Using Mortgages to Divide Property Interests

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Topics: Financing

There are other practical uses for mortgage debt that go beyond simple financing arrangements. Sharing property ownership interests is one of them. When two unrelated owners wish to join together in the ownership of a property without entering into a formal legal arrangement or running the risks of an implied or ostensible partnership being deemed, a mortgage is an excellent way to arrange this, and to divide both title interests and profits.

For many years a couple of people I know have shared ownership in a valuable property that, because of its urban location, also carries considerable risks in today's litigious environment. Neither party wants to bear the financial risks of holding title, but each wants to share in the eventual profits.

To resolve the dilemma, one party formed a corporation, the sole assets of which are this property. The other party's pension plan loaned 80% of the purchase price to the corporation on a 'shared appreciation' mortgage which calls for accruing interest at 15% with a single payment due in full anytime the property is sold.

They have divided the share of appreciation that each is entitled to. The mortgagee pays the taxes and upkeep on the property and adds these amounts to the unpaid principal balance on the loan. The corporate borrower will manage the property, and sell it at the end of 10 years, or at any future opportunity that would be more advantageous.

Any time the property is sold, the lender, in lieu of receiving accrued interest on the loan, has the Option of converting the accrued mortgage balance in excess of the original loan amount – plus tax payments – into an 80% ownership interest in the property.

In the event the property fails to appreciate sufficiently, the lender can elect to simply be paid off. Thus his investment will be earning an acceptable market yield while he speculates on appreciation.

Neither party actually owns the property insofar as title law is concerned; but they are the de facto owners of the property. The title holding corporation bears all financial liability for the property. Since the property is encumbered with mortgage debt, no judgment lien will precede the existing loans held by the de facto owners. Thus, the mortgage not only protects the owners and their share of the profits, but it also protects the property itself.

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