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Maitri House Case Study – Community Housing Law

Maitri House Case Study

The Rethinking Home Program of the Sustainable Economies Law Center is working to build a library of legal resources and documents to facilitate the development of shared, sustainable, and affordable housing arrangements. This work includes surveys and in-depth legal profiles of different models of shared housing, including cohousing communities, ecovillages, and housing cooperatives. What follows is a profile of a unique community in Maryland.

Disclaimer:

The Sustainable Economies Law Center cannot warrant that the legal model of Maitri House is perfect in every respect. In fact, there may be room for improvement in its legal structure and documents. However, this is true of EVERY community.  We nevertheless feel that it’s important to share information about unique communities, so that others may begin to replicate and improve upon the models. If you plan to use the information and sample documents in this case study as a model for your community, we strongly urge you to seek the advice of a lawyer, and to revise all documents to ensure that they comply with your State and local laws and ordinances, and that they meet your community’s needs.

Overview

Maitri House is a 20-person cooperative house located in Takoma Park, Maryland. Residents have their own rooms, but share common amenities, which include a large kitchen, living room, and dining room; as well as a home office; playroom; productive garden; and a bike shed. In addition, residents share a set of collectively articulated values which undergird the day-to-day functions of the community. However, what makes Maitri a particularly interesting case are the creative legal and financial structures its residents used to bring it into being.

The Initial Vision

Since a community like Maitri is, by definition, the work of many, it’s impossible to attribute its creation to any single person. However, even collaborative efforts require some initial force, and in Maitri’s case that force was a man named Ryan McAllister, who had long dreamt of starting a cooperative home. In 2006, Ryan began reaching out to people in his personal network, telling them what he wanted to do, and attempting to put together the core group that would go on to found Maitri. Even at this early stage, however, it was understood that Maitri would be:

  • A community that prioritizes closeness and social connection among its members, and serves as a supportive base for their engagements in the wider world;
  • A community that embraces members of different ages, races, familial statuses, and backgrounds, and that celebrates the richness such diversity brings to a shared home;
  • A place where parents and others could live as a large family, sharing the joys and challenges of supporting children;
  • A home that could be co-owned by all of its members, regardless of their financial situations, while also giving residents the ability to move in or out (and recoup their investments) as their situations changed;
  • A space that was large enough to fit 18-20 people, with ample space for privacy and quiet as well as community interaction; and
  • A home that was integrated into its urban community–close to the Metro, the local food co-op, and a number of other amenities;

Above all, Maitri would be a place where people could be themselves, contemplate what they value, and consciously center their lives around those things.

Finding People

Since Ryan had lived in the DC Metropolitan area for many years, he was able to use his personal network (friends and friends of friends) to find most of the people who would eventually form the core of Maitri. From late 2006 until early 2008, he sent emails, made phone calls, and organized informal meetings with people–telling them what he had in mind, while also listening to their own needs and wants. Throughout this process, the initial vision (above) proved to be an ideal recruiting framework: precise enough that people knew what they were getting into, without being so completely thought out that new participants could have no say in Maitri’s creation.

By early 2008, a core of people had coalesced around the project, Ryan’s initial vision had evolved into Maitri’s shared Vision and Values Statement, and the group began looking for a home.

Forming an LLC

Around the same time, the group hired a lawyer to form a Limited Liability Company (“LLC”) and draft its Operating Agreement. Like any LLC, this one enabled Maitri’s individual members to function as a single, legally coherent entity. Initially, the hope was that this entity could purchase property directly, which would then be jointly controlled by its members. This did not work out quite as planned (more on that later), but the LLC and its Operating Agreement did serve several other important functions. For instance, it:

  • Formally defined Maitri’s particular purpose (the acquisition and management of a cooperative residence, which would house at least some of the LLC’s members);
  • Defined the steps by which members could enter or leave the LLC, and by which members of the LLC would become residents of the house;
  • Provided some protections and rights to individual members (for instance, members would always have a right to sell their shares and divest themselves from the LLC), while also protecting the LLC as a whole (for instance, members cannot sell their shares to just anyone, and generally cannot demand that the LLC sell its assets in order to pay back equity shares);
  • Described the mechanisms by which the LLC would acquire capital from its members, and by which it would distribute profits/losses to them (this includes a very interesting clause saying that the LLC will pay 6% interest per year–lowered by consensus from the original 7% set forth in the Operating Agreement–on each member’s capital investment–more on this later); and
  • Defined the different spheres of decision-making that Maitri’s residents and LLC members might have to be involved in, from establishing house policies that would address day-to-day matters to legally mandated board meetings of the LLC), and set forth the mechanisms by which these decisions would be made.

