Finances: Startup Equity Splits
When establishing a Habitats for Happiness, typical Start-up expenses include the Down Payment for land purchase, any anticipated start-up costs (such as solar power systems, wells, road-building, etc), plus any cash slush funds established at start-up. It is assumed (but certainly not required) that land will be purchased with the assistance of bank or Investor financing, which involves monthly interest & principle payments. Those are grouped together in the community's Monthly expenses.
The cash for the Down Payment & startup funds is typically supplied by a small group of Individuals who then own a percent equity in the land. The value of their percent equity appreciates not only in accordance with normal Real Estate Market fluctuations, but also to the extent that the Mortgage is paid down by the Community, for truly excellent potential ROIs. Essentially, startup contributions engage the normal Real Estate Business Model of expecting the land to pay for itself.
So, for example: if a $1,000,000 property is being purchased for a Center, with a 30% Down Payment & Startup Expenses fund, an Individual who contributes 50% of that $300,000 receives a 50% share in the equity of the land (for their $150,000). Each New Paradigm Center is responsible for its own Mortgage, which it is required to make payments on, so as the Center pays its mortgage down, the value of each shareholder's equity increases relative to how much of the mortgage has been paid off (in addition to any increase or change in the value of the land). Thus if a shareholder keeps their share until the Mortgage is fully paid off, they would then own 50% of the full value of the land, which may also have appreciated in value during that time.
Individuals who financially participate in a Center's start-up cannot force the dissolution of the Center nor the sale of the land, but they can sell their equity stakes in the land at any time. They can do so either via a private party transaction (at mutually agreed upon terms) or - if no buyer is available - each Habitats for Happiness is contractually required to Be the Buyer of its own startup equity at its current Fair Market Value. So if the above Individual decides to sell his shares when the land has appreciate 50% in value and the mortgage is 10% paid down, his shares would be valued at 50% * ($1,500,000 current value - $630,000 outstanding mortgage) = $435,000. If he exercises his option to sell his stake in the land to the Center at its current value, the Center is required to buy it at that price. For Both parties' protection, the Center is required to complete the purchase as soon as reasonably possible without endangering its own existence.
While Habitats for Happiness are welcome to self-manage as they see fit, for their protection, and because of the potential profitability of startup investments, DomeGaia recommends that they give strong preference to Active Full members as start-up participants. Please also note that when calculating the Fair Market Value of the land for buyout purposes, any capital improvements made by the Center (such as buildings and roads) without use of start-up funds are specifically excluded.
Here are some examples of startup funds and exit strategies for the people who supplied them:
Startup Equity Example #1
Suppose the land costs $750,000 with a 30% Down Payment ($225,000), The Center budgets $50,000 in startup expenses and a $25,000 slush fund, for total startup expenses of $300,000.
Imagine that:
Person A buys in at 50% of $Startup ($150,000)
Person B buys in at 20% of $Startup ($60,000)
Person C buys in at 20% of $Startup ($60,000)
Person D buys in at 10% of $Startup ($30,000)
A has a 50% equity in the land
B has a 20% equity in the land
C has a 20% equity in the land
D has a 10% equity in the land
The Bank holds a $525,000 mortgage
The cash for the Down Payment & startup funds is typically supplied by a small group of Individuals who then own a percent equity in the land. The value of their percent equity appreciates not only in accordance with normal Real Estate Market fluctuations, but also to the extent that the Mortgage is paid down by the Community, for truly excellent potential ROIs. Essentially, startup contributions engage the normal Real Estate Business Model of expecting the land to pay for itself.
So, for example: if a $1,000,000 property is being purchased for a Center, with a 30% Down Payment & Startup Expenses fund, an Individual who contributes 50% of that $300,000 receives a 50% share in the equity of the land (for their $150,000). Each New Paradigm Center is responsible for its own Mortgage, which it is required to make payments on, so as the Center pays its mortgage down, the value of each shareholder's equity increases relative to how much of the mortgage has been paid off (in addition to any increase or change in the value of the land). Thus if a shareholder keeps their share until the Mortgage is fully paid off, they would then own 50% of the full value of the land, which may also have appreciated in value during that time.
Individuals who financially participate in a Center's start-up cannot force the dissolution of the Center nor the sale of the land, but they can sell their equity stakes in the land at any time. They can do so either via a private party transaction (at mutually agreed upon terms) or - if no buyer is available - each Habitats for Happiness is contractually required to Be the Buyer of its own startup equity at its current Fair Market Value. So if the above Individual decides to sell his shares when the land has appreciate 50% in value and the mortgage is 10% paid down, his shares would be valued at 50% * ($1,500,000 current value - $630,000 outstanding mortgage) = $435,000. If he exercises his option to sell his stake in the land to the Center at its current value, the Center is required to buy it at that price. For Both parties' protection, the Center is required to complete the purchase as soon as reasonably possible without endangering its own existence.
