OK, we’ve found our people and think we’ve found our property. It is 37 acres with a large house, outbuildings and potential for other building sites. There are at least three single people and a couple (all current property owners) who may want to cash in and go in on this beautiful spot. One person has an inheritance coming. The others have varying amounts of savings. All of us may have an additional $ after selling our properties. So there are ample funds in the long term. But real estate transactions can’t be stretched out for too long a period of time. The owner is asking for one-half down and will carry a note. Practically, it may be most expedient for one person or a couple to purchase and then develop a community structure later. Or we could attempt to fashion some kind of agreement from the get-go specifying everyone’s buy-in and stake. Any suggestions on this process? Formats? Advice? Responsibilities and privileges of members? Especially when people have different amounts to contribute. Thanks!
Welcome to IC Forum Salmons6. This is a major endeavor, so you need to have a legally binding contract with other members to avoid problems later on.
I suggest that you set up a trust or an LLC to own the property. In a trust each member is a beneficiary and owns beneficial units based on the amount of their initial investment in the project and can purchase additional units as the project proceeds.
In an LLC each member has a capital account based on initial and added investments which is credited with any income of the LLC and debited by expenses of the LLC in proportion to the percentage of total capital their account represents.
I have created both for my community. A land trust to own the property which is funded by 99-year leases of individual parcels of land from 1/4 to 2 acres depending on the amount each member contributes. The LLC owns the buildings and other infrastructure on the land and any business enterprises formed by the group. Any income or expenses is handled by the LLC and attributed to each member’s capital account based on his/her percentage of ownership.
We also credit labor by each member (at $10/hr), so that those who work on behalf of the community can build “sweat equity.” Some members of the community prefer to contribute cash or materials rather than labor and are so credited. In my case, I’m 77 years old and do less and less physical labor each year, but I pay the monthly mortgage and provide the tractor and implements used on many of the community projects. What labor I do provide, such as mowing, brush hogging, excavating, and such and caring for our chicken flock, I usually don’t bother to charge the LLC. I consider it labor of love and personal exercise. On the other hand, one of our members owns a SkidSteer excavator and he charges the community for its maintenance and operation. It has been quite helpful for terracing hillsides, leveling homesites, building roads, and hauling logs and firewood from the surrounding forest.
At present I am the only member with reliable income (from pension, Social Security, and rents from investment properties), so I cover all of the monthly bills and debit the amounts as loans to the LLC. If and when the LLC becomes profitable, it can reimburse me in the future, especially if Social Security goes bust as I expect it to.
If I can help with setting up your legal structure or your accounting system, please contact me via IC. This community is listed as “Liberty Tree Farm”
Thanks for the thoughtful reply. So the members contribute money to the trust or LLC which then is the purchaser? So the deed lists the trust as the owner? I suppose there is a board of trustees who are allotted votes based on their capital account balance? So a majority stake could theoretically vote to purchase, sell, subdivide, etc?
That’s mostly correct, except, “I suppose there is a board of trustees who are allotted votes based on their capital account balance?” The capital account is only in the LLC based on each member’s investment in the LLC and share of income and expenses less withdrawals by the member. The Trust has Beneficiaries—the leaseholders in this case, who deposit into the Trust their 99-year lease fee based on the size of a lot they can afford to lease. This money goes to purchase the property plus closing costs, or the down payment if there is a mortgage, and their monthly lease payments cover the monthly mortgage payment and other expenses. Except for annual property taxes, road maintenance, excavation of home sites, and other land related expenses, the land expenses should not be an ongoing burden. Any sale of timber would go into the Trust’s checking account to cover these land expenses.
The board of Trustees can be chosen from the Beneficiaries (members of the community) or outside, e.g. a banker or lawyer, or the Granter of the Trust can also be the sole Trustee as in my case. The terms of the trust should provide instructions to the Trustee(s) regarding acquisition, use, and disposal of the property. Additional rules or instructions can be added or changed via minutes of the Board or meetings of the Trustee and Beneficiaries. Mine states that the property cannot be sold without the consent of 3/4 of the lease holders and all unexpired leases must transfer with the property, so that no one can be evicted after the sale.
My intention is that the land will never be sold but held as one parcel of agricultural land in perpetuity. I think the only way I would consider selling is if someone wanted to come in with a lot of capital to build the community infrastructure in one fell swoop rather than continue to do everything piecemeal on limited funds. Then I would sell the Trust itself to recoup my investment plus a small profit, and nothing would change for the members except there’d be a new Trustee and the balance in the Trust’s checking account would increase to fund ongoing development projects.
The LLC, on the other hand, could sell any of its business entities, buildings or other structures like prebuilt residences, workshops, or animal shelters to existing or new members or even outside interests if it is advantageous to the community. Again at least 3/4 of all the members of the LLC must approve.
If you need any help setting up such an organization, I can provide sample trust and LLC documents, set up your accounting system general ledger and chart of accounts, and other start-up tasks on a consulting basis. Since I am retired and work at a slower pace, my current rates are much lower than they were when I was a CPA doing this for a living and dealing with a lot of stress from multiple clients.
Hope this helps clear the picture of how all this works.
Joy and abundance,
Did you guys get to purchase the land?! How are things going? Some communities have one person/couple/portion of the community buy the land initially to make things move quickly and then the LLC is formed and the land is transferred to the LLC which is everyone. This happens most often if only one community member has capital, or if the perfect land is located and buying it has to happen right away. If the founding group isn’t on a timeline for connecting with land, then they often get the LLC up and running first and then search for the right piece of property.
It is definitely advisable to set up your structure first, to avoid double duties on transfer.
I would recommend a corporate holding company with investors gratned long term leases rather than shares. This seems to work best in most places.
I have a bunch of seminars and materials to assist with these kind of things, I am a lawyer that sets up these type of structures for community projects. Feel free to reach out to connect.