While the members of Maitri didn’t actually end up being able to use their LLC until after they’d secured ownership of a home (a common occurrence), having their Operating Agreement written out in advance gave everyone time to read it through, understand its particulars, and sign on. It also probably helped to assuage many members’ concerns about the project (e.g., “Will I be able to recoup my investment if I want to leave?”), and to assure them that it was really going to happen.

Buying a Home, and Transferring the Powers of Ownership to the LLC

When the members of Maitri began to seek funding for their venture, they were dismayed to find that no bank would lend money to their newly-minted LLC (at least, not with anything resembling reasonable terms). In many ways, this made sense.  The LLC structure exists in large part to protect its member’s assets from being seized by creditors, and the LLC itself had no assets to seize. If Maitri’s LLC was unable to make its mortgage payments, the lenders would have little recourse. Still, this meant that Maitri’s home couldn’t actually be purchased collectively.

Consequently, two financially secure members of Maitri paid a down payment and took out a mortgage in their own names to jointly purchase Maitri’s building. If this had been the end of things, Maitri’s other members would still have had a house to reside in, and they probably would have been able to create a strong, stable, and supportive community within it. However, they would not actually have been owners of their home, and the resulting owner/renter power dynamics would almost inevitably have gotten in the way of real egalitarian community.

To resolve this situation, Maitri’s lawyer used something called a “Capital Lease” to transfer the powers, benefits, and responsibilities of ownership to the collectively-controlled LLC. Under this system, the LLC effectively has most rights of ownership to the home, and the residents (who invest in equity shares at a rate of $100/month–give or take) own the LLC.  In exchange for transfering the rights of ownership of the building to the LLC, the two mortgage holders got equity in the LLC equal to the value of the money they had invested in the project (for the down payment and remodelling costs).

For the time being, the original mortgage holders have the largest investments in Maitri–and consequently, a controlling-share in the LLC–but the hope is that the LLC will be able to amass enough equity over the next few decades to pay off the original mortgage, and that people’s individual shares of the LLC will equalize over time.

A Brief Note on Decision-Making Within the LLC

In theory (though perhaps not in practice), the LLC is the least egalitarian part of Maitri. It allows many decisions to be made unilaterally by an LLC Manager. For instance, the LLC Manager may sell any LLC asset or acquire any new one without seeking member approval, as long as the value of that asset does not exceed $30,000. Other major decisions–including extremely important ones like setting Member Expense Payments (see below) do require member approval. However, even here voting power is allotted according to each member’s investment in the LLC, meaning that Maitri’s two mortgage-holders have vastly more sway than any other members. Whether this is by design–a concession to expediency, and the mortgage-holders’ understandable desire to protect their substantial investment–or simply a relic of more traditional LLC structures is unclear. However, it does seem to be a less-than-perfect solution, ill-suited to Maitri’s overall mission and values.

Capital Lease: The Nitty-Gritty Details

The Capital Lease is an agreement between Maitri’s two mortgage-holding members—referred to in the Capital Lease as the “Purchasers”–and the LLC (which also includes those two members).  The Purchasers lease the property to the LLC for a period of seven years, with the option of three more automatically-renewing seven-year leases (for a total of 28 years).  The LLC also has an option to purchase the property, for a price equal to the unpaid principal on the mortgage loans at the time of the sale.  The intention is that by the end of the lease, including all option periods, the LLC will have paid off the entire mortgage loan amounts, including principal (see discussion under “The Business Plan” below), exercise the option to purchase, and title will formally transfer to the LLC.

The original lender itself is not involved, and has no knowledge of this secondary agreement; they still receive their payments from the mortgage holders, and as far as they are concerned nothing has changed.  Note that most mortgage promissory notes specify that the full balance of the loan becomes due on any transfer of the property securing the loan, without the lender’s prior written consent.  This is known as the “due on transfer clause.”  While lenders rarely enforce this right to call the loan unless they become aware of a transfer that would actually impair their security interest, the question of whether the lender would view the Capital Lease as a “transfer” and attempt to enforce the due on transfer clause, however unlikely, remains untested.

What the LLC Gets

The LLC’s lease payments under Maitri’s Capital Lease are set so that each month’s rent will be equal to the monthly mortgage payments (including any fees).  In addition, pursuant to the purchase option, the Purchasers cannot sell the house to anyone other than the LLC, and its sale price must be “equal to the unpaid principal on the mortgage loan” at the time of the sale, which very likely will be well below the fair market value of the house at the time.  In other words, the price that the LLC will eventually pay for the Maitri house cannot exceed its original purchase price, and the LLC will have paid that price by the time its lease expires.

For accounting purposes, the LLC effectively became the owner of Maitri House as soon as the Capital Lease was signed, since a Capital Lease is treated as a purchase with a loan.  Thus, rental payments are considered repayments of the loan.  The loan also allows the LLC to deduct the interest payments, and the mortgage holders have interest income and expense in an equal amount.  In addition, the LLC takes a tax loss each year on the depreciated value of the home, and passes this tax loss on to the LLC’s members as a deduction.  (This is described in more detail in “The LLC’s Tax Deduction” below).

