Coops and (co)-investing – a balancing act

One of the key decision to be made in setting up a new housing project, is around financial participation of the residents in the assets (the building). When delving into this question, a range of choices seem possible: from mimicking individual ownership (through a members’ full share of an apartment) up to mimicking a clear-cut rental model (through a model entirely based on monthly contributions, but not requiring a collateral deposit from members). For contribute equitably reasons those two extremes are unlikely candidates. During the recent MOBA meeting (25-27 January 2019 in Budapest) the discussion around this question has brought up a few insights.

First of all, the very format of a cooperative – due to adherence to the 7 cooperative principles, a set of rules that have guided this movement for over 175 years – assumes the direct economic participation of the members. This means that they contribute equitably to, and (democratically) control, the capital of their co-operative. In practice, this starts often with requiring new members to bring in their own capital (equity) in a certain percentage of the total investment (say 10-20%). While a large share of member capital brought in helps massively in securing additional capital (because it counts in as ‘collateral’), it obviously also is a barrier for access, as not everyone will be capable of raising that amount of capital.

On the other hand, a clear-cut rental model would not bring such barriers, but as we have seen the requirement of equitable member participation excludes it as such, and the necessity of forming a pool of own capital (as ‘collateral’) makes the approach very unpractical. Some (more significant) form of investment and co-ownership by the members thus looks like the way to go.

Doing a round along the approaches envisioned by the MOBA members, not only the size of this initial investment is crucial in this discussion, but also the question whether members through their monthly contributions over time increase their share in the cooperative. Imagine that through a monthly payment a member contributes to repayment of the loan that the cooperative took to finance the building. While the loan thus gets repayed, the ‘investment’ of the member increases. Through a model of virtual shares, it is possible to link the built-up equity to the members. And when a member leaves the co-operative, that equity could (if chosen so, and to a degree set) be returned to a member. There a pro and cons to this. If implemented, the co-op has to reserve a pot of capital to pay out members, and a new member (likely helped by the co-op) will have to finance the amount of capital taken out – obviously a burden to the coop and a new member. But on the positive side, it is a savings scheme that gives security to members and ensures that even upon leaving the co-op there is at least some capital to make a start in the tricky world outside. Or, in other words, it may prevent you from getting “locked” into the co-op, as you can financially not afford to step outside of it.

Finding a balance that provides easy access as well as long-term security will be something that MOBA will be undertaking in the time to come.