Operating Agreement

After a very detailed discussion with @adrian we came up with the some cool ideas to simplify the business structure without compromising the core ideas and goals of the organization. I have made a chart to give a visual example but I will go into detail as well.

Detroit Arcology Collective Corporation will be run by like minded individuals with goals to make housing affordable and meet the needs of lower income families. To become a member a contribution must be made be it a financial one or a labor one. All financial & labor contribution will be pegged together for simplicity as “UNITS”. The rate of the units will be determined by vote. The collective will vote to fund the housing projects and funds will distributed to the house LLC. The collective will also vote to appoint a CEO of the house LLC to oversee the funds and the rehab. The members can choose to make a labor or financial contribution and it will be tracked in the forum; in exchange they receive UNITS from the collective. A member will be appointed to oversee this to keep everything in check. When the house sells, the house LLC will repay the Collective and the funds will be distributed according to the UNITS a member has. Here are some points I want to highlight from our discussion.

-Equal voting rights (No matter how many units a person has the voting power stays the same)

-Prioritize membership being a majority of Detroiters

-The collective would set the purchase price, rent price, and labor hours needed for the projects.

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@Dame and I had an excellent and very productive conversation today. Here are my notes on the pieces that I remember us both tentatively agreeing on as a proposal for the operating agreement (both for the Detroit Arcology Collective and for the simpler LLC that would govern an individual property being rehabbed. I believe my notes are in alignment with everything @Dame has written above, but I have added additional points and also re-iterated some points in my own words.

Certainly a work in progress, but excited to get additional input from others.

  • Detroit Arcology Collective/Co-op (DAC) will have an LLC & operating agreement

    • Every member of the collective has equal voting power
    • In order to become a member you must make a minimum contribution of either hours of labor or cash to the DAC (or a combination of both)
    • At least 50% of members must have lived in Detroit at the time they originally become a member
  • Each property (e.g. Log Cabin) will have an LLC that is separate from DAC with a [simple] operating agreement

    • Each property will have a property CEO that has full decision-making power over decisions specifically related to the rehab process
    • DAC members will vote to: (1) appoint a property “CEO” (2) the budget of materials and labor and (3) the rental fee and/or sale price (thus implying a target rate of return - which should not exceed what is considered affordable (e.g. 30% of AMI))
    • There will be a cap on the maximum total contribution (in the form of labor hours or cash) that any one person can make on a particular property
  • All DAC members can contribute labor hours that will be valued at a set dollar value (e.g. $20/hour) and tracked as standardized member UNITS

    • Any member contributing labor on a property will track hours and get credited, hours not paid to member upfront are both credited as UNITS and are to be paid back from future house revenue in cash (based on the set $ value for an hour of labor)
    • After all hours and loans are paid back for a given property the remaining “profit” will be distributed to DAC members according to the proportion of UNITS that member owns within DAC
    • Alternatively, a member or 3rd party contractor may be paid out upfront from a property’s budget funds in cash, but will not earn any portion of the return (e.g. UNITS) from the rent or sale of the house for the hours paid upfront
  • Loans:

    • DAC will issue funds to cover the material and labor costs of a property in the form of a loan with a fixed rate of return.
    • DAC members will vote on the terms of the loans for a given property
    • Individuals or other 3rd party organizations may issue loans under the same terms (but are still subject to the same max total contribution as members are subject to)

Budgeting for labor:

  • It will be important to establish line items of work requiring labor (with an estimated total hours budget for each) so that members can easily choose an area to work on for a given property
  • We can also allocate some portion of our DAC labor budget “line items” for non-rehab work, such as improving the website, community outreach, fundraising, etc.

