Cohousing-L Mailing List: Responses on "Money flow in the development process"

[Jeff Hobson (jhobson]

Thanks much to all who responded to my query. I combined the responses in
one document to hand out to others on our development committee. Pasted
here is a text version - contact me directly if you'd like the
easier-to-read formatted version:

MONEY FLOW IN THE DEVELOPMENT PROCESS
I sent a message to the cohousing-l list about this issue and got a few
responses from:
- Dan Nachbar - Pioneer Valley (Amherst MA). 32 units, completed 5 years ago.
- David Mandel - Southside Park (Sacramento CA) , 20-odd units, completed
awhile ago.
- Kate - Bellingham (WA) Cohousing, in construction 
- Brian Setzler, Trillium Hollow Cohousing, Portland, Oregon, built recently

Following are my questions (see bullets) plus the responses I got for each
one (preceded by responder?s name):

· when & how you took in money during the development process
Dan Nachbar: People made "fair share" payments starting at $1K before we
found land up to 10% of purchase price when we started the constructions.
David Mandel: Slowly at first. Then we formed a limited partnership (before
the legislation creating LLCs), defined classes of partners (future
residents, others), the expected returns on their investments, order of
preference, etc. The future residents in particular were asked to put up
10% of the anticipated price of their units (5% for low-incomes), but that
was not a requirement. Amounts over that received a higher return with
higher priority, as did any investments from others. We had a goal of how
much we had to raise, and everyone did what they could. Many made
conditional pledges -- promising to put up $XXXXX if and when we received a
construction loan. The pledges may have been of some help in getting that
loan. 
Kate: At Bellingham we took in money as part of the membership requirement. 
Brian Setzler: Our group began with a core of folks who knew each other and
had a certain level of trust.  At first, when small amounts were needed for
copying, marketing, etc., everyone kicked in $100 to join the club and help
move the ball.  As they started to look for property, we expected serious
members (those that intended to buy), to put up 10% of their estimated unit
cost. The 10% was invested without interest.  
We were able to buy a $600k piece of property for cash using this approach
and I think 12 people had their name listed on the deed proportional to the
money invested.  Since we bought the property outright, we then took out a
$300k mortgage against the property to provide us with cash to keep moving
forward. Additionally, new members were expected to put up 10% as well.
Additional loans from members and new money from new members got us through
from the point of land purchase to construction (15 months) which was
financed by a traditional construction loan. 

· how you rewarded risk in the early stages
Dan Nachbar: None. We decided that making such distinctions (e.g. earlier
vs later) between members of the group was very divisive.  My personal
opinion is that people who are concerned about such issues are using them
as a proxy for a deeper lack of trust in the group.  The attitude that
worked for us was "I'm in" vs. "I'm not in".  If people say, "I'm in BUT I
want this, that and the other." then they weren't willing to make the
necessary leap of faith to live in Cohousing.  Don't waste your time on
them.  They will drain the life out of your group if you don't let them go.
It is critically important to differentiate the people who like the idea of
Cohousing vs. the people who are willing to live with the realities of
Cohousing.  Cash serves an excellent barometer of faith. 
David Mandel: None for investments up to the target amount. Higher
potential return if more. 
Kate: Interest, the first year was 10% (we bought the land in Sept so it
was ashort year, 9% the second & 8% the  rest of the project - that is on
anything above the downpayment. That money  rolls over into the downpayment
of the house. 
Brian Setzler: Those who put up more [than 10% of their estimated unit
cost] were paid interest, at a rate that was deemed appropriate.  We were
able to buy a $600k piece of property for cash using this approach and I
think 12 people had their name listed on the deed proportional to the money
invested.  The 10% down money was considered to be "at risk", meaning it
would be the last to be repaid should the project not succeed.  The loans
above the 10% would be repaid before anyone would get their prorata share
of the 10% back.  
All of this money (loans and 10%) was basically secured by the property
purchased. Ie.  After we shelled out $600k, all the cash was gone but we
still had the property we could sell if the project failed.  It was
possible we'd even make a profit if that happened. 

· how you allocated those contributions towards eventual unit costs
Dan Nachbar: dollar for dollar. 
David Mandel: Any amounts invested were applicable toward down payment and
closing costs. (Though in California, you're not allowed to promise that
quid pro quo until you get final approval from the Dept. of Real Estate, so
the money was totally unsecured and at risk. We were careful to apprise
everyone of that in oral presentations and in writing.) 

· how did you treat investment money from people who expected to *rent*
from the community rather than buy a unit (and what decision-making power
did they have)
Dan Nachbar: We took money only from buyers.  We have no renter members.
David Mandel: Didn't have any. So it didn't arise. 
Kate: We didn't have anyone who wanted to rent & not buy. 

· if you had any "investors", people who weren't going to live in the
community but wanted to invest in getting it started, how did you (or did
you) involve them in decision-making and how did you treat their money
Dan Nachbar: We did not. 
David Mandel: They were limited partners just as the future residents were,
but we were a majority. We didn't try to involve them in decision making
and they didn't seek to be involved. 
Kate: We have one investor - he is included as a developing member - he has
been an asset to the community. Eventually someone joined the group who
didn't have money for a downpayment & they are buying the unit together. 

· how people get money out if they decide partway through that they no
longer want to continue in the group
Dan Nachbar: Everybody who put money in got it out when somebody else
joined to take their place. 
David Mandel: The written understanding was that they wouldn't get it until
the end, out of the sale proceeds. But at one point we had more than we
needed and offered to repay up to a certain amount early to anyone who
would accept lower return, first come first served. At least two took us up
on it. 
Kate: We gave people's downpayment back until right after we started
construction.  Now although we have lost 3 households - they won't get
their money back until after we have moved in & are paying off our loans..
We were told to give people their money back as long as we could - to avoid
hard feelings & getting in legal trouble. But now that people have homes
that they are buying the risk isn't as great to use not to return their
money. We also have a 30 day period where people can put down 1% of their
unit price & then put up the rest of 5% at the end of that time - that's
when we lost 2 of the buyers. 


_____________________________________________________________________
*      Jeff Hobson & Kim Seashore        *      jhobson [at] igc.org     *
*  2139 Prince St  *  Berkeley CA 94705  *  510-845-0481 phone/fax  *