Now that our Bright Village project is getting close to incorporating (see last week's post "Grooving on the Fine Print"), and we are building a good core group of potential resident-developers, we really need to start getting very serious about the big question of Where Do We Get the Money to Build the Project? While most of our community falls pretty squarely into a middle-to-lower-middle class strata, such that making monthly housing payments is not a matter of serious concern (although we DO have a few folks who are truly very-low-income, due to advanced age and/or a lifetime of low-paying community service work), we are faced with the classic challenge that anyone has who wants to become a home owner - where do we get the down payment and how much is it going to cost us in interest payments and how confident are we that we can commit to the long term financial stability of the project - because for this project default is not an option!
To begin to understand what we are up against here we have begun to make the rounds of local banks to get a sense of what the rules of the road might be for funding a project like the Bright Village. After making calls to over a dozen banks, we have so far had appointments with three locals - Tri-Counties Bank, Savings Bank of Mendocino, and Umpqua Bank. The first two of these are fairly small, which we like - it will give us a chance to pitch the virtues of our project directly to senior bank officials whom we know will be sympathetic to our fire-recovery and local service objectives. These conversations have been VERY educational. The commercial loan officers we have met have been wonderful in walking us through the complexities of a commercial construction loan package - once again, we are learning a new language and we will probably talk with several other banks before we're done shopping.
For starters, we have learned that as a "multifamily" development, and an unorthodox one at that, we are looking, right off the bat, at higher rates (5%+ vs. 3.2% for straight home mortgages) and higher down payments (25-30% vs. 20%, 10% or even less for home mortgages). This is on top of increased construction standards and regulations for multifamily buildings. In addition, because we are building from the ground up, and any initial loans will be to bankroll the construction process, the banks will want to have extremely tight oversight (which means additional expense) of the construction process. Lucky we are not looking to make a profit on this! This really does push us to ask, can we possibly pull this off without bank financing?
To begin to understand what we are up against here we have begun to make the rounds of local banks to get a sense of what the rules of the road might be for funding a project like the Bright Village. After making calls to over a dozen banks, we have so far had appointments with three locals - Tri-Counties Bank, Savings Bank of Mendocino, and Umpqua Bank. The first two of these are fairly small, which we like - it will give us a chance to pitch the virtues of our project directly to senior bank officials whom we know will be sympathetic to our fire-recovery and local service objectives. These conversations have been VERY educational. The commercial loan officers we have met have been wonderful in walking us through the complexities of a commercial construction loan package - once again, we are learning a new language and we will probably talk with several other banks before we're done shopping.
For starters, we have learned that as a "multifamily" development, and an unorthodox one at that, we are looking, right off the bat, at higher rates (5%+ vs. 3.2% for straight home mortgages) and higher down payments (25-30% vs. 20%, 10% or even less for home mortgages). This is on top of increased construction standards and regulations for multifamily buildings. In addition, because we are building from the ground up, and any initial loans will be to bankroll the construction process, the banks will want to have extremely tight oversight (which means additional expense) of the construction process. Lucky we are not looking to make a profit on this! This really does push us to ask, can we possibly pull this off without bank financing?
Of course, looking at it from a Bank's perspective, it is reasonable that they will want to have strong assurances that we will in fact pay back their $2.8 million (that's 70% of our estimated $4M construction price tag). And we will benefit from the rigorous process of qualifying for any potential bank loan we assume.
Three key strategies are emerging for us:
1. Build our occupancy waiting list through pre-sales. Obviously, the more we can demonstrate that all of the units in the project will be occupied on day one, and that there is a further demand waiting in the wings, this will be attractive to our lenders, and help us negotiate better terms.
2. Getting a clear sense of how much down-payment power we have in our group. Some of us are sitting on fire insurance settlements, some of us have modest nest eggs, some of us may still have some sympathetic family. To begin to get better clarity about this, we have begun to hold a series of "prequalifying" interviews with prospective Project participants. One of our friends, a well seasoned mortgage broker has agreed to walk our partners through this first round.
3. Cultivating some Angels. Our major potential alternative to bank financing will be to structure a viable private investment package that we can pitch to a group of "high-net-worth" individuals who may be attracted to the innovative elements of the Bright Village project. And even if such folks are not willing to commit direct private investment to the project, they may be willing to act as guarantors for bank loans, which again may allow us to negotiate better terms.