Key things to decide & agree on:

  • What is the $ value of 1 hour of labor?
  • What is the maximum contribution from a single member or person/organization giving a loan?
  • How exactly is each house LLC structured? Who are the Members on file with the state? Who takes on tax liability?
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Youve done a great job summarizing a lot of our ideas @adrian Ive also attached your graph below for visual clarity. I stand by those ideas and believe that they are a good foundation for us to move forward and Id really want to see how others feel about it. I would also add that time is of the essence not only because of the time restrictions on Log Cabin but I would also feel a lot comfortable investing my funds into something with a simple, solid and defined structure. If a operating agreement isn’t made soon I will have to start the Log Cabin project without the DAC initially, perhaps something can arranged after the fact ? I am still committed to DAC, I believe in the ideas and align with them.

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Thanks for the detailed discussion, I’m in favor of many of the ideas. It sounds like you would like to have more members sign the LLC operating agreement than just the three of us: @Dame @adrian and me. That’s the most important part to me as well as a community investment project. I like the idea of equal votes regardless of contribution, but who would we want to invite? I’d eventually want to invite all neighbors who live within a certain radius, but that could have its own challenges.

Would you like to have another one hour meeting this coming Wednesday to welcome public feedback, and we can invite additional neighbors or housemates to read a proposed operating agreement beforehand?

Im imagining the timeline is:

  • draft an operating agreement based on above, for specific property LLCs
  • get public feedback
  • send to DJC lawyers for final reworking
  • file with the State
  • schedule a time to review the agreements again next year, joining with other activist groups, while working on DAC (Detroit Arcology Collective)

I’m all in favor of simplicity and would also like to get agreements filed for Northwestern & Log Cabin soon, in order to unblock progress.

For Northwestern, I’m proposing the initial capital table based on current contributions of time and requested money:

That LLC would have a proposed 13 members (we can invite several more of its too unlucky, or if we need to raise more capital). How would the CEO role work if every member gets an equal vote?

To be updated every year with our annual filing, or before a house is to be rented or sold. Feedback is welcome.

Id be looking forward to the meeting Wednesday. The one thing id like DJC to check out is if DAC could wholly own the house LLC’s but during @adrian n I meeting we suggested that it be separate just for tax purposes but the question is still out on who the actual members of the house llc would be. As for the DAC operating agreement I believe a senior officer has to sign that to make it biding as opposed to every member signing. Also remember that DAC would structured as a corporation so that it will be easier to give out “UNITS”. Michigan requires that the articles of incorporation state how many shares a company starts out with so that will need to be discussed as well.

@Dame @cryptogoth A meeting on Wednesday sounds great. The best time for me would be 11:30 AM Eastern Time.

Paul, I think your overall timeline makes sense, but one very key thing for us to settle on and ensure we are all on the same page about is how a single house LLC’s Operating Agreement will interact with the larger Detroit Arcology organization.

Unfortunately I’m feeling somewhat burned out at the moment and would like to take a step back. I have ongoing health issues and would rather focus on the land down in AZ for rest of the winter. Trying to focus on two different places has been stressing me out for awhile, and I’ve extended myself as far as I can financially and attention wise.

I’m happy to talk at a time later, but if you need to move forward with Log Cabin house I can offer moral support and advice. I still think the funding from our first DAO is a valuable resource and should be pursued first. As one member of six, I would vote for any proposal to invest those funds into Log Cabin house.

In other respects, I’d like to sell the house at Northwestern St to someone who will finish it and bring it up to code, with distributing proceeds according to the table I posted before.

I think our current group of people is too small and only represents investors / rehabbers, whose interests are not aligned with homebuyers and neighbors (I.e. finishing houses for sale and rent efficiently, rather than building relationships and including more people who want to be first time homeowners ). The latter takes time, probably years, and the majority of our time spent in meetings, not borrowing money and working on houses. I think both of you want to move faster @adrian and @Dame and I respect if you want to move forward with a separate Log Cabin LLC operating agreement.

I’ve also considered hosting a dinner for other land bank house owners and contractors and think it’s likely you can find co-investors there as well, or that our friend Peter Bailey might be interested as well.

I understand this can be very overwhelming. Focus on your health and recovery. I will proceed forward with the Log Cabin project under my organization however it is open for anyone who chooses to invest .

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Thanks, I believe in you @Dame and I encourage you to post videos / photos anywhere (doesn’t have to be here, but we’re happy to host it) to build investor confidence and show progress on the house.