What the Purchasers Get

Under the Capital Lease, Maitri’s original mortgage holders (the “Purchasers”) are guaranteed to receive an amount equal to their mortgage payment each month (which they will then turn over to the lender). In addition, the LLC agrees to pay for all maintenance, repairs, alterations, and improvements on the property. Finally, if the original mortgage holders wish to be free of their investment, the LLC agrees to either buy them out, or to sell the property on the open market and use the proceeds to pay back the original investors (plus any other equity holders).

The “Business Plan”: Maitri LLC’s Inputs and Outputs

In order to purchase the building that Maitri’s members call home, its original purchasers put in $400,000 of their own money. This is no small sum of money, and the fact that Maitri had members capable of investing so much was a considerable boon to the LLC as a whole, since it allowed them to take on a much more reasonable mortgage. However, it’s worth pointing out that there’s nothing in Maitri’s structure that would have prevented more members from putting in smaller amounts of money–the Capital Lease would work as well for ten “Purchasers” as it does for two.

The remainder of Maitri’s purchase price ($909,041) was paid for through a combination of a large mortgage ($500,000 at 4.75%) and two smaller private loans totaling a bit over $9,000. In order to be financially viable, Maitri’s LLC must be able to pay the interest on these three loans ($32,455/year), plus a host of other expenses involved in owning and maintaining a home. In order to do that, the LLC needs to have money coming in.

The LLC’s Income

Each month, residents of Maitri house pay an “Expense Payment” in exchange for a room in the house and full use of common spaces. The amounts of these payments vary from $500-$950, depending upon the size and general desirability of the room they occupy. Taken together, these expense payments bring in $87,000 a year. An additional $4,500 a year comes from extra fees for rooms occupied by more than one person ($150/month for each adult, and $75/month for each child).

Finally, many members pay an extra $50-$100/month of “equity” (thus building up their equity in the project, and either buying out some of the equity of the original mortgage holders or hastening the time by which Maitri’s bank mortgage will be paid off). This brings in an extra $6,600/year. All told, the Maitri LLC takes in $98,000/year–nearly $18,000 more than they need in order to meet their basic expenses. The surplus can be held in reserve to pay for emergency maintenance/other large projects, or used to pay off the mortgage, depending on the needs of the house and determined in accordance with the Operating Agreement.

A Small Addendum on Income: The LLC’s Tax Deduction

Like all individuals and entities, Maitri’s LLC reports and pays taxes on its income annually.  As lessee under the Capital Lease, the LLC reports and takes a tax deduction of about $33,056/year, based upon the 27.5 year depreciation schedule for residential rental property.  This deduction is then passed directly onto the LLC’s individual members via an IRS form called a K-1.

Generally, LLC members claim a K-1 tax deduction in proportion to their equity stake in the LLC (so that someone who held a 40% share of the LLC would receive 40% of the deduction amount). However, LLCs have some flexibility to allocate deductions in other ways. In Maitri’s case, all members will receive an equal share of the deduction, unless they choose otherwise (which they might, if, for example, they don’t make enough money in a given year for the deduction to be useful).  Essentially, this deduction amounts to something like a $1,600 Expense Payment refund per person, per year, which does a lot to reduce the real cost of living at Maitri.

* For more information on the tax deduction, see IRS Pub. No. 527, Residential Rental Property; IRS Pub. No. 46, How To Depreciate Property; Financial Accounting Standards Board (FASB), FAS No. 13, as amended.

The LLC’s Expenditures

The LLC’s largest single expenditure is the service payment on its mortgage. Currently, this is $31,605/year. Beyond this, it must pay $850/year on its two small private loans; $10,500 in annual taxes; $1,300 in insurance, about $7,000 in utilities; $2,500 for general maintenance; and about $2,100 for the services of a professional accountant. It also pays 6% simple interest to its equity-holding members each year–an amount which currently works out to $24,000 (this fact is interesting enough to warrant its own separate discussion, which can be found below). All told, these expenses total about $80,000 a year–a sum which is more than covered by members’ annual Expense Payments.

Invest in Yourself: 6% Interest on Maitri Equity

Perhaps the most unique thing about Maitri, at least from a financial perspective, is that its members chose to pay 6% annual interest on any member’s equity in the LLC. It is possible that this was meant as a partial compensation to the original mortgage-holders–their $400,000 equity investment means that they get $12,000 back at the end of the year. This is enough to completely offset their expense payments, which means that they are able to live at Maitri rent-free (in fact, they will have a bit left over each year).

