Capital expenditures are those which nourish the long-term viability of the EcoReality community. Operating expenses are those that occur in the day-to-day activities of EcoReality. We must never confuse the two!
Capital vs operations
Any economist will tell you that capital is defined as the means of production. What they're more unwilling to admit is that there are limits to capital -- it all ultimately comes only from Mother Earth and Father Sun, representing mass and energy, respectively. (Well, a miniscule bit of matter comes from meteors, and tiny bits of energy come from lunar tides and spontaneous fission of radioactive decay.)
This resonates deeply with primitive and pagan spirituality and tradition, but it is also vindicated by modern science. The twin capital sources of earth and sun combine to create what biologists call "basic productivity" -- the growth of plants -- by which all other life on the planet is supported in a long-term manner.
But capital degrades, and must be maintained. The soil requires replenishment, and green antennas that gather solar energy don't grow on trees. (Oh wait -- they do! But you still must care for the trees if you are consuming their products.) The consumption (work or money) that goes into maintaining capital is called operating expense, or overhead.
From this, it is easy to see that a piece of land is a capital expense. But so is a building or a book -- anything that you use to produce other things that are consumed. It is also easy to see that taxes on the land (used to support community-wide, province-wide, or nation-wide infrastructure and services) is overhead, But so is interest on the loan used to acquire the land or building or book.
If money is taken in as capital, it must be spent on capital. For example, if someone is "renting to own", then that money must be invested in capital expenses. If it is not, then "dilution" happens -- the capital that exists is split up by more people, and less productivity comes of each share.
If money is taken in as an operational expense, it should be applied to such expenses, but if more money is taken in than is needed for overhead and operations, that money is called "profit", and may be invested in more capital, or paid out to shareholders as a dividend.
It is much easier to obtain grants for operations than it is for capital. Grant funders do not want to put money in your pocket; they want to help you find ways to do so yourself. So it is highly unlikely that a grant will pay for a portion of land purchase, but fairly simple to get a grant that will hire a consultant to help you acquire property. One notable exception: grants are great ways to fund "human capital". Many grants are available for training, which in effect, is a form of capital (a means of production).
Financial inflow initially comes from:
- investment shares, which are used for capital acquisition and improvement (Class A Investment Shares),
- additional investment shares are issued to members who contribute needed capital resources, such as equipment, furnishings, structures, etc. that the members all agree to "purchase" from the member (Class B Investment Shares),
- additional investment shares are issued to members who contribute labor to capital projects that members all agree on, at a rate agreed by all members, that is the same for any capital labor, regardless of the skill and education behind such labor (Class B Investment Shares),
- Member Shares, which are used to fund the operations of adding members,
- additional classes of investment shares, the funds from which are devoted to particular business enterprises:
- income from village economic operations,
- ongoing support of guests, renters, and other temporary lodging,
- ongoing and equal operations labor commitment from all members,
- dues or assessments to members in support of operations.
At some point, it may be necessary to seek additional ongoing support from villagers, based upon both their use of common ecovillage resources, and their level of outside income, especially if that income is supported by ecovillage resources.
Financial outflows go to:
- revenue from investment shares go into land acquisition, development, construction materials, capital equipment subject to depreciation, and outside labor and professional fees that would normally be considered a capital expense,
- grants and other large outside contributions should go toward explicit capital projects (this may be "human capital" in training expense),
- income from operations goes first to paying operational expenses,
- excess income from operations goes into new financial shares that are distributed equally to members,
- should income not meet operating expense, ongoing financial needs are met by members dues or assessments.
Briefly, our ownership structure consists of:
- Membership shares: $1,000 each adult member. Couples pay for two. Each member share has blocking rights in our consensus decision making process.
- Class A investment shares: $1 each, minimum investment of $10,000. Return on investment is pegged to the Core Consumer Price Index and is paid out annually in additional shares. Redemption may require up to a three year waiting period. These shares fund capital projects, such as land acquisition, construction, equipment, etc. Our goal is that eventually, each member will have substantially equal number of Class A shares. We will be setting up a mechanism so that younger people can borrow Class A shares from the coop, which older, more established people will loan to the coop. On approval of members, non-members may invest, but the total held by non-members cannot exceed 50% of the total shares issued.
- Class B investment shares: $1 each. These are for "donations" of capital equipment or labor on a capital project. These shares may be subject to a "negative stock split" from time to time as the capital underlying them degrades. These shares are not intended to be redeemed except under special circumstances.
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