(info, applied to Cohousing in particular, discusses the situation in the U.S.)
A. Allen Butcher:
"Equity sharing is quite common. In the Cooperative Housing Compendium: Resources for Collaborative Living (Center for Cooperatives, University of California, Davis, 1993) Lottie Cohen and Lois Arkin explain (pg 131) that equity-sharing is also called "shared appreciation" and "homeownership coinvestment."
They also caution that equity-sharing entrepreneurs may charge high fees and interest rates since these types of transactions are not regulated. Everyone cautions that competent legal advice be consulted on shared appreciation loans.
Lottie Cohen points out that equity-sharing programs have three general features:
- co-investment by the home buyer(s) and public or private lenders,
- repayment to investors by the buyer(s) is deferred as necessary, and
- all co-investors share in the appreciation of the property value.
In "Equity Share Your Way to Ownership" (see citation below) J.P. Vaughan explains that equity sharing is "an off-shoot of the joint venture." And Lottie Cohen explains that another form of joint venture is the "private lending pool" or "private offering," and give the Ecovillage at Ithaca (NY) as an example. A nine-member funding pool financed the land purchase, of which only two members planned to join the community (Cohen, Arkin, pg 123). J.P. Vaughan states that the equity sharing agreement "must be written so that the IRS does not see the Occupier as a renter or mere tenant ... (and) the Investor is not seen as a lender under the tax laws." (citation below).
Broderick Perkins in "Market Ripe for Equity Sharing Provided Buyer Heeds Caveats" (citation below) explains that since both the investor(s) and the occupier(s) of the shared-equity property are on the deed, both receive any profit from appreciation of the value of the property upon sale or refinance, and can deduct their share of the mortgage interest and property taxes from their income taxes. The investor claims the depreciation, adjusted for the percent of ownership held by the occupier or resident.
William Bronchick presents the potential problems with equity-sharing in "Equity Sharing Arrangements" (citation below). These include failure of the occupiers of the property to maintain it or to pay the mortgage, insurance or property taxes, and the problem of a stagnant or deflating housing market, preventing anyone from making a profit. Bronchick also suggests the importance of consulting with a real estate lawyer in order to assure that any pool of money involving limited partnerships and other corporations does not fall under the Securities and Exchange Commission's (SEC) regulations as a "syndication," meaning that some members are passive investors. If pooled funds are considered to be securities (stock) by the SEC the resulting legal fees will be substantial. Since in Colorado cooperative corporations are exempt from SEC regulations the housing co-op would be one good option for larger "shared equity" or "limited equity" community investment projects. The Limited Liability Company may also be an option if none of the members are passive investors (do not live in the property owned by the LLC) or if the LLC files for an exemption from state and federal securities laws, such as with an "intrastate offering" or "private offering" or other exemption. (An excellent resource is: www.nolo.com, click on "Business" then "Owership Structures" then "LLC," for any topic. See also: www.freeadvice.com and www.findforms.com)
Broderick Perkins recommends that deeds to equity sharing properties can be held in joint tenancy, tenancy in common, a partnership or as a living trust. (For definitions go to www.nolo.com For free articles enter in the search box any term then click on "Entire Site" and search again.)
The "land contract," "lease-option contract" or the
"contract-for-deed" is not a form of equity-sharing
since in these at least one party is not on the deed.
Perkins writes that the lease-option is appropriate for
sellers when real estate markets are stagnant or
deflating as they lock in the purchase price to be paid
in the future. In the lease-option the occupier is a
tenant and so does not benefit from any tax deduction,
yet may receive a share of any appreciated
value of the property. The contract-for-deed does
just the opposite for the occupier, permitting interest
deductions but not a share of the appreciated real
( https://we.riseup.net/assets/4969/ELAN.pdf - 2005)
See the following:
- www.nolo.com is a great general legal reference, searching for "equity sharing" finds Agreement to Share Property and a Living Together Legal Guide, written for unmarried couples yet useful for groups
- www.freeadvice.com and www.findforms.com
- for equity-sharing tax rules see Internal Revenue Code 280A(d)(3)(B)
- for a Shared Equity Financing Agreement see http://www.geojohn-law.com/Real%20Estate/SEFA.html
- Equity Sharing Arrangements, William Bronchick: http://www.legalwiz.com/articles/equity.htm
- Market Ripe for Equity Sharing, Broderick Perkins: http://realtytimes.com/rtcpages/19990312_equitysharing.htm
- Equity Share Your Way to Ownership, J.P. Vaughan: http://www.creonline.com/articl41.htm
- The Home Equity Sharing Manual, David Andrew Sirkin