The Law Center is piloting a new model of cooperative real estate we’ve named the Permanent Real Estate Cooperative (“PREC”), which will permanently take land off the speculative market and into community stewardship. A PREC simultaneously decommodifies land, enables community control for structurally excluded communities, and disrupts root causes of racialized inequality. Unlike a conventional housing cooperative, which is formed to provide housing to a defined group of residents, a PREC could be described as a “movement cooperative,” because it is designed to provide housing, build a large membership base, and serve members’ collective goal to transform our neighborhoods and our systems of finance and land ownership. Our vision is for a typical PREC to have hundreds or thousands of members who look around at the land and buildings in their community and think: “We should own this!” Rather than watching the fate of their communities be determined by wealthy speculators, large companies, and absentee landlords, PREC members will build collective power, pools of capital, skills, and organized communities that can take action to shape the future of local land and buildings.
In 2017, the Law Center helped officially incorporated the East Bay Permanent Real Estate Cooperative in collaboration with the People of Color Sustainable Housing Network, a community of over 1000 people of color interested in building intentional, healthy, collective, and affordable housing communities in the Bay Area and beyond. We have convened a series of community design sessions to further refine the PREC model, and developed a participatory governance structure with multiple volunteer-led working groups. It is now an autonomous cooperative with a dynamic staff collective led primarily by women and people of color. In late 2018 or early 2019 it expects to take title to its first property, a Berkeley home donated for joint stewardship by EBPREC and the Oakland Community Land Trust.
Entity structure: A PREC is a cooperative corporation, which has at least three built-in perks:
- A cooperative’s primary governing body is chosen and major decisions are made on a one-member one-vote basis, meaning that democracy is embedded in the legal structure.
- Cooperative corporations are limited in their ability to pay high returns on capital, meaning they cannot be vehicles for making the wealthy wealthier.
- The Sustainable Economies Law Center recently helped write and pass a law that increased California cooperative corporations' securities exemption, allowing them to raise capital by selling membership shares for up to $1,000 each.
Decentralized organizing and governance structure: The vision for PRECs is that they are decentralized organizations where land and housing acquisition and development is driven from the grassroots, rather than by individuals at the top of governance hierarchies. Groups of members can take initiative, self-organize, search for properties, raise capital, and shepherd housing into the cooperative, with the board and staff serving in a supportive role.
Homebuying: Members who live on the cooperative’s properties will pay a “purchase” price for a long-term “diminishing rent lease,” and the experience will simulate direct homeownership in many ways. Monthly payments will be reduced over time as residents pay off the purchase price.
Resident control: The cooperative will set minimum standards of maintenance, but the residents will control most decisions related to the property.
Price stabilization: When a member “sells” their lease, they will receive a pre-determined price that will give them a modest return (likely tied to the Consumer Price Index or a similar index) on their purchase price, as well as compensation for improvements. This ensures that housing will be affordable for the next buyer, and it means that a bidding process (which always privileges the wealthy) will no longer be the method by which communities allocate housing and land resources.
Title and long-term protection: The cooperative holds title to the land and housing and adopts multiple restraints on its own ability to sell properties. To keep it off the speculative market in the long-term, the cooperative preferably gives multiple land trusts and other PRECs rights (through deed restrictions, easements, co-ownership, and purchase options) to enforce affordability restrictions and to take ownership of projects that are abandoned by the PREC.
FAQ on the Model
How are PRECs different from Community Land Trusts (CLTs)?
CLTs and PRECs have many similarities and emerge from the same movement toward equitable and democratic control of land. Both engage community members in governance and permanently remove real estate from the speculative market. A primary difference is that most CLTs are 501(c)(3) nonprofits. The cooperative structure of PRECs create promising opportunities:
- Cooperative corporations have the flexibility to take capital in multiple forms, meaning that financing options are greatly expanded.
- Unlike 501(c)(3)s, cooperatives are not constrained to providing housing to low- and moderate-income people. PRECs can spread the expectation that everyone – high- and low-income – should stop profiting from property and live in price-stabilized housing.
- Cooperatives are platforms for mutual aid and self-help, not charitable assistance. Charities can sometimes create a disempowering divide between the helpers and the helped. The cooperative structure transforms the relationship to create empowered groups of people working together to provide for their own long-term housing needs.
Where did PRECs come from?
“Permanent Real Estate Cooperative” is a phase that the Sustainable Economies Law Center uses to describe a land ownership model that began to strike a chord with many of our partner organizations and clients. The model combines features of CLTs, limited equity housing cooperatives, real estate investment cooperatives, and self-organizing social movements from around the world. This hybrid needed a name to set it apart from other models.
PREC? Couldn’t you find something with a better-sounding acronym?
Trust us. We tried and gave up. Embrace it! PREC the city! PREC the planet!
Can a PREC change the world?
Not quite, but a widespread PREC movement can change the world. As people begin to reject the inequitable and exploitative nature of conventional land ownership and financing structures, people everywhere will be looking to be part of the solution. The PREC, itself, is designed to foster movement-building. Anyone can join and support a PREC (whether or not they intend to live in PREC housing), and the decentralized organizing structure can spur rapid scaling and leadership growth from the grassroots. The vision is for every community to be filled with PRECs, each PREC will steward many properties, and every person may join multiple PRECs.