While Habitats for Happiness are welcome to self-manage as they see fit, for their protection, and because of the potential profitability of startup investments, DomeGaia recommends that they give strong preference to Active Full members as start-up participants. Please also note that when calculating the Fair Market Value of the land for buyout purposes, any capital improvements made by the Center (such as buildings and roads) without use of start-up funds are specifically excluded.
Here are some examples of startup funds and exit strategies for the people who supplied them:
Startup Equity Example #1
Suppose the land costs $750,000 with a 30% Down Payment ($225,000), The Center budgets $50,000 in startup expenses and a $25,000 slush fund, for total startup expenses of $300,000.
Imagine that:
Person A buys in at 50% of $Startup ($150,000)
Person B buys in at 20% of $Startup ($60,000)
Person C buys in at 20% of $Startup ($60,000)
Person D buys in at 10% of $Startup ($30,000)
A has a 50% equity in the land
B has a 20% equity in the land
C has a 20% equity in the land
D has a 10% equity in the land
The Bank holds a $525,000 mortgage
Scenario 1: Time passes…. Person C wants to sell their equity to the Community
Supposing that the Fair Market Value of the land1 is now assessed at $850,000 & the remaining mortgage is $500,000:
C’s buyout is calculated at:
20% * ($850,000 FMV - $500,000 Mortgage Balance) = $70,000 * 92%2 = $64,400
A still has a 50% equity in the land
B still has a 20% equity in the land D still has a 10% equity in the land The Center now has a 20% equity in their land and owes C $64,400, which they are committed to paying off as quickly as feasible. |
[1] Improvements to the land made with start-up funds are included in the Fair Market Value. Improvements such as Buildings that are constructed after start-up, without using start-up funds belong to the Center and are specifically excluded from the Fair Market Value of the land. [2] A -8% adjuster is applied remove the "last man standing" onus and reflect the actual costs of selling real estate (commissions, appraisals, legal fees, etc) |
Scenario 2: Time passes…. Person E wants in and would like to buy in with $50,000.
Supposing that the Fair Market Value of the land is now assessed at $875,000 & the remaining mortgage is $475,000
E’s $50,000 will buy him $50,000 / ($875,000 - $475,000) = 12.5% equity in the land
E’s $50,000 is put towards paying off any debt still outstanding to C
Supposing that the Fair Market Value of the land is now assessed at $875,000 & the remaining mortgage is $475,000
E’s $50,000 will buy him $50,000 / ($875,000 - $475,000) = 12.5% equity in the land
E’s $50,000 is put towards paying off any debt still outstanding to C
A still has a 50% equity in the land
B still has a 20% equity in the land D still has a 10% equity in the land E now has a 12.5% equity in the land The Center now has a 7.5% equity in the land |
Note that under self-management principles, some Centers may choose to adopt a goal of owning all the Equity in their land and behave accordingly. |
Scenario 3: Time passes….
Person A has a friend (F) who wants to buy half of their equity for a mutually agreed upon price.
This decision does not affect the Center; it is a private transaction, so now…
A now has a 25% equity in the land
B still has a 20% equity in the land
D still has a 10% equity in the land
E still has a 12.5% equity in the land
The Center still has a 7.5% equity in their land
F now has a 25% equity in the land
Exit Strategy:
If the Association ever sells the land (discouraged!), then the Net Value of the land gets divided among the Equity Holders according to their %equity. Any remaining amount is due to Improvements, belongs to the New Paradigm Center's members, and will be apportioned in a manner to be determined by the Center.
The Net Value of the land is defined as min($NetSalePrice, $AssessedValueOfLandWithoutImprovements* 92%)
Implications
Note that this has a few implications:
Person A has a friend (F) who wants to buy half of their equity for a mutually agreed upon price.
This decision does not affect the Center; it is a private transaction, so now…
A now has a 25% equity in the land
B still has a 20% equity in the land
D still has a 10% equity in the land
E still has a 12.5% equity in the land
The Center still has a 7.5% equity in their land
F now has a 25% equity in the land
Exit Strategy:
If the Association ever sells the land (discouraged!), then the Net Value of the land gets divided among the Equity Holders according to their %equity. Any remaining amount is due to Improvements, belongs to the New Paradigm Center's members, and will be apportioned in a manner to be determined by the Center.
The Net Value of the land is defined as min($NetSalePrice, $AssessedValueOfLandWithoutImprovements* 92%)
Implications
Note that this has a few implications:
- Any equity holder can leave at any time. They do not need the land to sell to get their investment back.
- As long as they hold their investment in the land, it appreciates in value via the mortgage being paid down on top of any normal real estate appreciation/fluctuations.
- This phenomenon makes acquiring equity in the land a very attractive option.
- The Center has an incentive to remain operational
- The Center has an incentive to acquire equity in the land
- When someone wishes to transfer their equity in the land, an Assessment will need to be done to determine the current Fair Market Value of the land. These assessments should always include any improvements made with startup funds and specifically exclude improvements (such a buildings) that were made by the Center after Start-up without the use of Start-up funds. Obviously, these Assessors need to be unbiased & mutually agreed upon by the Center & the person buying in or out.