Tony to Jim: Co-op housing association flexes muscle
I’ve been mulling your comment: “The whole co-operative sector of the global economy is a bit off the radar, and probably doesn’t get the attention it deserves. Its low-brow profile probably also inhibits it in attracting organizational talent and leadership, along with technically competent management. Alas, most MBA grads don’t lavish their hard-earned expertise on co-op enterprises . . .”
True enough that there’s not a long line of Wharton and Harvard grads in front of the co-op table at the job fair. But there are certain places that they covet.
The co-op sector is divided between two extremities. There are the co-op colossi that have caught a wave and been carried to heights unimagined by their founders. These do business in the billions, have thousands of employees and compete with the biggest and best in the marketplace. Desjardins Financial and Federated Ag are in this bunch in Canada. They are midgets compared to their co-op relatives in Japan, Germany, France, Spain, England and the United States, to mention some jurisdictions that treat co-ops more seriously than does the maple leaf forever. But they and a handful of others are of estimable size, with the ability and in some cases the plan, to engage the brightest lights on offer among MBA grads and their equivalents. Monique Leroux voilà.
Then there are the mom-and-pop co-ops, formed by family and friends, or by small communities. Some are near a century old and have surmounted cataclysmic economic surges in their time. They may do a couple of million dollars worth of business, five million, ten million. Small business. Most co-ops, by a large margin, fall within this category. They would have a few thousand members at most. Some are no bigger than Catalpa, the housing co-op I live in, with 15 members, running on about $100,000 a year. Most would be bigger than this but still small businesses by any definition. Certainly not of a size to be affording skills honed in $25,000/semester business schools.
What they can’t afford, of course, is what they most require. Co-ops are often founded by people with a need or with a passion but with little or no management experience. They soon enough recognize that survival depends on following basic business principles and practices. They get pretty good at it, with a survival rate well above that of conventional businesses. But most co-op managers never encounter what Gord Sharwood used to call “golf club preferred,” mezzanine financing or M&As. If co-ops are to play a fair part in rethinking and reshaping market fundamentals for the new economy, if I may put the goal so grandly, they are going to need some pretty smart people at the helm with some depth of ability in the back room.
And they do want to play their part. Here is Charles Gould, director general of the International Co-operative Alliance: “We want to see co-operatives rise to the top of global business as the fastest growing business model by 2020. Actors on the global economic stage are seeking answers to pressing financial and social problems and this model provides many of the solutions they seek.” I call your attention to the author. Chuck Gould took to association work from a career as a Beltway lawyer in Washington, D.C. He is now astride the united nations of co-ops, based in Geneva.
To bring myself back to Canada, and even further back to something I know something about, the housing co-op sector is undergoing an interesting metamorphosis that illustrates the dilemma of leadership in an assembly of autonomous entities, some weak, some strong. It starts with a place called Bridlewood.
The story is told more completely in this blog but the précis is that this 131 unit co-op near Windsor was facing bankruptcy this year (2012) because co-op members kept their unit fees much too low for much too long. The Co-operative Housing Federation stepped in and bought the place for $6 million. CHF, which is the national association of housing cooperatives, now owns Bridlewood and has become landlord of a 131 unit low-income housing development. Some tenants will be former co-op members, paying 50% more per month in rent for their units, but the Bridlewood Co-op per se has been dissolved.
CHF absolutely did the right thing here. The alternative was to see the development taken out of the social housing sector altogether and exploited by commercial interests. But it’s also fact that the co-op housing federation has removed these homes from the co-op sector and, so far, has had nothing to say about how, or indeed whether, Bridlewood will be restored to co-op status.
Very recently CHF revealed a housing cooperative refinancing strategy. Essentially it finesses the personal guarantee problem that afflicts the capitalization of cooperatives. With no control and little return, none but the most eleemosynary member will guarantee loans for a co-op that put their capital at risk. It happens but not often. But banks like guarantees, particularly when lending to small businesses. So co-ops have trouble borrowing from banks. And even though credit unions are essentially co-ops too, they’re just as tough to borrow from as banks. They compete with banks. For housing co-ops this scene is further complicated in two ways. First, many of them (Section 95 co-ops) are under the watch of Canada Mortgage and Housing Corp. because they were financed with federal mortgages, back in the Trudeau days when the feds believed in social housing. Now Section 95s across the country (Catalpa is one of the smallest) are about to finish paying out the mortgages. We can burn ours in 2016 and the vast bulk will be extinguished by 2020. No more audits to CMHC norms. No more reports to CMHC. No more inspections by CMHC. All will be free. Many will want to refinance, for reasons ranging from structural improvements to support for cooperative development projects. But it will be a specific liability for Section 95s that they’re no longer under the CMHC umbrella. They will face the general reluctance and ignorance of the finance sector that I mentioned. And then it will be noted that they have been under government tutelage ever since they were established. Not good.
Enter CHF, with its cooperative refinancing strategy. What the association will do is go hand-in-hand with a member housing co-op to one of several credit unions. CHF will profer what I can only call a “trust guarantee” for the co-op’s loan. That is, CHF will promise the CU that it will watch over the housing co-op to make sure it behaves responsibly, somewhat the same role that CMHC has. This is supposed to play in the co-op’s favour with the credit manager. I say ‘supposed to’ because this program is so new that nobody has passed through yet.
