Cohousing project as an investor in The Reef?

The Reef
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The Flemish company Cohousing Projects accompanies groups like ours to building their own cohousings. We know we don’t want to do that, and have opted to be a self-managed group instead. But they also have three other types of activities that might be interesting for us.

  1. Rental properties. They buy apartments in cohousings, which they then rent to third parties. This makes it easier to complete the group.
  2. Interim financing. They step in at the time of buying the site, if the site has space for one or more more units that the group has committed to. Then they sell their part to someone who enters the group after the site has been purchased.
  3. Rent to buy. They acquire a unit, and then sell it to someone under a rent-to-buy scheme.

This can be interesting for us, also from the perspective of @reef-inclusion, because it alllows people with not much capital to access The Reef.

@Lee has reached out to them, and they agreed with meeting up with us. I guess it’s up to @reef-finance to organize a meeting in which we explain what we are doing and sound out their conditions.

Who wants to lead on this?

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I am on this. Booked an appointment with Federico for August 2nd at 14.30. Anyone wants to join, welcome.

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I am very interested to hear their story, so if I’m welcome I’d be happy to attend.

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Won’t be able to join, but looking forward to hearing from the meeting.

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The meeting just ended. Participants were Federico Bisschop for Cohousing Projects (CP) and @Lee and myself for The Reef.

Possible forms of pre-financing from CP

After the niceties, Federico’s first questions were:

  1. Have people been asked to pay money?
  2. Have you done financial checks?
  3. Are you looking for a site?

This is because, in their experience, cohousings are a game of chicken, where most people drop out. In their first project, they presented a site to 200 people; of these 60 paid some money to start the process; of these, only 2 ended up buying a unit. For them, a cohousing starts with a suitable site, which then looks for a group.

Of the three forms of financing listed above, rent-to-buy is closed to us: it is only available to people in their own in-house projects. Of the remaining two, the one with which they are most familiar is interim financing. it works like this: CP are asked by an incomplete group to buy a site, and then sell it back to the group once it is completed, and the permission to build is awarded. This is preferrable for many groups, because banks do not like to give mortgages on purchasing sites, so the group needs to pay it in full. But it is expensive: CP re-sells the site with a 30-40% markup (“A normal developer would take more like 100%”). This covers acquisition costs, profit margin (target: 4% a year to the shareholders) and risk (main risk: the group breaks down, and the site needs to be resold). If the price of the site is right, and the project is good, CP “will always find financing for it”.

Rental properties might also be possible, but here Federico was more vague. This is because these forms of financing evolved as services that CP supplies to its own groups. There is almost no precedent for them financing a third-party group. Nevertheless they are, in principle, open to it. This is because they are in fact two companies: a cooperative, whose sole purpose is to build cohousing projects, and a RE developer. The former is looking for more projects.

Conditions for CP to get involved

Getting involved with a third-pary group like The Reef poses the question of CP’s participation in decision making. Again, there is not much experience to go by: “we would have to talk about that, if we finance we would have to have some involvement, some kind of checks”.

For CP to make a financing decision, the key element is a feasibility study. This needs to include:

  • volume projections (how many units, how large etc.)
  • construction costs (here architects “cannot be trusted”, because they systematically underestimate costs)
  • benchmarking of the resale value of the finished units in the area (building assessors can do it, or you could also do it yourselves with good research on the immo-websites in the neighborhood)

A piece of advice from Federico

They recommend to all groups to not become too big. Stop recruiting, then look for a site, then once you have the site you “sell off” the extra units to newcomers. Consensus on the site does not work (here Lie replies that we have a majority vote rule on the site). Federico think that, if we find a suitable site, we should buy it even if only 10% of the group wants in.

@reef-finance, any thoughts?

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Thanks a lot @alberto.

My personal summary of the key points:
  • Option 1: we find a site but we don’t have enough capital to buy it
    => CP would buy it, and then resell it to us at the price that is 30-40% higher once we have all the permits (i.e. 1-2 years later).
  • Option 2: we manage to acquire a site with a group that is not fully complete (the site can fit more units than we have households)
    => CP could pre-finance some units, but in this case it is unclear how they would participate in The Reef’s decision-making.
My personal opinion:

To me personally, these two options are a no-go. The first one because it drives up the price and thus leads to more exclusion, the second one because I fear that this will affect The Reef’s stability and independence.

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Thank you, Alberto and Lie.
My thoughts:

  • we will have to do feasibility studies anyway. If CP do not trust architects about the construction costs, who would they trust? Would they do their own study? If so, how much would this cost?
  • I agree with Lie about option 1 being too expensive.
  • I would not close the door totally to another form of financing by CP. I think we are not advanced enough yet to negociate what we would need from them and their involvement in the Reef’s decision-making (if any is needed beyond the financial checks), so I would put this “on the backburner”.
  • I personnally don’t like the idea that a minority would decide on the site. And I think getting people together on the basis of principles and values includes much more than just “selling off” units.
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This is a good question. I think yes, CP thinks of itself as a real estate developer, and so it makes its own estimate, based on its own experience.

No worries, we did not burn any bridge. In closing the meeting:

  • We warned Federico that we were not going to make an imminent decision to request prefinancing, we were still scouting the ground.
  • We asked if we could get back to him in case we had remaining questions, and he said of course, any time.
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