As things stand, these original mortgage-holders receive the most benefit from Maitri’s 6% return. However, it provides some incentive for every member of Maitri to invest in the LLC. They may not receive an astronomical return from the money they put in (Maitri is no stock market), but they also have very little risk of losing their investment (again, Maitri is no stock market). Furthermore, they will be investing in themselves, and their own home.

Assuming that the entire $909,041 purchase-price of Maitri’s home is eventually converted to member-held equity, the amount that the LLC pays to its members each year will go up by about $30,000, to a bit over $54,000. However, by this time the service payment on Maitri’s mortgage (currently $31,605) will go down to zero. This means that, at least from a cost perspective, Maitri’s members have very little reason not to pay themselves 6% interest–at least, not for the next several decades.

At some point in the future, it’s possible that all of Maitri’s members will have equal amounts of equity invested in the project (with some members selling, others buying, and all continuing to live in the home long-term). In this unlikely scenario, there really wouldn’t be much reason to continue paying interest: each member would just be paying out and collecting money in equal amounts. However, in the much more likely scenario that members continue to have unequal equity, and that some equity-holding members cease to live in the Maitri house, these payments would continue to serve a real purpose: compensating those who had invested their money in Maitri, and who had risked some of their financial security and liquidity in order to make the home a reality.

Day-to-Day Decisions: Life in the Community

As interesting and important as Maitri’s legal and financial structures are, it’s worth remembering that ultimately they are means to an end–life, after all, is not lived within the LLC. Maitri’s primary purpose was to create a space in which residents could experience true cooperative living, along with all the joys and (hopefully productive) challenges that such living entails. For this reason, Maitri has put at least as much thought into its informal structures as it has into its Operating Agreement and Capital Lease.

Like most cooperative homes, Maitri has a lengthy list of agreements about everything from what house members are expected to do on a regular basis (cooking, cleaning, taking out the trash) to what sorts of food people will pay for and share together. What makes Maitri unique is that they have chosen to make all of these little day-to-day decisions with an eye on the bigger picture.

Vision and Values Statement

For Maitri’s members, this big picture is the community’s Vision and Values Statement: a one page document which lays out the overall vision of Maitri House, and lists its seven core values (which range from “Prioritizing the Vitality/Wellness/Connectedness of our Relationships” to supporting “Life-Enhancing Social Change”). Each of these values includes a few sentences of descriptive text, elaborating upon what Maitri’s members mean by each value–what, for instance, would supporting “Life-Enhancing Social Change” look like in a cooperative home?

In each case, the values and their descriptions were arrived upon after a long process of reflection, discussion, and debate, and they are in many ways the biggest bit of “work” that Maitri has done. It is the Vision and Values Statement, more than anything, that makes Maitri an intentional community–it encapsulates the way that Maitri’s members want to live, and the promises to themselves that they hope their housemates will help them to keep.

From Values to Practice

With these values in mind, Maitri’s members then formulated a Document of Intentions and Practices–a list of intentions, or ways that they hoped to live and act in order to embody their stated values. For example, because they value strong interpersonal relationships, they intend to meet regularly; make house decisions by consensus; listen carefully to one another; share openly; and discourage the use of televisions, computers, and other screens in common space. From these intentions (and others like them) flow Maitri’s specific practices: everything from meeting once a week for an hour and a half, to composting their kitchen waste.

Of course, most communities have some shared values, even if they are only implicit. Not having a written statement of house values certainly doesn’t prevent people from coming to collective decisions. And yet, there are solid benefits to having them agreed upon, and clearly articulated. According to Ryan of Maitri, the Vision and Values Statement functions as a “sort of fork–a way to hold ourselves in alignment with ourselves, and push ourselves to notice when we’re [making decisions or acting in ways that are] not in alignment with our values.” Furthermore, he says, “framing [disagreements] in terms of values helps move them away from tension between people and onto tension between values, and we become representatives of our values when we speak, rather than representatives of our personal preferences.” In other words, having an explicit set of shared values can help remind people to make collective decisions based upon what is best for the group, rather than merely what is most convenient for them. For instance, I as a hypothetical member of Maitri may really want to watch Jersey Shore on a giant TV in the living room, but I would also recognize that doing so would monopolize the space and overpower any interpersonal interactions that might otherwise occur there. And so, I would respectfully refrain.

Maitri House Documents

Maitri House Vision and Values

Maitri House LLC Operating Agreement

Maitri House Sample Financial Plan (Income and Expenditures)

Capital Lease Between Mortgage Holders and Maitri House LLC

Excerpt from Maitri House Document of Intention and Practice

 

Acknowledgments

This case study was written by SELC Rethinking Home Program Manager Sean Betouliere, with input from SELC Co-Director Janelle Orsi and volunteer attorney Esti Miller. Thank you to Ryan McAllister for sharing so much information about the Maitri community and its legal structure!