FAQ on PREC Finances
What does it mean to buy an ownership share of the Cooperative?
The Cooperative will initially sell ownership shares for up to $1,000 each. If you buy a share, you can later redeem it at face value along with a small rate of return, so long as the Cooperative has funds available. For example, if the Cooperative pays a 2% dividend on shares, you will receive $1,195 if you redeem your share 10 years later. After a round of selling initial ownership shares, the Cooperative likely will offer the opportunity to purchase larger shares or to lend money to the Cooperative.
Regardless of the size of your investment, the rate of return will be capped, likely below 5%. No individual or company will be able to profit limitlessly from the Cooperative. The goal is to pay a reasonable return on investments (comparable to what you receive in interest‐bearing savings accounts, at the very least) and to return as much value as possible to the Owners in the form of good housing, jobs, education, and community‐building.
What does it mean to buy into Cooperative housing?
If you buy into a house or building, the Cooperative will structure your purchase to simulate homeownership as closely as possible. The main exception is that, rather than selling your share on the speculative housing market, you will later sell your share at a predetermined price. That price will be designed to pay you a rate of return that is more akin to a savings account, and likely tied to a common index, such as the Consumer Price Index. The formula is designed to stabilize the price of housing for future residents. For example, if you buy a unit for $200,000, you might sell it 10 years later for $239,000 (if the return is around 2%), plus the cost of improvements you made or minus the cost of restoring the property to good condition. Ideally, the Cooperative, itself, will purchase your unit and then sell it to another Cooperative owner.
While you live there, you will be making monthly payments to the Cooperative. Legally speaking, the Cooperative holds title to property and you will be a tenant of the Cooperative. What you purchase when you buy in is a “diminishing rent lease,” which is a type of lease designed to simulate homeownership. It is called this because your rent is designed to be substantially reduced when you pay off your share of the purchase price.
For example, imagine that half of your monthly “rent” is put toward your $200,000 purchase price. The other half of the rent is put toward costs such as maintenance, property taxes, insurance, and administration by the Cooperative. When you pay off your $200,000 purchase price and financing costs, your monthly payments will be substantially reduced, likely by as much as 50%.
How will the Cooperative finance everything?
The Cooperative is designed to grow and support the acquisition of many properties over time, meaning that it will always be raising capital. The Cooperative will aim to build a large ownership base in order to raise substantial capital through the sale of ownership shares for up to $1,000 each. While this will not be enough to continuously acquire properties, this amount will enable the Cooperative to leverage capital in other forms and from other sources, such as banks, cities, and other institutions. However, the vision is to source as much capital as possible from the grassroots. A significant portion of our communities’ wealth is tied up in savings invested on Wall Street. As movements grow and encourage divestment from fossil fuels and other extractive and exploitative industries, growing numbers of individuals, businesses, and large institutions (like foundations), are searching for alternative investments. A Permanent Real Estate Cooperative is designed to be a vehicle to enable divestment from Wall Street and reinvestment in our local communities. In order to solicit and receive this capital from ordinary people in the community, the Cooperative will have to obtain a permit to offer securities from the State of California. This is also called a direct public offering (DPO).
The development of EBPREC is also supported by grants from San Francisco Foundation, Full Circle Fund, Christensen Fund, and potentially other grants that are pending.
What will the Cooperative do with its profits?
Cooperatives generally operate to maximize benefit to their members (aka owners), which means that – apart from paying a small return on capital, as described above – profits are otherwise returned to members in various forms. The main form of “return” is to constantly improve the Cooperative’s offerings and opportunities, based on the interests and needs of owners. In addition, owners may be allocated a small dividend at the end of each year, which essentially represents a refund on amounts each owner pays in annual dues, event tickets, course tuition, and other costs. The more you take advantage of and pay for the services and opportunities of the Cooperative (aka “patronize” the Cooperative,) the larger your dividend will be. In the cooperative sector, these dividends are therefore often referred to as “patronage dividends” or “patronage refunds.” Owners who are residents of Cooperative property will receive an additional patronage dividend representing funds from their monthly payments that were not spent on maintenance and management of their unit and building.
Dividends will often be retained in an account for each owner, rather than paid out directly. This is because the dividends will be used as both operating capital and reserve capital for the Cooperative and for its properties. When accounts build up to a certain level, the Cooperative will then make distributions directly to owners. For example, if you are a resident owner, the Cooperative might allow your account to grow as high as $30,000 in order to retain a maintenance reserve for your property. If the account builds up beyond ideal reserve levels, you might be paid annual dividends. When you leave the Cooperative, you will be paid the amount in the account, either immediately or as payments over time.
In sum, financially speaking, here’s what it means to be a Cooperative owner:
- All owners will likely receive a small dividend representing a return on their ownership share investment.
- Owners who pay dues and participate in events and activities will also likely receive a small dividend representing a refund on dues and other payments to the Cooperative.
- Owners who are residents will also likely receive a dividend representing a refund on “rent,” and they will receive a small return when they sell their unit or share of housing.
Disclaimer: The exact financial structures of East Bay Permanent Real Estate Cooperative are still works in progress, as we are currently seeking and incorporating feedback. This summary offers the basics, which are subject to change.