Starting a Co-Op.
NEIC receives inquiries from communities across the country about starting their own property investment cooperatives. We do caution that although our organization has been successful, there are other routes and vehicles that may be more well suited for community development depending on each community's needs and resources. Cooperative law also varies widely from state to state, and you will need to determine whether this type of co-op is possible where you live. The information included below is meant to serve only as a guide, based on our experience. We encourage others who are considering starting their own property investment cooperative to look at the unique factors affecting their communities.
Below is a copy of a presentation that NEIC has given to outside groups, as well as links to three short videos we have made to document our story during our first couple of years. We are happy to answer follow-up questions or to schedule a phone call, meeting or presentation with your group. Just send us a message through our contact page and we will be in touch.
Step 1: Identify the Need
Determining what the needs are in your community are critical and form the basis and mission of your organization. It can helpful to research any local development plans which have already been completed.
Step 2: Build a Strong Team
This may seem like a no brainier but the team you select will ultimately determine whether your organization is successful. Credibility, trustworthiness, and the ability to work cohesively are very important. It's also important to have a wide range of backgrounds and skills in your team. You'll want people on your team who have experience in accounting, construction, real estate, marketing, and ideally even other cooperatives. Although its not required but ideally the people you select have strong ties and networks in your community that you can utilize in the early steps of building the organization. The people you select should be aware of the time commitment that will be required with a volunteer ran startup organization.
Step 3: Establish the Cooperative
Research the cooperative model and the implications to the business. One of the great benefits with a cooperative is a group of people can accomplish a great deal more than one person could on their own. One drawback is due to having many owners, making decisions will require consensus by a board of directors and decisions tend to take longer than if you were the sole owner of a business.
Determine how your organization will be structured. NEIC is governed by a volunteer Board of Directors which oversee three standing committees (Property & Tenant, Finance & Governance, and Membership & Marketing). The Board of Directors are elected at annual meetings by members of NEIC.
Determine how to file your organization according to your local state co-op law. Research federal securities laws to determine how your shares will be structured. NEIC is formally organized as a cooperative under 2014 Minnesota Statutes, section 308(A). NEIC decided early on to only allow Minnesota residents to purchase shares to avoid additional requirements from federal securities laws.
Determine what an ownership share will cost and whether the value will be tied to an individual project or to the total assets of the organization. Also discuss how your dividends will be structured. NEIC decided on a $1,000 base membership share and for our shares to be tied to the total assets of the organization. NEIC can issue dividends when it has the financial ability to do so. NEIC also has capital account allocations which it can give to members if the equity in our properties increases. These capital accounts can eventually be turned into dividends when reaching a certain dollar amount.
Below are the NEIC articles of incorporation and bylaws that can be used as a guide when considering starting your own property investment cooperative.
Step 4: Raise Capital
You've outlined a part of your community or parts of your community that you would like to work in and now it's time to start raising capital to find a project. This step, depending on your timing, may also happen after you find the project. Research properties and determine roughly how much capital your group will need to complete a project. Realize that you'll need certain startup costs to put earnest money down on a property, complete any structural or environmental inspections, and retain an architect and engineer. Depending on how much capital your group can raise, your group will need to obtain other financing options from banks or neighborhood organizations. While this is happening, make sure your organization is getting competent legal advice on securities offering and relevant state and federal exemptions.
This step is where the rubber meets the road. It's time to hit ground running and telling your story to anyone who will listen. Presenting to local organizations and holding events where potential members can come learn about your organization and why they should join. Recruit members to be ambassadors and help the spread the word to their friends and family.
Step 5: Find the Right Project
Identify a project that aligns with your vision of your organization. When a potential project is identified, complete an analysis to determine how the project will cash flow. Look at how much capital is required to be raised, how much can be raised by owners, and how much will need to taken out in loans. Determine what lease rates your group would anticipate. Regardless of how amazing the project may be, the project must be able to cash flow in order to protect your members investment and ideally offer them competitive rate of return as well. Work with your architect or engineer to determine what work you will do and coordinate with your local municipality to determine what work will be required for the anticipated use of the space. It's important to identify what the finished space will need to look like to avoid costly change orders during construction.
Determine how your group will go about recruiting and selecting tenants. Look for synergies with nearby businesses that might help to make all businesses in the area successful. Determine how your organization will support your tenants and make them successful.
Step 6: Construction
Depending on how much work your property needs, a contractor may need to be hired. Complete a cooperative bidding process and anal ye the bids based on price and contractor qualifications. Hire a third party independent project manager to oversee the construction. Allow the project manager leway to handle smaller change items up to a certain dollar amount and require board approval for larger cost changes.
Remember to coordinate and respect the needs of your tenants as their livelihood and success of their business will greatly affected by the schedule of construction. Keep your members properly informed during the construction and be ready to celebrate success when the project is compete.
Step 7: Post Project
Hire a property manger to perform regular maintenance and tenant requests. Manage your property responsibly to maintain positive cash flow. Establish a track record for financial viability and build up enough savings to cover potential periods of vacancy. Take time to reflect on lessons learned and continue to tell your story to potential members and future tenants. Work on building systems that allow for growth and added capacity. Recruit and train new board members to ensure organizational perpetuation. Start looking for your next project!