 

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Maitri House Case Study

The Rethinking Home Program of the Sustainable Economies Law Center is working to build a library of legal resources and documents to facilitate the development of shared, sustainable, and affordable housing arrangements. This work includes surveys and in-depth legal profiles of different models of shared housing, including cohousing communities, ecovillages, and housing cooperatives. What follows is a profile of a unique community in Maryland.

Disclaimer:

The Sustainable Economies Law Center cannot warrant that the legal model of Maitri House is perfect in every respect. In fact, there may be room for improvement in its legal structure and documents. However, this is true of EVERY community.  We nevertheless feel that it’s important to share information about unique communities, so that others may begin to replicate and improve upon the models. If you plan to use the information and sample documents in this case study as a model for your community, we strongly urge you to seek the advice of a lawyer, and to revise all documents to ensure that they comply with your State and local laws and ordinances, and that they meet your community’s needs.

Overview

Maitri House is a 20-person cooperative house located in Takoma Park, Maryland. Residents have their own rooms, but share common amenities, which include a large kitchen, living room, and dining room; as well as a home office; playroom; productive garden; and a bike shed. In addition, residents share a set of collectively articulated values which undergird the day-to-day functions of the community. However, what makes Maitri a particularly interesting case are the creative legal and financial structures its residents used to bring it into being.

The Initial Vision

Since a community like Maitri is, by definition, the work of many, it’s impossible to attribute its creation to any single person. However, even collaborative efforts require some initial force, and in Maitri’s case that force was a man named Ryan McAllister, who had long dreamt of starting a cooperative home. In 2006, Ryan began reaching out to people in his personal network, telling them what he wanted to do, and attempting to put together the core group that would go on to found Maitri. Even at this early stage, however, it was understood that Maitri would be:

  • A community that prioritizes closeness and social connection among its members, and serves as a supportive base for their engagements in the wider world;
  • A community that embraces members of different ages, races, familial statuses, and backgrounds, and that celebrates the richness such diversity brings to a shared home;
  • A place where parents and others could live as a large family, sharing the joys and challenges of supporting children;
  • A home that could be co-owned by all of its members, regardless of their financial situations, while also giving residents the ability to move in or out (and recoup their investments) as their situations changed;
  • A space that was large enough to fit 18-20 people, with ample space for privacy and quiet as well as community interaction; and
  • A home that was integrated into its urban community–close to the Metro, the local food co-op, and a number of other amenities;

Above all, Maitri would be a place where people could be themselves, contemplate what they value, and consciously center their lives around those things.

Finding People

Since Ryan had lived in the DC Metropolitan area for many years, he was able to use his personal network (friends and friends of friends) to find most of the people who would eventually form the core of Maitri. From late 2006 until early 2008, he sent emails, made phone calls, and organized informal meetings with people–telling them what he had in mind, while also listening to their own needs and wants. Throughout this process, the initial vision (above) proved to be an ideal recruiting framework: precise enough that people knew what they were getting into, without being so completely thought out that new participants could have no say in Maitri’s creation.

By early 2008, a core of people had coalesced around the project, Ryan’s initial vision had evolved into Maitri’s shared Vision and Values Statement, and the group began looking for a home.

Forming an LLC

Around the same time, the group hired a lawyer to form a Limited Liability Company (“LLC”) and draft its Operating Agreement. Like any LLC, this one enabled Maitri’s individual members to function as a single, legally coherent entity. Initially, the hope was that this entity could purchase property directly, which would then be jointly controlled by its members. This did not work out quite as planned (more on that later), but the LLC and its Operating Agreement did serve several other important functions. For instance, it:

  • Formally defined Maitri’s particular purpose (the acquisition and management of a cooperative residence, which would house at least some of the LLC’s members);
  • Defined the steps by which members could enter or leave the LLC, and by which members of the LLC would become residents of the house;
  • Provided some protections and rights to individual members (for instance, members would always have a right to sell their shares and divest themselves from the LLC), while also protecting the LLC as a whole (for instance, members cannot sell their shares to just anyone, and generally cannot demand that the LLC sell its assets in order to pay back equity shares);
  • Described the mechanisms by which the LLC would acquire capital from its members, and by which it would distribute profits/losses to them (this includes a very interesting clause saying that the LLC will pay 6% interest per year–lowered by consensus from the original 7% set forth in the Operating Agreement–on each member’s capital investment–more on this later); and
  • Defined the different spheres of decision-making that Maitri’s residents and LLC members might have to be involved in, from establishing house policies that would address day-to-day matters to legally mandated board meetings of the LLC), and set forth the mechanisms by which these decisions would be made.

