Community Capital at EB PREC
How EB PREC Leads with Community Capital
The East Bay Permanent Real Estate Cooperative (EB PREC) raises capital for real estate acquisitions by selling cooperative ownership shares to community members for $1,000 per person. Anyone in the East Bay community can buy a share, regardless of their income level. At its launch party in December 2018, EB PREC sold ownership shares to close to 80 people, raising nearly $80,000 toward its first real estate acquisition. This is both innovative and potentially transformative. Here’s a little more about how and why EB PREC raises capital from everyday community members.
About Cooperative Securities Laws
EB PREC is able to sell shares to the public thanks to a California law exempting the sale of cooperative ownership shares (up to $1,000 per person) from rigorous securities registration requirements. applicable to almost every other kind of enterprise raising capital through sale of securities to the public. Securities registration typically requires payment of fees, assistance by lawyers and accountants, preparation of substantial paperwork, and a waiting period before getting approval from securities regulators, all of which amounts to a significant deterrent to community capital raising. Securities registration laws exist to protect investors, though there are a growing number of exemptions to registration under state and federal laws, in recognition that public interest is served by allowing certain kinds of entities to more easily raise capital from the public. Cooperatives – including agricultural cooperatives, electrical cooperatives, food cooperatives, and worker cooperatives – have long had securities registration exemptions under some state and federal laws. Outside of California, many other U.S. states have laws exempting the sale of cooperative shares from securities registration, and some states, such as Minnesota, do not impose a cap on amounts per individual.
Under new federal crowdfunding laws and some state crowdfunding laws, enterprises other than cooperatives are able to sell small shares to the public, though in many cases, they must do so using an intermediary that communicates the offering to the public. The use of an intermediary creates other barriers and costs that may still deter enterprises from raising capital through community crowd-financing. The California cooperative securities law (Section 25100(r) of the CA Corporations Code) does not require the use of an intermediary, which enables a cooperative to directly communicate with potential members about the sale of ownership shares. In 2015, the Sustainable Economies Law Center, which also provides legal support to EB PREC, successfully advocated to amend 25100(r) to raise the cap from $300 to $1,000 per cooperative member.
Innovation: EB PREC is a Movement Cooperative
Another innovation that enables EB PREC to raise capital from a large number of community members is its reframing of the role of a real estate cooperative to not only serve members who reside on cooperative property, but to serve all community members who view the cooperative as a platform for building a movement and transforming their local economy. As such, EB PREC membership is not simply limited to tenants of the cooperative’s real estate, but it is open to all local community members motivated to apply their capital, time, or skills toward building a democratic commons for land and housing.
The Transformative Role of Community Capital
To acquire properties, EB PREC will often supplement community capital with loans from credit unions and other capital sources. Even while EB PREC’s model relies partially on institutional capital, community capital will play a transformative role by letting everyday people in the community initiate and lead land acquisitions. This is a powerful step toward democratizing land and housing. In typical real estate transactions, a purchaser must put down between 15% and 30% of the purchase price in order to obtain an institutional loan. This puts real estate purchase out of reach for a growing majority of people, since most people in the U.S. have little or no savings available for a down payment. At best, people without funds for a down-payment may be able to borrow money from relatives or friends, but this is a privilege available to few. Communities of color, in particular, are at a substantial disadvantage; for example, White household wealth, on average, is 13 times greater than that of Black households. As such, if everyday people in our communities are to have any leverage to acquire and steward local land and housing, we have to create vehicles for community members to pool their capital. EB PREC is such a vehicle for communities to collectively exert their influence, pool their capital, and then use that influence and capital to leverage larger institutional funds. What’s important is that the community – not wealthy people or large institutions – is leading the way. In other words, community capital is not just a way to raise money; it’s a way to build power for the community.
Lowering the Cost of Capital = A Key to Affordability
Community capital is also one tool EB PREC uses to create and preserve affordable real estate. EB PREC will pay a return of approximately 1.5% per year to its share owners, which is much lower than a typical mortgage interest rate. If the cost of capital is lower, the cost of real estate will be lower, and those savings can be passed to residents. Thus, the more that EB PREC can rely on community capital (versus institutional capital) for a particular property acquisition, the less the residents will have to pay to live there.
