The "Sweet Deal"
as described by Mark Goehring
Pleasant Hill Cohousing pioneered a start-up self-financing package which we named the "Sweet Deal".
Most real estate developments projects (including all cohousing start-ups that
I'm aware of) need to go to the bank for a construction loan to get money to pay
construction costs. This needs to happen before the actual building can begin.
A typical bank construction loan requires around 15% up front of developer money so
that if the project goes over budget or bad that 15% is eaten away first before the
bank starts to lose money. In our case this meant $1.5 million needed to be raised.
Since this real estate venture capital (or "seed" money) is at great risk (it's
the first to go if the project fails or goes way over budget), the people who loan
it out demand a huge rate of return - a share in the profits and up to 100% return
if the project hits its budget.
We decided that our project was not that risky
(we had the land and the people committed to buy the units) and that
if we self-financed we could save a lot of money and even make money for the community.
So here's what we did:
We offered community members and their extended families the opportunity to invest in
the project with an appealing rate of return of 11% (at the time that was 2 points over
prime and we wanted to encourage people to dig deep). The financing costs were already
in the budget and the 11% rate of return would come from that budget line item (and thus
be paid for like everything else out of the sales prices of the to-be-completed units).
In addition, in return for shouldering this financing, our developer offered to us
(Pleasant Hill Cohousing, LLC) what would have gone to the venture capitalists i.e.
the half share of the money left over the budgeted
"profit share" which was budgeted to be a tenth of the sales value of the project.
28 of the 32 member households at the time participated in this Sweet Deal, i.e.
in addition to the mandatory 5% of expected sales price that all member
households had to
contribute interest-free to join the group at the outset.
We did come in on budget, everyone got their expected interest return, and
the community received that share of leftover money for use in otherwise
unavailable capital improvements. Hundreds of thousands of dollars in
financing costs stayed within the community rather then going outside to venture
capitalists. We were all very happy with this arrangement...to put it mildly!