Development Financial Structure
From: Mac & Sandy Thomson (
Date: Tue, 12 Nov 2002 08:29:02 -0700 (MST)
Mark & Others,

Here¹s a fairly comprehensive answer to your questions about Heartwood¹s
development financial structure.  I¹d guess that other new forming groups
may share your questions so I¹m posting it to coho-l as well.  I¹m very
satisfied with how our development finances went.  We always had adequate
cash flow when we needed it and we ended up with a 4% surplus of cash (i.e.,
~$170K profit)

If you¹re not already subscribed to that chat, I¹d strongly encourage you to
do so.  It¹s a very good ongoing conversation of the various issues related
to creating and living in cohousing.

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On 11/09/02 PM, Mark Wolfe wrote:
> My name is Mark & I' am a founding member of Carbondale Cohousing in
> Carbondale. 
> We are a group of approx 12 households and have existed for about 2 years.
> We are trying to collect information from other groups about our financial
> structure.
> Specifically we are looking for examples of membership agreements, and we
> are wrestling with the question of how to reimburse individuals who make
> loans to the group, i.e. high risk $$ vs. low risk $$.
> Thank you very much for your time.

One of the keys to financing a cohousing project, IMHO, is to get a solid
group of financially committed members together before getting under
contract for land.  Once you get your land under contract, the spending
really accelerates.  Here's the history of our spending through the various
development phases:

PRE-CONTRACT          40 mos          $9K          0.2%
UNDER CONTRACT          13 mos          $28K          0.7%
DESIGN          15 mos          $250K          5.9%
CONSTRUCTION          12 mos          $3,950K          93.2%
TOTAL          80 mos          $4,237K          100.0%

We did 2 things to ensure commitment of members.  One was to have them
complete a membership application which basically was a checklist of
requirements (attending meetings, meeting members, etc, etc) to ensure that
they had carefully considered joining Heartwood (our membership is self
selecting), from both a personal emotional point of view, as well as
financially (they had to get bank prequalification to buy a house).  The
second thing was to have them invest $6000 (nonrefundable) in our
development corporation.  Our development corp was a sub-S we formed (LLC's
are also popular amongst coho groups) to act as our legal development
entity.  Now that development is completed, our sub-S development corp has
been dissolved.

Some groups have a system of gradually increasing investment, but we went
for $6000 all at once for various reasons:  1) so we didn't string people
along who were really not in financial position to buy a home at Heartwood;
2) to get the investment bit handled with minimal administrative work; 3) to
get a decent sized pot of cash together to proceed with development.

We chose the $6000 amount because:  1) it was too much for most people to
lose so they'd make good and sure that Heartwood was right for them before
investing (people joining and then quitting can be very disruptive to the
group as well as to the people themselves); 2) it was low enough so that
even our financially strapped members could come up with it;  3) it was
enough to weed out folks who weren't in a position to buy a home; 4) it was
enough to finance development during those early stages.

When folks invested the $6000, they and the corporation entered into a
'stock purchase and earnest money agreement' to make everything clearly
understood and legal.  Of the $6000, $100 bought stock in the development
corp and $5900 was earnest money for their eventual home purchase.

There was no interest earned on the $6000.  Instead, we created various
incentives for joining at various critical stages of development.  The
incentives included place in lot selection queue (first to join, first to
choose), and a discount on the eventual purchase of the member's lot ranging
from $1K to $5K depending on when they joined.  The earlier they joined in
the development process, the greater risk they were taking, so the greater
discount they received.

Matching risk and reward is a basic financial principal and it's one that we
followed.  It was the most important factor in determining how we
compensated members for their various investments in Heartwood.

As we moved into the design phase, we needed to raise more cash and we
started working with banks to arrange our construction loan.  The bank
wanted to see that our homebuyers (members) were completely committed so
they wanted a full 10% of the eventual home purchase invested in the
development corp so we raised the member investment requirement from $6000
to 10% of the eventual home purchase (someone buying a home expected to cost
$250K needed to bring their investment up to $25K).  More well off members
or family members sometimes helped out financially strapped members to meet
this requirement.

The bank was only willing to loan a certain percentage of the construction
cost (I think it was 70%).  We had to come up with the rest in equity
(investments from members and possibly others).  (We developed the project
ourselves so we had to come up with all of the equity.  If you partner with
a developer, they will provide some of the equity.)  In order to raise the
additional equity, we created a series of member loan pools.  These loans
were optional.  If members had money to invest, they did.  If they didn't,
that was fine too.  Because only some of the members invested in these loan
pools, we had to take special care to make sure the returns we paid to them
were appropriate to the risk we they were taking so they didn't get over or
under compensated.  We structured the loans such that the member investor
received a discount on their eventual home purchase rather than receiving
interest and that amount of discount was fixed.  By fixed discount, I mean
that regardless of  when their home was ready to buy, they received the same
discount.  With a regular loan, the interest earned is tied directly to how
long the loan is made.  One of the biggest financial risks in construction
is delays that cause financing costs (interest) to increase greatly.  That
was a key characteristic of these loans for the development corp.  It
reduced our risk of construction delay financing costs by passing that to
risk to the member investors.  These member loans generated over $700K and
raised the equity we needed.  I like the fact that we raised all of our
equity from our members.  We were the ones putting it on the line to realize
our dream.

Again all of these additional investments and loans were supported by legal
contracts to make sure everyone clearly understood the risks, rewards, and
obligations and to have something on paper to fall back on if there was ever
a disagreement later (fortunately that never happened to us -- perhaps
because we put everything in writing)

If I remember right, our bank loan was for up to about $2 million, but we
only ended up needing a little over $1 million.  The reason we ended up
borrowing so little was because almost all of our homes were pre-sold.  We
actually ended up selling the homes before we had paid for much of their
construction.  We'd wrap up construction, get the CO, sell the home, and
then a few weeks later get the construction bill for the last part of the
home construction from the contractor.  At one point when almost all of the
homes were completed, we had over a $1 million in the bank with no loans
outstanding.  In this way, our interest income for the whole project was
almost as much as our interest expense.

I can't emphasize enough how important it is to get full membership as soon
as possible.  Having full membership (and pre-selling 100% of the project)
meant that we could get a bank loan without having to partner with an
experienced developer so we got to keep 100% of the profits.  And it meant
selling our homes as soon as they were completed to minimize interest
expense (and actually generate substantial interest income).  Besides these
huge financial implications, full membership also means greatly reduced work
on membership recruitment (there's always some, even now) and incredible
peace of mind.

Some of the financial requirements we imposed on ourselves may sound hard
nosed, but all of the various financial structures and requirements we came
up with over the years we're approved by the group using consensus.

I still have all of the various agreements we used on my computer so if
you'd like a copy of anything to use to get ideas, let me know.  Please
consult with your own members, lawyers, and accountants to create the
agreements which work best for your group.

> You may have met Jeff and Priscilla Dickenson, from our group, who visited
> your site in September (?).

I did indeed meet Jeff and Priscilla.  We had a good visit out here at
Heartwood and a great time at Dan and Lisa's wedding.

Best of luck to you!  If you have any questions, please feel free to call or

- Mac

Mac Thomson

Heartwood Cohousing

"Expect nothing; be prepared for anything"
           -- Samurai Saying


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