While the members of Maitri didn’t actually end up being able to use their LLC until after they’d secured ownership of a home (a common occurrence), having their Operating Agreement written out in advance gave everyone time to read it through, understand its particulars, and sign on. It also probably helped to assuage many members’ concerns about the project (e.g., “Will I be able to recoup my investment if I want to leave?”), and to assure them that it was really going to happen.

Buying a Home, and Transferring the Powers of Ownership to the LLC

When the members of Maitri began to seek funding for their venture, they were dismayed to find that no bank would lend money to their newly-minted LLC (at least, not with anything resembling reasonable terms). In many ways, this made sense.  The LLC structure exists in large part to protect its member’s assets from being seized by creditors, and the LLC itself had no assets to seize. If Maitri’s LLC was unable to make its mortgage payments, the lenders would have little recourse. Still, this meant that Maitri’s home couldn’t actually be purchased collectively.

Consequently, two financially secure members of Maitri paid a down payment and took out a mortgage in their own names to jointly purchase Maitri’s building. If this had been the end of things, Maitri’s other members would still have had a house to reside in, and they probably would have been able to create a strong, stable, and supportive community within it. However, they would not actually have been owners of their home, and the resulting owner/renter power dynamics would almost inevitably have gotten in the way of real egalitarian community.

To resolve this situation, Maitri’s lawyer used something called a “Capital Lease” to transfer the powers, benefits, and responsibilities of ownership to the collectively-controlled LLC. Under this system, the LLC effectively has most rights of ownership to the home, and the residents (who invest in equity shares at a rate of $100/month–give or take) own the LLC.  In exchange for transfering the rights of ownership of the building to the LLC, the two mortgage holders got equity in the LLC equal to the value of the money they had invested in the project (for the down payment and remodelling costs).

For the time being, the original mortgage holders have the largest investments in Maitri–and consequently, a controlling-share in the LLC–but the hope is that the LLC will be able to amass enough equity over the next few decades to pay off the original mortgage, and that people’s individual shares of the LLC will equalize over time.

A Brief Note on Decision-Making Within the LLC

In theory (though perhaps not in practice), the LLC is the least egalitarian part of Maitri. It allows many decisions to be made unilaterally by an LLC Manager. For instance, the LLC Manager may sell any LLC asset or acquire any new one without seeking member approval, as long as the value of that asset does not exceed $30,000. Other major decisions–including extremely important ones like setting Member Expense Payments (see below) do require member approval. However, even here voting power is allotted according to each member’s investment in the LLC, meaning that Maitri’s two mortgage-holders have vastly more sway than any other members. Whether this is by design–a concession to expediency, and the mortgage-holders’ understandable desire to protect their substantial investment–or simply a relic of more traditional LLC structures is unclear. However, it does seem to be a less-than-perfect solution, ill-suited to Maitri’s overall mission and values.

Capital Lease: The Nitty-Gritty Details

The Capital Lease is an agreement between Maitri’s two mortgage-holding members—referred to in the Capital Lease as the “Purchasers”–and the LLC (which also includes those two members).  The Purchasers lease the property to the LLC for a period of seven years, with the option of three more automatically-renewing seven-year leases (for a total of 28 years).  The LLC also has an option to purchase the property, for a price equal to the unpaid principal on the mortgage loans at the time of the sale.  The intention is that by the end of the lease, including all option periods, the LLC will have paid off the entire mortgage loan amounts, including principal (see discussion under “The Business Plan” below), exercise the option to purchase, and title will formally transfer to the LLC.

The original lender itself is not involved, and has no knowledge of this secondary agreement; they still receive their payments from the mortgage holders, and as far as they are concerned nothing has changed.  Note that most mortgage promissory notes specify that the full balance of the loan becomes due on any transfer of the property securing the loan, without the lender’s prior written consent.  This is known as the “due on transfer clause.”  While lenders rarely enforce this right to call the loan unless they become aware of a transfer that would actually impair their security interest, the question of whether the lender would view the Capital Lease as a “transfer” and attempt to enforce the due on transfer clause, however unlikely, remains untested.

What the LLC Gets

The LLC’s lease payments under Maitri’s Capital Lease are set so that each month’s rent will be equal to the monthly mortgage payments (including any fees).  In addition, pursuant to the purchase option, the Purchasers cannot sell the house to anyone other than the LLC, and its sale price must be “equal to the unpaid principal on the mortgage loan” at the time of the sale, which very likely will be well below the fair market value of the house at the time.  In other words, the price that the LLC will eventually pay for the Maitri house cannot exceed its original purchase price, and the LLC will have paid that price by the time its lease expires.

For accounting purposes, the LLC effectively became the owner of Maitri House as soon as the Capital Lease was signed, since a Capital Lease is treated as a purchase with a loan.  Thus, rental payments are considered repayments of the loan.  The loan also allows the LLC to deduct the interest payments, and the mortgage holders have interest income and expense in an equal amount.  In addition, the LLC takes a tax loss each year on the depreciated value of the home, and passes this tax loss on to the LLC’s members as a deduction.  (This is described in more detail in “The LLC’s Tax Deduction” below).

