Q.: Have you ever heard of an “Equity Share Agreement”? I have asked many local real estate agents, but no one seems to know what I’m talking about.

A.: Yes, the concept of “equity share arrangements” is something that I have been discussing with local real estate broker Ken Osty of Osty Realty in Arroyo Grande, for several years. As Mr. Osty says, “Equity sharing can be a person’s answer to provide the down payment cash and give them the key to the American dream – their own home on the Central Coast!” With the equity share, your investor won’t have the tenant headaches and monthly payments that can often make real estate investing a nightmare. Instead, the Investor receives a valuable investment while the Occupier occupies and takes care of the property and pays all expenses while the property appreciates in value.

In the traditional equity share purchase, the parties co-own the property. They are called Investor and Occupier. The Investor is the one who provides the down payment cash. The Occupier is the one who occupies the property and makes its payments. They split the tax deductions and appreciation. The Equity Share transaction puts the Investor and Occupier on title, backed by a deed of trust for the Investor to foreclose in case the Occupier defaults.

In the traditional equity share arrangement, the Occupier must pay fair rent to the Investor for use of the investor’s portion on the property. This is accomplished by the Occupier paying no more than he would have paid, yet some payments are shifted to the Investor who pays the expense. What occurs is that the Occupier makes the rental payment out to the Investor (to a bank account in the name of the Investor, but often with the Occupier as the signatory). Each month Occupier makes out a check in the rental amount to the Investor account, and that amount is then drawn from the Investor account and paid to expenses the occupier has agreed to pay. The rest of the expenses (above the rental amount) go directly from the Occupier to the creditor. The Equity Sharing Agreement ideally assigns rental reimbursement first to expenses the Investor can claim but the principal residence Occupier cannot. The end tax result is that the Investor reports income in the amount of the rent with an equal amount of tax deductions for expenses paid. Please consult your Certified Public Accountant for more details.

Again, the above relates to the traditional equity share between Occupier and Investor. Other forms of Equity Sharing include co-ownership of the real estate. The term “Equity sharing” means co-ownership – sharing the equity.

© Copyright 2009 Michael J. Boyajian

Michael J. Boyajian, Esq. is the owner of Five Cities Law Center in Grover Beach. He has 18 years of experience in real estate and construction law. Your e-mailed questions are welcomed at boyajianlaw@sbcglobal.net.