What Is A FARJHO (SM) Structure?
FARJHO (SM) is the flagship service of PeoplesAlly Foundation. It is an offshoot from the R&D work on SwapRent (SM) embedded FARM product. The new name reflects the fact that FARJHO (SM) is meant to be a new way of home ownership structure, not just another mortgage product.
At the present time, there are many opportunities for investors to set up a fund to invest for the long term in foreclosed or distressed single family residences in many worst hit neighborhoods in California, Nevada, Arizona and Florida. FARJHO (SM) was created as a new way of shared equity based home ownership to allow institutional money to come in by letting renters and property investors co-own the properties in a LLC structure so that there would be a positive yield on their investments, similar to a real estate syndication process on commercial properties but with much scaled down expenses and complexity.
Due to its simplicity, this new commercialized service is ready for use by investors and homeowners without relying on the participation or any involvements by the government or major financial institutions. A common base structure for the US market is currently composed of a real estate syndication using an LLC legal entity. Each structure will be put together by a syndicator with up to a total of 10 members in the LLC. One of the co-owner members will be renting the property from the LLC and treat the property as his/her own principal residence.
For example, a home seeking person could identify a property in a particular geographical location. Instead of using a down payment say 5, 10 or 20% of the property value to apply for a conventional mortgage, which under most current circumstances he/she would not be qualified to, he/she could join the group of property investors to co-own the property in this all equity based syndicated LLC structure.
Although further financing using the property owned by the LLC is always possible as a variation of FARJHO (SM) if all members of the LLC so desire and approve, it is not a recommended structure. The intention FARJHO (SM) is to help renters become homeowners through minority stake ownership in the jointly owned LLC. A pure equity based structure without borrowing provides the long term social stability for home ownership and increase true housing affordability.
Since tax considerations are entirely passed through to each of the members, there is normally no point to use further leverage at the LLC level, unless the investors are of foreign jurisdictions. The use of moderate and reasonable borrowing to deduct the taxable income could be considered but should never be done to the degree that negative yield or negative cash flow occurs.
Tax advantages are man-made by nature. They reflect a government’s housing and property investment policies. Better tax treatments will follow prudent government policies when the economic benefits of innovative housing finance methodologies are more fully understood and accepted in the future.
For the time being, under the existing tax rules, property investors could manage the interest deduction individually since the rental income will pass through to each of the US based LLC members. For the homeowner/occupiers in the FARJHO (SM) structure, they could take advantage of the tax benefits of principal residence such as interest deduction and capital gains tax exemption for the portion of the equity that they own in the LLC. If they are interested in getting more of these conventional tax advantages, they could either increase their equity holding in the LLC or simply switch to complete ownership through conventional mortgage borrowing anytime they want, as long as they are able to afford it and be qualified for it.
FARJHO (SM) will serve as an additional consumer choice to increase housing affordability under the free market, not meant to replace any housing finance methods already in existence. It will only become a creative destruction if its economic value is proven and adopted by the consumers through further public education and awareness. For now it serves as a perfect alternative when homeowners either can not afford the conventional borrowing or are not interested in the conventional burden of debt.
Buy-out arrangements could be customized and structured in each individually syndicated LLC between members in the operating agreement of the LLC to serve different purposes of the members. When SwapRent (SM) transactions become available at REIDeX.com in the near future, the flexibility and reversibility features as well as the benefits of FARJHO (SM) will only get to fully present themselves at that time.
FARJHO 