What the Purchasers Get

Under the Capital Lease, Maitri’s original mortgage holders (the “Purchasers”) are guaranteed to receive an amount equal to their mortgage payment each month (which they will then turn over to the lender). In addition, the LLC agrees to pay for all maintenance, repairs, alterations, and improvements on the property. Finally, if the original mortgage holders wish to be free of their investment, the LLC agrees to either buy them out, or to sell the property on the open market and use the proceeds to pay back the original investors (plus any other equity holders).

The “Business Plan”: Maitri LLC’s Inputs and Outputs

In order to purchase the building that Maitri’s members call home, its original purchasers put in $400,000 of their own money. This is no small sum of money, and the fact that Maitri had members capable of investing so much was a considerable boon to the LLC as a whole, since it allowed them to take on a much more reasonable mortgage. However, it’s worth pointing out that there’s nothing in Maitri’s structure that would have prevented more members from putting in smaller amounts of money–the Capital Lease would work as well for ten “Purchasers” as it does for two.

The remainder of Maitri’s purchase price ($909,041) was paid for through a combination of a large mortgage ($500,000 at 4.75%) and two smaller private loans totaling a bit over $9,000. In order to be financially viable, Maitri’s LLC must be able to pay the interest on these three loans ($32,455/year), plus a host of other expenses involved in owning and maintaining a home. In order to do that, the LLC needs to have money coming in.

The LLC’s Income

Each month, residents of Maitri house pay an “Expense Payment” in exchange for a room in the house and full use of common spaces. The amounts of these payments vary from $500-$950, depending upon the size and general desirability of the room they occupy. Taken together, these expense payments bring in $87,000 a year. An additional $4,500 a year comes from extra fees for rooms occupied by more than one person ($150/month for each adult, and $75/month for each child).

Finally, many members pay an extra $50-$100/month of “equity” (thus building up their equity in the project, and either buying out some of the equity of the original mortgage holders or hastening the time by which Maitri’s bank mortgage will be paid off). This brings in an extra $6,600/year. All told, the Maitri LLC takes in $98,000/year–nearly $18,000 more than they need in order to meet their basic expenses. The surplus can be held in reserve to pay for emergency maintenance/other large projects, or used to pay off the mortgage, depending on the needs of the house and determined in accordance with the Operating Agreement.

A Small Addendum on Income: The LLC’s Tax Deduction

Like all individuals and entities, Maitri’s LLC reports and pays taxes on its income annually.  As lessee under the Capital Lease, the LLC reports and takes a tax deduction of about $33,056/year, based upon the 27.5 year depreciation schedule for residential rental property.  This deduction is then passed directly onto the LLC’s individual members via an IRS form called a K-1.

Generally, LLC members claim a K-1 tax deduction in proportion to their equity stake in the LLC (so that someone who held a 40% share of the LLC would receive 40% of the deduction amount). However, LLCs have some flexibility to allocate deductions in other ways. In Maitri’s case, all members will receive an equal share of the deduction, unless they choose otherwise (which they might, if, for example, they don’t make enough money in a given year for the deduction to be useful).  Essentially, this deduction amounts to something like a $1,600 Expense Payment refund per person, per year, which does a lot to reduce the real cost of living at Maitri.

* For more information on the tax deduction, see IRS Pub. No. 527, Residential Rental Property; IRS Pub. No. 46, How To Depreciate Property; Financial Accounting Standards Board (FASB), FAS No. 13, as amended.

The LLC’s Expenditures

The LLC’s largest single expenditure is the service payment on its mortgage. Currently, this is $31,605/year. Beyond this, it must pay $850/year on its two small private loans; $10,500 in annual taxes; $1,300 in insurance, about $7,000 in utilities; $2,500 for general maintenance; and about $2,100 for the services of a professional accountant. It also pays 6% simple interest to its equity-holding members each year–an amount which currently works out to $24,000 (this fact is interesting enough to warrant its own separate discussion, which can be found below). All told, these expenses total about $80,000 a year–a sum which is more than covered by members’ annual Expense Payments.

Invest in Yourself: 6% Interest on Maitri Equity

Perhaps the most unique thing about Maitri, at least from a financial perspective, is that its members chose to pay 6% annual interest on any member’s equity in the LLC. It is possible that this was meant as a partial compensation to the original mortgage-holders–their $400,000 equity investment means that they get $12,000 back at the end of the year. This is enough to completely offset their expense payments, which means that they are able to live at Maitri rent-free (in fact, they will have a bit left over each year).