Now all of this talk about banks, and interest and debt and lien-holding and securitization is making some of our Project partners very nervous. As stated above - default on this project is NOT an option for us - it's just too close to the deep marrow of our community. The idea that stewardship of the Bright Village could be jeopardized by a few quarters of miserable financial performance (occupancy rate falls, unexpected repairs accumulate, insurance rates spike, one bad liability lawsuit, etc. etc.) is anathema to some of our brothers-and-sisters-in-community. So while we continue to explore all the nooks and crannies of possible bank help we will also be working on alternative strategies.
The easiest of these to think about it simple: just build what we can afford right now, even if it's just a modest community center (that we all chip in for). Maybe one or two groups of people could bankroll a couple of large single family houses (maybe even manufactured homes) using cash on hand and insurance settlements. No overall permacultural design, no site-level architectural design. This would not be our Bright Village.
A second option will be to work more intensively on raising all the construction funds directly from our extended networks. This quickly becomes more complicated as we will need to be very mindful and careful about a complex maze of investment regulations that make strong distinctions about who can ask for money from whom, and how much, and where they can live (inside California easier, outside the U.S. much more complicated).
A third option has also begun to emerge, even in the past few days, although it has roots deep in our extended network of fellow communitarian pioneers and alternative economics experimenters. In this scenario, we bypass at least to some degree the money economy and activate a "service exchange" network. In this model, which has already been successful in related enterprises, and which is already functioning here in Lake County, we mobilize the active participation of our community members through a managed exchange of services (sometimes called "time banking"), via which we can exchange our skills (from acupuncture to zoo management) for help in building the village. This topic will warrant a much more description and we'll tell you more about it as it develops!
For now, our plan is to focus on continuing our research with local banks, sharpening our inventory of existing assets, nurturing our local service exchange network and cultivating the angels in our midst.
Three key strategies are emerging for us:
1. Build our occupancy waiting list through pre-sales. Obviously, the more we can demonstrate that all of the units in the project will be occupied on day one, and that there is a further demand waiting in the wings, this will be attractive to our lenders, and help us negotiate better terms.
2. Getting a clear sense of how much down-payment power we have in our group. Some of us are sitting on fire insurance settlements, some of us have modest nest eggs, some of us may still have some sympathetic family. To begin to get better clarity about this, we have begun to hold a series of "prequalifying" interviews with prospective Project participants. One of our friends, a well seasoned mortgage broker has agreed to walk our partners through this first round.
3. Cultivating some Angels. Our major potential alternative to bank financing will be to structure a viable private investment package that we can pitch to a group of "high-net-worth" individuals who may be attracted to the innovative elements of the Bright Village project. And even if such folks are not willing to commit direct private investment to the project, they may be willing to act as guarantors for bank loans, which again may allow us to negotiate better terms.
Now all of this talk about banks, and interest and debt and lien-holding and securitization is making some of our Project partners very nervous. As stated above - default on this project is NOT an option for us - it's just too close to the deep marrow of our community. The idea that stewardship of the Bright Village could be jeopardized by a few quarters of miserable financial performance (occupancy rate falls, unexpected repairs accumulate, insurance rates spike, one bad liability lawsuit, etc. etc.) is anathema to some of our brothers-and-sisters-in-community. So while we continue to explore all the nooks and crannies of possible bank help we will also be working on alternative strategies.
The easiest of these to think about it simple: just build what we can afford right now, even if it's just a modest community center (that we all chip in for). Maybe one or two groups of people could bankroll a couple of large single family houses (maybe even manufactured homes) using cash on hand and insurance settlements. No overall permacultural design, no site-level architectural design. This would not be our Bright Village.
A second option will be to work more intensively on raising all the construction funds directly from our extended networks. This quickly becomes more complicated as we will need to be very mindful and careful about a complex maze of investment regulations that make strong distinctions about who can ask for money from whom, and how much, and where they can live (inside California easier, outside the U.S. much more complicated).
A third option has also begun to emerge, even in the past few days, although it has roots deep in our extended network of fellow communitarian pioneers and alternative economics experimenters. In this scenario, we bypass at least to some degree the money economy and activate a "service exchange" network. In this model, which has already been successful in related enterprises, and which is already functioning here in Lake County, we mobilize the active participation of our community members through a managed exchange of services (sometimes called "time banking"), via which we can exchange our skills (from acupuncture to zoo management) for help in building the village. This topic will warrant a much more description and we'll tell you more about it as it develops!
For now, our plan is to focus on continuing our research with local banks, sharpening our inventory of existing assets, nurturing our local service exchange network and cultivating the angels in our midst.
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