I support the Log Cabin house and any Detroit Arcology members I encourage to learn more about it and invest with you @Dame . I’m personally tied up with Northwestern St house and is as much as I can handle atm, but DAC is much more than just me or one house. I still consider the Log Cabin house one an Arcology house that I’ll help with as much as I can regardless of ownership structure. Looking forward to seeing how the proposals evolve.

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I understand and respect your decision. After all this is a big project but seeing I still have your support means a lot and I will continue to do the same for you.

Thanks everyone for your work and continuing to engage with the cooperative. I respectfully continue to emphasize that I’m prioritizing my health during this time and will not be working full time on this like in the past. As @adrian has set a good example, I’d like to dedicate Wednesdays to being most responsive to forum posts and having meetings with everyone here, and prefer the forum or chat to text messages unless there is a house emergency at 3731 Northwestern St. Please respect these boundaries.

I have memory challenges and find it stressful when people rely on what’s said in private conversations or through personal relationships rather than rational arguments presented in public.

I see a path to having a cooperative DAC LLC agreement that is one-person-one-vote where we all contribute money equally up front and share time in a 1:1 basis, and if anyone is paid an hourly rate, it is voted on by everyone and taken out of all our equal cash contributions. I’m continuing to work on this Google doc (not the final version) and welcome any and all help in shaping it, as always. I have never intended this to be a one man effort, and anyone can contribute such a google doc at any time for us all to consider and pass in to the DJC lawyers for final rewriting.

I will participate in this cooperative LLC but have no funds to contribute to it beyond the amount in the original DetroitDAO, which is currently amounting to about $4,000. I continue to be mystified why no one is making use of these funds or giving any feedback about it, and instead worrying about new funding from new sources. Any of the three DAO members can still spend these funds at anytime. I would rather spend our one hour meetings doing this, and I am ready to vote in support of this at any time.

You can also move forward without me! I realize my opinions are not shared by everyone, and I still cheer all forms of cooperation. there are many activist groups in Detroit, and Even other cooperative building groups. Not all of us have to work on all buildings at all times, which I personally find stressful.

After yesterdays meeting, does the Log Cabin house have a title that can be transferred to any LLC because of the 9 month Land Bank restriction? If so, I think we should use the DAO funding and form the coop LLC to get DCWF funding and other loans. If not, I see the cooperative LLC as an equity fundraising and loan gathering effort for @Dame and his crew, which I consider a worthy operation, guaranteed through our personal connection only. I’d also like to verify: there is a risk the land bank will take this house back, and all money invested in it lost. This is not new to us in real estate. The first house I was part of bidding on at 7377 Hanover, we lost our earnest deposit of $2,000 which was a sobering learning experience, and probably won’t be our last.

I will not transfer 3731 Northwestern to the cooperative 1p1v LLC above, and instead will be it’s own property-specific LLC, complete its remodeling and sale in a way that primarily relies on funding from the cryptocurrency / web3 community, that places a voluntary lien on the property to secure anyones loan including my own, that will require the participation of majority neighbors and faith-based / activist groups that I am continuing to reach out to, and that rewards everyone’s existing contributions according to SourceCred and work hours tracked, including this ongoing discussion about cooperatives. I welcome everyone’s feedback on that here in this forum, but it will take place in its own timetable and I ask that you not rush it or pressure it or me. I would like this to be my contribution to a much wider group than three people, and following a primarily online approach that I acknowledge here others are not comfortable presenting to public groups without me.

The Northwestern house will be its own LLC, it will follow a timetable determined by the 50 members who choose to keep engaging with it online who are majority Detroiters and majority first time homebuyers who are interested in the house as a place to live and not invest in, and this house should not be counted on to meet any other goals.

I take no offense if anyone here has their own timetable and wants to move forward without me.

