Seed Investor Guidelines
What does it mean to be a seed investor for a Fruit Haven group land buy?
A seed investor, either alone or with a small number of other investors, buys a property up-front, with the intention of re-selling shares in the property to smaller investors. This is essentially how the group buy is done. There are a number of reasons for this:
- It is much simpler, easier, and faster for one person to buy a property from the original seller, than to try to arrange 6-10 group buyers to get all their paperwork and money together in time to do the closing. Oftentimes sellers don’t have patience and would rather sell to somebody else.
- Once we have the property owned by a seed investor, then we can more comfortably wait 6-8 months to find enough people for a group buy, have them sign the appropriate documents and send the money, do lot measurements and assign personal homestead lots, finalize the development budget, etc. Whereas the original seller would not want to wait around for all that.
What benefits does a seed investor get?
- A seed investor, when the property is re-sold, will get a return on the original sale price. We aim for 10-15% but it depends on the valuation and the circumstances. So, if a seed investor buys a property for $40k, and wants to retain a 25% share for him/herself, 75% of the property’s ownership will be sold with the property being valued at $44k, so that the investor would earn a $3k commission.
- The seed investor has first choice in terms of where their personal homestead lot is placed.
- The seed investor can have more say in the property development budget when it is being planned, due to being involved and committed much earlier in the planning process.
- The seed investor can hold onto some lots and sell later for an even higher price when the development is completed.
What does the seed investor pay upfront?
- The sale price of the land (or half if there are 2 seed investors, of course.)
- The closing costs
- Initial development costs, usually $10-$15k. This can include things like marking the property boundaries, initial work needed to maintain the property, full survey, mapping and marking of personal homestead lots, initial access improvements, anything else that is necessary to get started. However, these expenses are all considered as part of the property development budget, so as other investors buy into the title later on, their contributions will reimburse the seed investor for the corresponding percent of these costs. For example, if the seed investor pays $10k of initial development costs, and later retains a 25% share of the property, the later buyers will pay 75% of these costs after they buy in, and that will be credited back to the seed investor.
Are there any restrictions for the seed investors?
We are very thankful to have people willing to invest capital to help carry out these group land buys, so that more fruit-based permaculture homesteaders can live a more sustainable lifestyle, own food-producing land in the tropics, etc. However, we would prefer that seed investors not plan on retaining more than a 50% share of the properties that they buy up-front. This way we can maintain a de-centralized ownership of the properties. Decentralization is an important part of the Fruit Haven community vision. Also, this ensures that we get a reasonable number of people participating in each property. There will not be much of a “community” with only 3-4 owners, especially if there is a controlling share i.e. one person who owns 60-70% of the property or more. If any individuals wish to purchase a property to own all or most of it, they are free to contact us and we will be happy to assist them with private property purchases. These can be remotely managed the same as any Fruit Haven property, the only difference is that they will not be considered a part of the Fruit Haven project.
What if it takes a long time to sell the remaining lots? Will a seed investor get stuck
with the bill for the property development fund?
No. In the legal contract between owners, it specifies the amount they are obligated to pay for the development budget. All later investors pay this entire amount upfront so there is no issue of late or missed payments for the initial development budget. However, seed investors only pay the property purchase and a few other costs up front, and their development budget contribution (assuming they retain shares and will incur a contribution) is credited from the funds that come from later investors – up until thatobligation is met, at which point additional funds are sent back to the seed investor.
In the community contract, the seed investor’s total obligation for the property development fund is limited to the percent which the seed investor plans to retain.
For example: If the development budget is $80k total, and the seed investor plans to retain 25% property ownership, the legal contract between the property co-owners would state that the seed investor is only obligated to pay $20k towards the property development budget.
Along with the budget, a “budget priorities” list is published or planned for. If for 2 years, we only find buyers for 50% of the property, during those 2 years, we will only complete the first projects on the priority list up until the funds are almost used. Then, we will delay the lower-priority projects until buyers are found for the remaining 25%, to fund the rest of the development budget. It would be legally impossible to hold the seed investor responsible for the remaining 25% since it is in the contract that they are only liable for up to $20k.
How is the accounting reported?
We use GAAP accounting software which generates standard reports such as transaction and income/expense. We also release the raw data that can be loaded into the software for auditing, as well as a PDF file with all receipts for each period.