|Development Financial Structure||<– Date –> <– Thread –>|
|From: Mac & Sandy Thomson (ganeshrmi.net)|
|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. To subscribe via the World Wide Web, visit http://www.communityforum.net/mailman/listinfo/cohousing-l or, via email, send a message with subject or body 'help' to cohousing-l-request [at] cohousing.org 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 write. - Mac -- Mac Thomson Heartwood Cohousing http://www.heartwoodcohousing.com "Expect nothing; be prepared for anything" -- Samurai Saying ********************************************************** _______________________________________________ Cohousing-L mailing list Cohousing-L [at] cohousing.org Unsubscribe and other info: http://www.communityforum.net/mailman/listinfo/cohousing-l
- Development Financial Structure Mac & Sandy Thomson, November 12 2002
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