership fee?

If you have a structure that says you pay the same amount whenever you join, 
you be less likely to have dormant members. 

There will always be people on an email list who are lurking. Let them lurk but 
don't consider them members. Many people have to be sure about this before they 
join. They may be wonderful members after they join or after move-in. 
Households with small children often fall into this category. They just don't 
have the extra time. They may join later.

Define participation clearly. This isn't just about money -- community is built 
on participation and it starts now. No participation, no community.

One way to reward participation is to allow only those who participate to make 
decisions. Those who make decisions will also need to consider the broader 
needs of the community and the best practices of cohousing but it's a lot 
easier to make decisions with participating members than those who know nothing 
about your community.

> 4.  What defines a defunct or former member and what should happen to any
> funds they've paid in?

I would recommend three classes of "households":

1. Paid and participating,
2. Oriented and actively interested, and 
3. On the mailing list.

Have clear agreements before you accept any money.

Monthly dues or set membership fees that pay ongoing expenses are usually not 
refundable. Money credited toward equity may be refunded but not until the unit 
is sold to someone else. Otherwise the group will go under because that money 
may be spent on bank fees or construction permits and is not sitting in the 
bank.

Most states have laws, however, that say down payments on a contract must be 
kept in reserve accounts or some such. These would be refundable.

> 5.  What incentive models have been used to encourage first movers -- i.e.,
> credit multiple at closing (e.g., $2,000 purchase credit for the first 20
> members who give $1,000).

Graduated cost of houses with the costs going up at various points. Perhaps 10% 
for people who join 2 years out and 5% at some other point. People doing all 
that work for all those years should be compensated. This will also help you in 
pressing from more work from people who are sitting around.

People have done all sorts of scales, even discounting units at the end because 
the rest of the owners couldn't carry the costs. 

The developer is your best guide on this. In the end the budget has to work. If 
the early purchasers get a discount, the people at the end have to pay more. If 
this goes above market, it won't work. At Takoma Village we bought at market 
price two years before we moved in but the market when up so those paying 
relatively more at the end were still not paying more than market.

Developing real estate is an investment and thus has risks. You want to take 
these  into account to be sure the project gets built.

There is lots of information available in the archives. The above is just what 
I've gleaned from reading this list for going on 20 years and seeing what 
worked and didn't work.

Sharon
----
Sharon Villines
Takoma Village Cohousing, Washington DC
http://www.takomavillage.org





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