First Id like to say I appreciate all the effort and energy that has been put into everything especially over the last few days and weeks. Id also like to say although I’m fully committed and willing to keep working towards our goals, things have not panned out as I have hoped. If I’m not mistaken, I believe that DJC said that a collective or co-op could not be an LLC (I could be wrong) that is why we settled on being a Corporation. I wont re-iterate all the previous points and proposals because they can be referenced on the forum but I will go back to that because i feel comfortable with those ideas.

A single collective corporation of members one member one vote to decide which homes it funds the rehab process is the simplest way I can put it.

I am in favor starting a equal member LLC but that would be completely separate from the collective. It would be a for profit business. And the members will decide a new home to rehab. The Log Cabin project would not be apart of that situation.

When I offered the Log Cabin project I was doing so under the pretext that it would be apart of the Collective. We have yet to agree on anything solid on the main organization so it must be concluded that the organization is not ready. However the sooner we can get to that point the better.

When its comes to 3731 @cryptogoth is free to do %100 what he likes. I would even be okay for that to be your personal house. Since Paul is obviously the most invested I think that would make the most sense but like I said it’s ultimately your decision.

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Thanks for these points. I think you’re right that an LLC cannot be a cooperative corporation. It is a normal corporation with more overhead than an LLC: it needs bylaws, a board of directors, to file an annual report, and keep track of shares. It costs $50 per year to register for up to 60,000 shares, in Michigan State, instead of $25 for an LLC.

I’d like to suggest also that we consider a mutual benefit corporation, which is also a corporation but rather than focusing on dividends to its shareholders, it focuses on providing a product or service affordably for its members (housing or food or insurance).

While I intend to help operate any common enterprise efficiently and profitably, I think we should retain the majority of that profit to buying more houses and growing the land that is stewarded, for any citizen of Detroit who wants to be a first time homeowner. That is closer to a non-profit mission. When we talk about helping our neighbors build community wealth, what DCWF means (my interpretation) and what I mean, is to help them save money by owning their own home, and they have more funds to contribute to their children’s education or their retirement savings. I don’t intend to operate where first time homebuyers are our customers and business model; I want partners who want to be actively involved in helping us all save up and earn a home, through slow and steady mortgage payments or doing the renovation ourselves, if and when we’re ready for it.

So I wouldn’t be in favor of a for-profit enterprise. I think we need at least 50 people showing up to meetings, giving opinions, and wanting to be members before we have any hope of producing a valuable and long-lasting agreement. This is part of the reason I see 360 Detroit and other groups as such valuable partners, and why they probably don’t want to be treated like customers. With 50 people, it will be easy to see what’s valuable, and that the goal of Arcology is not just to make one or two or three people happy.

To justify the extra complexity of a corporation, I’d like to suggest a few questions:

  • what’s the business model to achieve sustainable returns?
  • what’s the budget for the parent corporation, including salaries for any employees?
  • how much should each member contribute to join? The difference between our budget and member contributions is how much we have to make up in loans, grants, etc.
  • who will our board of directors be? The Detroit Cultivator Community Land Trust has a temporary board of directors that will oversee a future election of real directors, and they have been working on this since about 2017, and before that they know each other from Oakland Ave Urban Farm for many years. I suspect the next time they meet, which I encourage all of us to go to that mtg to see in action, they will probably have over 50 people in attendance.

Because I respect Jerry Hebron, James Lesko, and DJC so highly, i would resist any attempt for us to move quickly just to get a business done. Our reputation of being givers and not takers in our neighborhood is more important than finishing any one house or property, especially if that property doesn’t belong to a community trust up front.

It’s not true that 3731 Northwestern St is all my decision. The spreadsheet I’ve posted only has me owning about 67%, because of the time I’ve put in, and I publicly commit to contributing all of that to the next two houses in the trust. I appreciate you saying you would wish for it to be my home @Dame because I don’t have a permanent place to live in Detroit. When I am there, I am only working on the house and the land trust. most of my work has been on laying out legal guarantees so that people who want to work hard, share risk by loaning money, and who put their neighbors first can share in the returns of improving their neighborhood, earn equity in the trust, and be part of something that is worth all this sweat and attention and creativity.

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