Cohousing-L Mailing List: Re: financial planning

[David Mandel (dlmandel]

A quick reply to Leslie  Maniccia's questions about members' investments,
since I think the system we devised worked fairly well and could be
instructive -- THOUGH SOME OR ALL OF IT MAY WELL NOT BE APPROPRIATE FOR ANY
OTHER PARTICULAR GROUP. ...

>What success have completed projects had in paying
>out interest to their early investors?  Was there enough money at the end to
>make the payments?

When we were at the point we needed to start collecting big bucks, we
1) Formed a formal limited partnership, with our general contractor as
general partner. This was needed for the city housing agency, which was
selling the land, and the bank which eventually gave us a commercial
construction loan. Today we'd probably form a limited liability company
(LLC) instead, but that animal didn't exist then in California. It combines
most of the advantages of partnerships (pass-through taxation and different
levels of investment and return permissible) with clearer limitations of
liability, fewer restrictions and no concentration of power with the
general partner).
2) Came up with a fairly complicated formula of interest on investments (a
certain percent for members investing up to target amounts we set at 10
percent of projected unit cost (5 percent for low-income); a somewhat
higher rate for members' investments above the target amount and for
outsider friends and relatives; a much higher rate for commercially
solicited investments if necessary and for certain delayed payments to our
contractor and architect.
3) Came up with another complicated list of priorities determining who
would get paid first, who last and who would get any excess. Highest
priority was ensuring that actual member/buyers got their principal back,
since it was to be credited to their down payments. Lowest priority was the
interest on these member/buyers' target investments. ... And no, due to
weird circumstances at the end of construction, there was not enough to pay
this last category. We got only about half the scheduled interest.
4) Very apropos this last point, we invited a certified securities broker
to attend a meeting and heard him lecture us on how investment in such a
project was extremely risky and actually quite stupid. Anyone who wasn't at
the meeting was required to listen to a tape of it before signing the
partnership agreement. This was meant to protect us/each other from
lawsuits by a disappointed investor who might have lost a lot of money if
the project had gone down the tubes.

>Another major unanswered question for us is how to handle members who have
>made large sum investments who want to leave the group.  When/how do they get
>their money back, assuming the project goes through to completion?  Do they
>get paid interest for having their money tied up for a period of time?  Do
>they get their money refunded as soon as another household joins the group or
>at the completion of the project?

The partnership agreement made it clear that such dropouts might not get
there money back until the very end, just like everyone else. And with a
few exceptions they didn't. We needed the cash. But the partnership had the
right to repay them early if it could afford to and chose to. That
flexibility was a good idea. A couple such people did get repaid early
because they really needed money and we had a little to spare as the end
neared; in exchange, they agreed to forgo some of their interest, so the
project benefited. One dropout who didn't really believe she'd get her
money back (she could have) chose to make a different deal: Her investment
went into our common dining fund and she has the right to sign up for
common meals for free for life. She's almost 80, but we hope she keeps
coming until she's 120 -- and everyone seems happy with the arrangement.

A couple other important points Leslie didn't ask about directly:

As construction got under way and we continued to collect investments, we
significantly lowered the rate of return on all new funds, reflecting the
gradually lowered risk. This was not in the original partnership agreement
but a consensus of partners was empowered to do it.

Had there been any excess funds after all construction costs beyond the
scheduled interest payments, the partnership agreement said the money would
have gone to the member-investors in proportion to their target
investments. In the end there was no surplus. But if there had been, a
consensus was openly brewing that would have used this money instead for
common house furniture and such -- a collective benefit for the same people
instead of dividing it up among the individuals.

I hope this was useful.

David Mandel
Southside Park, Sacramento