What is an investment cooperative?
According to the US Small Business Administration (SBA), a cooperative (co-op) is a business or organization owned by and operated for the benefit of those using its services. They are common in the healthcare, retail, agriculture, art, and restaurant industries. An investment co-op is created for the purpose of the purchase, rehabilitation, and reuse of residential and commercial real estate.
To participate in the co-op, members purchase shares, and profits and earnings generated by the co-op are then distributed among the members. Typically, an elected board of directors and officers run the co-op while regular members have voting powers to control its direction.
Why create an investment cooperative?
An investment co-op can help to catalyze community revitalization by taking neglected buildings often overlooked by typical real estate investors and putting them back into service. In this regard, residents can take control by putting their own capital to work in their local economy. As the co-op model creates a for-profit entity, members may be provided with a modest return on their investment.
The NorthEast Investment Cooperative (NEIC), started in 2011 in Minneapolis, Minnesota, is a commercial-property co-op. Tired of waiting on traditional developers to invest in poorly utilized property in their neighborhood, a group of community members got together to buy and rehab properties. Minnesota residents could join the NEIC for $1,000. What began with 39 founding members has since grown to over 200, and the NEIC has succeeded in putting a vacant property back into use that is now the home to three thriving, local businesses.
Other investment co-op examples include the Riverwest Investment Cooperative in Milwaukee, Wisconsin, which succeeded in revitalizing a vacant, burned out house into a home for a family of four. The NYC Real Estate Investment Cooperative, which began in May 2015, has over 300 members and has received pledges of over $1.3 million for future investments. Their first project is expected in 2017.
How is an investment cooperative created?
For forming an investment co-op, a group of potential members must agree on a common need and a strategy on how to meet that need. Many co-ops are incorporated, but incorporation is not required. The NEIC, for example, is an incorporated, for-profit real estate development organization that works with non-profit fiscal agents to apply for grants and receive tax deductible donations.
The following are steps to be completed toward creating a co-op. However, consultation with an attorney, the Indiana Cooperative Development Center, the Indiana Secretary of State Business Services Division, and/or the SBA is highly suggested.
File Articles of Incorporation with the Indiana Secretary of State Business Services Division - The articles of incorporation legitimizes the co-op by providing the organization's name, location, purpose, and duration of existence, as well as the and names of the incorporators and the capital structure. According to the Indiana Cooperative Development Center, an investment co-op could incorporate in Indiana most likely as a mutual benefit corporation, but could also incorporate in another state and operate in Indiana as a foreign corporation.
Create bylaws - While the law does not require bylaws, they do need to comply with state law and are essential to the success of the co-op. Bylaws specify membership requirements, duties, responsibilities and other operational procedures that allow the co-op to run smoothly.
Create a membership application and ownership share cost structure - To recruit members and legally verify that they are part of the co-op, create and issue a membership application that includes names, signatures from the board of directors and member rights and benefits.
Conduct a charter member meeting and elect directors - During this meeting, charter members should discuss and amend the proposed bylaws, ultimately ending with bylaws adoption. If the board of directors was not named in the Articles of Incorporation, they should be designated at this time.
Obtain any relevant licenses and permits - Regulations vary by industry, state and locality. Check with the Indiana Secretary of State Business Services Division.
Hire employees (if needed) - Be sure to check into federal and state regulations for employers.
Raise capital - Research properties and estimate the funds needed to complete a project. Depending upon how much capital the co-op can raise, other financing options from banks or organizations may be necessary.
Promote the co-op - Plan to present the co-op plans and projects to local organizations and hold events for potential members.