Permanent Housing Markets are Local Commons where occupiers have custody of the house they occupy and treat it as though they owned it. Sooner or later, the occupier will move on, and someone else will occupy it. The new occupier will pay to live in it and acquire equity with each payment. The property is always in the market and acts like a housing commons. This differs from cooperative housing because occupiers act as owners and do not share the house.
A Local Commons will likely need more members to justify employing people and investing in every service they need. They need existing service providers to provide services other Local Commons can use. The service providers will have to invest money to develop the service, and once they have it, they can sell it again to other Local Commons groups.
The traditional way of financing is for the service provider to get a loan or other finance — such as using some of their other profits to develop the service. However, another — cheaper way is to share the profit from the investment by giving a discount on future sales with a credit (much like a frequent flyer point) on the next sale. The financing reduces the finance cost and is a cheaper alternative to debt.
A service provider — like an accountant, an IT company, or a lawyer- must develop a product usable by Local Commons. Assume the development cost is $100,000, the price of each sale each year is $3,000, and the profit is $2,000.
Two ways to finance the development are:
- The service provider goes to a bank and borrows $100,000 each year at an interest rate of 10%.
- The service provider offers a prepayment investment opportunity to investors. Investors buy $100,000 worth of credits that appreciate at a rate of 10% every year. The service provider agrees to repurchase a portion of the credits every time they make a sale. The repurchased amount equals 100% of the profit so that it can be compared with bank loans.
Reducing the customer share from 100% to 50% means the service provider will continue to finance developments at a lower cost.
The spreadsheet above (Figure 1) compares a bank loan with prepayment financing and shows that the Local Commons make better use of finance. The main reason is that the bank’s interest is a profit to the bank. Prepayments transfer this profit to the local cooperatives that take the financial risk. Using prepayments removes the need to charge interest, and sharing increases the rate of money movement and reduces the need for as much money to provide the same or greater return on investment.
Service providers who share profits will outcompete other providers because their finance costs are lower. Most service providers to Local Commons are expected to adopt the approach.
