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From AmukTrade
Buying and selling shares in residences: Some guidelines ---
Unlike timeshares and other forms of property ownership like joint and fractional ownerships, purchasing these ownership interests (shares) will not give the purchasers/shareholders/investors any undivided interest in the entire property, or any right to live in, or use or possess the property, unless specifically agreed upon between the owner-occupant and the investor(s). These purchases will be for investment purposes only.
How it'll work:
(a) The residence will be placed in a single-asset Limited Liability Company (LLC), Limited Partnership (LP) or Trust, and interests in the LLC/LP/Trust will be sold to investors through private placement offerings. Alternatively, the owner-occupant(s) and the investor(s) can enter into a direct partnership or similar agreement for an individual property;
(b) To keep the tax benefits for a primary residence, the owner-occupant(s) may need to own the residence in individual name(s) for two out of every five years and then can place the residence in the LLC/LP/Trust for three years;
(c) After the agreed period of time (mostly three years), the property can be sold or refinanced, and the proceeds from the sale/refinancing can be shared among the owner-occupant(s) and the investors according to their respective ownership interests. Or the owner-occupant(s) can sell additional interests in the LLC/LP/Trust to pay off the existing shareholders.
(d) For tax purposes, and to avoid triggering the Due-on-Sale clause in the existing mortgages which allows the lender(s) to call in their loans if the owner sells ownership interests, the transaction can be structured as a loan (mortgage), or an installment sale, or a cross between selling equity and debt, or whatever benefits the owner-occupants and the shareholders.
An example:
An owner-occupant has a home worth $1,000,000 (with, for example, $200,000 equity in it).
He sells, for example, 10% ownership interest in his home by selling a 10% interest in the single-asset LLC or LP or Trust holding the residence at the current face value of $100,000 to an outside investor. How much the investor will actually pay, and the method of payments, will be individually agreed upon between the investor and the owner-occupant. (The investor will own 10% of the home without using or living in it, so he’ll have to be compensated for that by a “rent” payment or its equivalent which has to be factored into the prices of the ownership interests.)
How the maintenance and other expenses will be shared (if they’re to be shared) will have to be agreed upon between the investor and the owner-occupant. We recommend that to simplify paperwork and calculations, the owner-occupants continue to pay all the expenses, including all mortgage payments, all taxes, repair and maintenance and all other expenses for the property, and these expenses be factored into the prices of the ownership interests.
After three years, the owner-occupant can sell or refinance the residence for, let’s say, $1,200,000, and the proceeds will be divided between him and the investor 90-10 (according to respective ownership interests). Or the owner-occupant can sell additional interests in the LLC/LP/Trust to pay off the existing shareholders at agreed upon or predetermined prices.
In case of sale or refinancing, the owner-occupant will have to pay off the mortgages on the house that he had from before from his share of the proceeds.
For owner-occupants of single-family residences:
1. Can partially cash out their investments now locked in their homes without outright selling or taking out a mortgage. Since these are not loans, no monthly loan payments are required. Also, it does not use up and reduce owner’s equity as much as home equity loans.
2. Can choose how much to cash out, depending on outstanding mortgage balance, equity and lender's permission. It makes it easier to own and keep real estate, at all times and especially in a down economy like now. It also spreads the risk of individual property ownership among the owner and the investors.
3. No mortgage (loan) restructuring necessary.
4. Proceeds from the sale of ownership interests (shares) can be directly applied towards mortgage balance (principal) to increase equity, if necessary or required by lender. Or the owners can use the proceeds to diversify their investment portfolios.
5. The periodic payments to shareholders by the owner-occupants, if any, may be marginal after all the taxes and expenses paid by them, management fees payable to them and home value appreciation are factored in, and may decrease further when the market for these ownership interests become more liquid and the transaction costs go down. Inflation and an adequate return on shareholder's investment will have to be factored into the prices.
6. After a specific period of time, the owner-occupants can sell or refinance the home and share the proceeds with the shareholders. This way the shareholders can get back their investments in a timely manner.
7. If they do not want to sell or refinance their homes, the owner-occupants may need to buy back the shares from the shareholders after a specific period of time at specific prices if no other buyer for the shares can be found. They, however, can sell new shares to buy back the shares sold before. They can also refinance the entire property with the new partners.
8. Provision will have to be made for an early selling of the property if the owner-occupants need or want to.
9. Both the owner-occupants and the shareholders can have the right of first refusal for purchasing shares being sold by either party.
10. The owner-occupants must maintain the property appropriately, and most likely will have to pay all property expenses and taxes. They'll continue to enjoy all the tax benefits of home ownership.
11. If an owner-occupant is unable to fulfill any of his duties, including buying back the shares from the shareholder(s), the shareholders may have to force a sale of the residence to recover their investments.
12. When selling their homes, the owner-occupants can just sell their remaining interest to the new owner-occupants and pay off the existing mortgage. The new owner-occupants will inherit the existing arrangement with the shareholder(s). This way, the new owner-occupants can buy their homes at much lower upfront costs.
13. This method provides asset protection from creditors by reducing owners’ ownership interest and equity. That makes it also a great wealth protection tool.
14. For a well-known/celebrity property owner, these partial ownership interests may fetch higher than normal prices, making this method even more attractive.
For the shareholders:
1. Management and maintenance of assets by owner-occupants.
2. Direct investment in an attractive, solid and mega-trillion dollar asset class for the first time on a regular basis, systematically -- for good and stable returns, and great diversification and hedging of investment portfolios.
3. New money-making opportunities in a new global mega-trillion dollar market.
4. Initially, an illiquid market for the shares.
5. May have to force the sale of the residence to recover their investments if the owner-occupants fail to fulfill their duties, including buying back the shares from the shareholder(s).
Some of the provisions needed to be included/clarified in the legal agreement between the owner-occupant and the shareholder(s):
1. The time period for the arrangement after which the property has to be sold and the proceeds divided among all, or the owner-occupant will have to buy back the shares from the shareholder(s).
2. The price or a formula for calculating the price of the shares that the owner-occupant elects to buy back from the shareholder(s).
3. The method of the payment(s) to be made by the shareholders to the owner-occupant for purchasing the shares.
4. Who'll pay for the taxes, maintenance and all expenses for the property, and if they're to be shared, how they will be shared.
5. How to deal with any lien placed on the property, and any judgment against the owner-occupant or shareholder(s) which may affect rights to the property.
6. Ensure that the owner-occupant discloses all loans taken on the property, and specify when the owner-occupant can apply for further loans on the property if he needs, and for how much.
7. Ensure that all shares sold in a property are properly recorded to safeguard the shareholder(s), and all lenders of the property are properly notified and have given their permission to the share sales.
8. Ensure that the owner-occupant can sell his ownership interest in the property, and if that is not possible, can sell the entire property anytime prior to the expiration of the time period agreed upon with the shareholder(s), if it is needed.
9. Ensure that shareholder(s) can enforce sale of the entire property to recover their investments on time, if the owner-occupant fails to fulfill his obligations.