As things stand, these original mortgage-holders receive the most benefit from Maitri’s 6% return. However, it provides some incentive for every member of Maitri to invest in the LLC. They may not receive an astronomical return from the money they put in (Maitri is no stock market), but they also have very little risk of losing their investment (again, Maitri is no stock market). Furthermore, they will be investing in themselves, and their own home.

Assuming that the entire $909,041 purchase-price of Maitri’s home is eventually converted to member-held equity, the amount that the LLC pays to its members each year will go up by about $30,000, to a bit over $54,000. However, by this time the service payment on Maitri’s mortgage (currently $31,605) will go down to zero. This means that, at least from a cost perspective, Maitri’s members have very little reason not to pay themselves 6% interest–at least, not for the next several decades.

At some point in the future, it’s possible that all of Maitri’s members will have equal amounts of equity invested in the project (with some members selling, others buying, and all continuing to live in the home long-term). In this unlikely scenario, there really wouldn’t be much reason to continue paying interest: each member would just be paying out and collecting money in equal amounts. However, in the much more likely scenario that members continue to have unequal equity, and that some equity-holding members cease to live in the Maitri house, these payments would continue to serve a real purpose: compensating those who had invested their money in Maitri, and who had risked some of their financial security and liquidity in order to make the home a reality.

Day-to-Day Decisions: Life in the Community

As interesting and important as Maitri’s legal and financial structures are, it’s worth remembering that ultimately they are means to an end–life, after all, is not lived within the LLC. Maitri’s primary purpose was to create a space in which residents could experience true cooperative living, along with all the joys and (hopefully productive) challenges that such living entails. For this reason, Maitri has put at least as much thought into its informal structures as it has into its Operating Agreement and Capital Lease.

Like most cooperative homes, Maitri has a lengthy list of agreements about everything from what house members are expected to do on a regular basis (cooking, cleaning, taking out the trash) to what sorts of food people will pay for and share together. What makes Maitri unique is that they have chosen to make all of these little day-to-day decisions with an eye on the bigger picture.

Vision and Values Statement

For Maitri’s members, this big picture is the community’s Vision and Values Statement: a one page document which lays out the overall vision of Maitri House, and lists its seven core values (which range from “Prioritizing the Vitality/Wellness/Connectedness of our Relationships” to supporting “Life-Enhancing Social Change”). Each of these values includes a few sentences of descriptive text, elaborating upon what Maitri’s members mean by each value–what, for instance, would supporting “Life-Enhancing Social Change” look like in a cooperative home?

In each case, the values and their descriptions were arrived upon after a long process of reflection, discussion, and debate, and they are in many ways the biggest bit of “work” that Maitri has done. It is the Vision and Values Statement, more than anything, that makes Maitri an intentional community–it encapsulates the way that Maitri’s members want to live, and the promises to themselves that they hope their housemates will help them to keep.

From Values to Practice

With these values in mind, Maitri’s members then formulated a Document of Intentions and Practices–a list of intentions, or ways that they hoped to live and act in order to embody their stated values. For example, because they value strong interpersonal relationships, they intend to meet regularly; make house decisions by consensus; listen carefully to one another; share openly; and discourage the use of televisions, computers, and other screens in common space. From these intentions (and others like them) flow Maitri’s specific practices: everything from meeting once a week for an hour and a half, to composting their kitchen waste.

Of course, most communities have some shared values, even if they are only implicit. Not having a written statement of house values certainly doesn’t prevent people from coming to collective decisions. And yet, there are solid benefits to having them agreed upon, and clearly articulated. According to Ryan of Maitri, the Vision and Values Statement functions as a “sort of fork–a way to hold ourselves in alignment with ourselves, and push ourselves to notice when we’re [making decisions or acting in ways that are] not in alignment with our values.” Furthermore, he says, “framing [disagreements] in terms of values helps move them away from tension between people and onto tension between values, and we become representatives of our values when we speak, rather than representatives of our personal preferences.” In other words, having an explicit set of shared values can help remind people to make collective decisions based upon what is best for the group, rather than merely what is most convenient for them. For instance, I as a hypothetical member of Maitri may really want to watch Jersey Shore on a giant TV in the living room, but I would also recognize that doing so would monopolize the space and overpower any interpersonal interactions that might otherwise occur there. And so, I would respectfully refrain.

Maitri House Documents

Maitri House Vision and Values

Maitri House LLC Operating Agreement

Maitri House Sample Financial Plan (Income and Expenditures)

Capital Lease Between Mortgage Holders and Maitri House LLC

Excerpt from Maitri House Document of Intention and Practice

 

Acknowledgments

This case study was written by SELC Rethinking Home Program Manager Sean Betouliere, with input from SELC Co-Director Janelle Orsi and volunteer attorney Esti Miller. Thank you to Ryan McAllister for sharing so much information about the Maitri community and its legal structure!

 

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