Again, I think this is a valuable and necessary approach. But if it works the way it’s designed and CHF-backed applicants fare better at loan wickets than others, the inevitable result will be to additionally empower CHF. Presenting without a CHF endorsement will become an additional obstacle for loan applicants.
Finally, there’s a story in British Columbia I’m working on. The folks at CHF BC say they’ll give me details early in the New Year (I’ll keep you posted). But the idea is that CHF is planning to set up corporations to organize, perhaps build, new housing co-ops. A partnership in Vancouver is the pilot. ”The ability to form co-ops has atrophied over the years,” I heard one exec explain. The new model means “somewhat less member involvement.”
I’m not sure whether this is a good idea for housing co-ops in Canada or not. I’m waiting for information. But already I know one thing. There are a bunch of smart cookies at CHF, very smart. Hope they’re not outsmarting the members.
I see it’s past my bedtime. Good night and good cheer.
Jim to Tony: Self-sufficient they should be
Rather than do it myself and then explain, I’ll let you Google this guy if you think it’s worthwhile: At least a decade ago (maybe two) an economist named De Soto published a notable book (name forgotten) about global poverty, attributing it fundamentally to the inability of the poor to obtain property, which is essential to give them borrowing power, which they must have to finance their own economic growth. The kind of property involved here is, of course, land. When a farmer owns some, he can get a bank to finance a new tractor and some seed to farm it. But with no land, no dice. De Soto attracted the attention of various UN agencies, but of course, the fundamental reform his concept requires, i.e., giving property rights to the poor, runs afoul of Marx’s law that says no one surrenders power voluntarily. (Actually, the Chinese have broken this law, allowing all sorts of property rights to emerge, tho’ only in certain regions and industries.) Still, the point is that De Soto roots economic growth in property (or assets owned) that enable the owners to borrow, and thus finance their own economic growth. I’m sure he’s right about this, because the map of places where such rights (and the borrowing power that attends them) exist matches perfectly the map of economically advanced countries. So the co-op movement is right at the heart of the matter when it deals in property ownership and the financing thereof. And I see no reason why it should not be, or quickly become, entirely self-sufficient in this regard, whether the big banks like it or not. All condos actually ARE co-ops in real, physical terms, regardless of their legal status as real estate assets.
The original credit unions were, I believe, based on this fundamental concept. They served both to finance agricultural enterprises, and to market the harvests. How this wholesome situation morphed into today’s grotesque, chemical-dependent agribusinesses is one of the uglier aspects of today’s economy. Like professional hockey, food production has been taken over by a cabal of capitalist thugs. If the co-op movement needs a new mission to revitalize it, I say, back to the land! Down with the flavorless multinational agritomato! More smaller farms, more good stuff to eat, a cleaner, tastier world. The more I think about it, the more I like it. Take the co-op movement back to its roots, fostering the growth and stability of the most basic business of all (other than prostitution, of course). Couldn’t the co-op movement do a better job of slaughtering beef than that e coli-ridden megaplant in Alberta the Brazilians just bought? Or the stinking mega pig farms in Manitoba? The automated chicken factories in Toronto? Tie this in with the growing public unease about irradiated and genetically modified foods, and farmers dousing their land with exotic herbicides, and it’s easy for the marketers to make small look beautiful, even if it’s more expensive. Make co-ops the source of things that may not be cheaper, but they’re better — right back to the source. And while you’re at it, do this with beer. Every decent town in Ontario ought to have its own brewery. And a hemp farm, or maybe two. That’s how it was in the good old days when Jesus (or was it John Molson? Willie Nelson?) walked the earth.
I think it’s time for an eggnog.
Tony to Jim: Great minds think
Ah yes, Hernando de Soto. Now that you’ve brought him to mind, I have him to hand. I bought The Mystery of Capital (hard cover, $41.25 on the flyleaf) not long after it was published in 2010. As he so clearly points out, it’s not just the existence of property that enables wealth. There are millions of shacks on hillsides and nearly as many cantinas by the roadsides that impoverished people live and work in but to which they have no legal title. Without title they can’t get a mortgage or any kind of loan against the property and this route out of poverty is blocked. The way to capital growth is to leverage assets already owned (or those to be acquired). Co-ops with assets either know or can learn how to use them. But it must be allowed that there isn’t the same rush to growth by cooperatives as there is by hard core public companies. A little less, a little slower, a little more do-it-yourself suits the co-op style just fine.
Reinterpreting the role of capital to productivity and growth is also enshrined in the theories of Lou Kelso of ESOP fame, which he named binary economics only after his last book was published. I spent time with him in San Francisco and knew a number of his Canadian followers. Like Noam Chomsky and, God help us, Michael Moore, Kelso found some of his earliest and most fervent admirers here. We invited him twice to Ottawa for meetings of The Response Group. His work on employee stock ownership programs is beginning to intersect with cooperatives, particularly worker co-ops and most particularly the thrust of co-ops for consideration as a vehicle in the corporate founders’ succession game. Worker co-ops haven’t been slow to recognize opportunity with the burgeoning retirements of boomers who were SME-founders.
Happy New Year.
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