Author Topic: Interesting investment opportunity in local food co-op  (Read 1559 times)

FreelanceToFreedom

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Interesting investment opportunity in local food co-op
« on: August 23, 2018, 11:25:26 AM »
A food co-op in my area is raising funds from co-op members for a pretty interesting opportunity. It's a not-for-profit local/natural food grocer with 2 locations in town, and solid financials.

Basically, they expanded in the last couple years, and financed a new building at a cost of ~$3 million. It's financed through a local credit union.

Now, they are raising funds from community members to pay off that loan. Basically, their goal is to pay interest to community members, instead of to the bank.

I thought this was a fascinating concept, and I've never heard of another business doing this. The co-op is technically already member-owned (you pay a small fee to get membership, and they issue dividends if they hit financial targets). Now, they are taking this another step forward.

I mainly just wanted to discuss this as a concept, because I find it interesting. Has anyone seen similar programs out there?


Here's what they are offering in terms of "shares" (function more like bonds):

Class - Interest - Term - Minimum
Class B - 2.75% - 1 year - $500 min
Class C - 4% - 4 year - $2,500 min
Class D - 5% - 5 year - $10,000 min


I'm considering parking 5-10k there (funds that are currently sitting in a high-yield savings account, earmarked for a house at some point) but I'm still thinking about it.

BicycleB

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Re: Interesting investment opportunity in local food co-op
« Reply #1 on: August 23, 2018, 11:42:02 AM »
I haven't seen similar items specifically, but they don't seem unreasonable.

From an investor standpoint, I would think that the relevant issues are:
-Specific risks (is the business as stable as it is perceived to be? Could issues of worker self-determination interfere with payments to investors?)
-Lack of liquidity
-Whether the rates offered adequately compensate for the above factors

Comparing to other fixed income instruments:
-CDs at Vanguard and such were offering about 2.6% the last time I looked. Not much benefit from Class B. You could get close to that rate at a credit union or bank and maybe have the ability to borrow against it if needed.
-Class C and D have higher interest than Treasury bonds or money market accounts, but is it enough to compensate for liquidity loss and specific risk? Here from Google is an article about 10 income investments with 5% yields:
https://seekingalpha.com/article/4115495-10-attractive-5-percent-yields-preferred-stocks-bonds-conservative-options-trades?page=4
-My uninformed take is that each of these price points is "meh" from an investor standpoint, but reasonable if supporting the coop makes you feel like you made a contribution.

I will defer to wiser comments when they arrive!

YoungInvestor

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Re: Interesting investment opportunity in local food co-op
« Reply #2 on: August 23, 2018, 12:00:50 PM »
Seems to me like they are putting a nice wording on something that will mostly save them interest.

Isn't the credit union itself owned by members of the community?

bwall

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Re: Interesting investment opportunity in local food co-op
« Reply #3 on: August 23, 2018, 12:52:48 PM »
Seems to me like they are putting a nice wording on something that will mostly save them interest.

Isn't the credit union itself owned by members of the community?

The fancy wording, co-op, indicates that it is a grocery store, not a credit union.

That being said, I think it's a great idea. Why not put your money in something that you believe in (or not), and provide an opportunity for financing outside of Wall St.?

Think about it: how else can they access $3m in financing? Bond issuing, or a bank loan will be over 10%. By saving interest, they can pass along the savings to their members (read: shoppers). I bet that the CEO of the co-op earns a lot less than the CEO of the local supermarkets, even these savings are passed on to the consumer.

pressure9pa

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Re: Interesting investment opportunity in local food co-op
« Reply #4 on: August 23, 2018, 02:36:54 PM »
I would want to know if the building is secured by these notes.  If they raise enough to pay off the credit union loan, I assume it would be.  But what if they raise $1MM and still owe $2MM to the original lender?  I would assume this series then sits in a second lien position.

terran

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Re: Interesting investment opportunity in local food co-op
« Reply #5 on: August 24, 2018, 07:01:15 AM »
Seems to me like they are putting a nice wording on something that will mostly save them interest.

Isn't the credit union itself owned by members of the community?

The fancy wording, co-op, indicates that it is a grocery store, not a credit union.

That being said, I think it's a great idea. Why not put your money in something that you believe in (or not), and provide an opportunity for financing outside of Wall St.?

Think about it: how else can they access $3m in financing? Bond issuing, or a bank loan will be over 10%. By saving interest, they can pass along the savings to their members (read: shoppers). I bet that the CEO of the co-op earns a lot less than the CEO of the local supermarkets, even these savings are passed on to the consumer.

YoungInvestor was referring to the fact that the Coop (grocery store) previously borrowed the money from a credit union (bank) and is now looking to borrow money directly from people to pay off that loan. Credit unions are usually owned by people in the community as well, so the coop is just trying to cut out the middle man by borrowing directly from community members rather than borrowing from community members through the credit union.

From an investment perspective this opportunity should be compared to an individual bond from a company with similar financials since that's what it is, not to a CD from an FDIC (or the credit union equivalent NCUSIF) insured institution or a diversified bond fund.

If you feel strongly about the coop's mission and could afford to lose the investment you might still make the investment even if the risk/reward don't line up. I'm not saying they don't, maybe this is a good deal when compared to individual bonds, I'm just saying there may be other factors than just the pure investment decision.

MustacheAndaHalf

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Re: Interesting investment opportunity in local food co-op
« Reply #6 on: August 24, 2018, 11:02:24 AM »
Class - Interest - Term - Minimum
Class B - 2.75% - 1 year - $500 min
Class C - 4% - 4 year - $2,500 min
Class D - 5% - 5 year - $10,000 min

I'm considering parking 5-10k there (funds that are currently sitting in a high-yield savings account, earmarked for a house at some point) but I'm still thinking about it.
Based on that last line, this investment doesn't make sense.  You're using your future house deposit, and there's a reason that's outside the stock market.  It would be less risky to put half of that in the stock market, and leave half in bond funds.  So since the money needs to be kept safe, I'd avoid putting a key chunk of your future house purchase at risk.

The closest thing to this investment is a junk bond - a company with poor credit or financial strength asking to be loaned money.  If you bought shares of Vanguard's High Yield Bond Fund (VWEHX), you get a share of the ~500 bonds that fund holds, mostly from different companies.  So you diversify your risk across hundreds of companies with risks of being able to repay the bond.  That fund currently pays 5.6%, where Total Bond Market pays 3.1%.
https://investor.vanguard.com/mutual-funds/profile/overview/vwehx

Choosing the co-op CDs over that investment features the following disadvantages:
- less diversification, picking 1 company instead of 100x companies
- lower yield, since even the longest CD pays 5.0% versus 5.6%
- you can't access the money, since it's locked up for 4-5 years
- if people panic, the co-op probably won't have the cash to handle a "run on the bank"
- I doubt a "groceries co-op" has a bank charter, and they might need one for this activity

WalkaboutStache

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Re: Interesting investment opportunity in local food co-op
« Reply #7 on: August 26, 2018, 10:15:18 PM »
I have seen this before. It was a non-profit but essentially controlled by one of the directors that held significant interests in the entity itself (read: none of the usual minority protection clauses one might find in a similar situation).  I am not sure that was the case here, but make sure you understand the terms of the deal really well, who the key people are (i.e. does the co-op rely on the efforts of one or two people and what interests do they hold), and even what the repayment history of the CU loan has been.

Additionally, if your money is earmarked for a house, are you comfortable parking it for the term of the loan?