It gets worse from the Bank's POV, by the way Because their accounting entry would look like this *Debit Provisional Liability account 5% of Capital Gain on units** ** Credit Other Expenses (provisional) account 5% of Capital Gain of units*
So they end up with an uncertain liability/expense to get past their financial auditors.
Min
-------- Forwarded Message -------- Subject: Re: [Ucol-shareholders] development fund Date: Tue, 22 Dec 2020 20:13:31 +1300 From: Y Lee yblees@orcon.net.nz Reply-To: yblees@orcon.net.nz To: ucol-shareholders@list.king.net.nz
Sorry Jeffrey I'm against discussing the 5% contribution right now because it just complicates things for me when altering the Body Corp. Plus at the moment, it's the banks we have to convince, not the shareholders.
Also From an accounting point of view, it's not as straightforwards as getting cash whenever a unit is sold
The accounting entry would look like this - accumulated and reported annually: *Debit Provisional Asset account 5% of Capital Gain on units** ** Credit Other income (provisional) account 5% of Capital Gain of units*
So every year, the accountant has to find a valid number to plug into this entry They can't just pull a number out of a hat. They have to be able to prove in a financial audit that it's a reasonable figure. If you need to do a multi year forecast, it becomes even more guesstimate. Like what is the average capital gain for the next 20 years (term of mortgage)?? If you think about it this way, you can see why the banks don't like dealing with it.
Regards Min
On 22/12/2020 12:46 pm, Jeffrey Robinson via Ucol-shareholders wrote:
Hi everyone
It’s Jeffrey, Catherine’s partner. I’m new to the cohousing project but keen to be involved and looking forward to living in Toiora.
I’d like to put forward a few thoughts about the development fund and some figures produced by Rainer.
There are currently two potential revenue sources for the development fund: monthly fees, similar to the BodyCorp, and the contribution of 5% of capital gains (5%cg) upon sale of units.
A few meetings ago there was discussion about ‘do we need to change documents for mortgages? And if we were to take out the 5%cg clause upon resale, how could we recoup that money for the development fund through annual fees?’
According to Rainer’s table and email, if the capital gain of every unit over the next year was 10% then 5% of capital gains (5%cg) is about $65,000. But the only way that we would get $65,000 into the development fund via the 5%cg next year is if we *sell all* *the units with a 10% capital gain*. No offence intended Rainer, but I suggest that the underlying premise of your figures is wrong. This may seem like splitting hairs but we need to be careful about the big numbers we wave around and where they come from and what are the underlying assumptions.There seems to be an idea in the group that we will have ‘too much money’.
I suggest that a more likely scenario is that once everyone is settled into cohousing the turnover of units will be relatively low (it’s going to a great place to live).Perhaps only one unit sale every few years.If, for example, the capital gains on one unit is $100,000 after 5 years then, when sold, $5,000 goes to the development fund.
In the short term, taking the 5%cg out of the cohousing documents may only have a small effect on the liquidity of the development fund (depending on how much we levy annually). In the long term, if we assume that property prices keep rising (quickly or slowly) 5%cg might become substantial.
(The idea that prices keep going up forever is also questionable. Property bubbles expand and pop for various reasons. World issues of climate change/pestilence/war can mean the collapse of financial systems. These things have happened throughout history. The recent large increase in property values in Dunedin of the last 2 years is not consistent with the previous 28 years and we cannot assume it will continue.)
Earthsong suggested a percentage of capital gains be returned to the Commons because, over the long term, the large rises in property values made those who sold a lot of money, due to some extent on the back of the work by everyone in the Commons, but none of that money ever came back to the Commons, as they would never be sold.
The point of the Covenant is to keep Toiora as cohousing in the long term to fulfil the conditions of our Resource Consent. It is simple and enduring, but we may need to look at other ways in the short term to fulfil those conditions. The point of the 5%cg contribution is to fund development in the long term. I suggest that a way is found to keep this contribution as a mandatory part of the cohousing set-up. Not so much for the short term but for the long term.
As I understand it, the actual amount of yearly fees to go to the development fund has not been fully discussed, unlike the BodyCorp fees which have been decided. Over the next few years the development fund will mostly come from our own annual contributions. With mortgages, living expenses and BodyCorp fees to pay there may not be much left to accumulate in the development fund. I suggest we are very unlikely to have ‘too much money’.
Best Jeffrey
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