Although these issues have been discussed before, I would like take a moment to clarify these concepts about FARJHO a bit further on this quiet Sunday morning.
The LLC legal entity structure is merely a convenient way for implementing the FARJHO concept and method for applications in the US. LLC is only a means to an end, not an end itself. In many other countries or autonomous economies the FARJHO method could be implemented through a variety of other local legal structures, most notably, a “trust” structure of some sort.
Two of the most important unique features of FARJHO should always remain the same in order to be called a FARJHO, i.e. first, FARJHO owns one house or condo at a time, and second, no more borrowing at FARJHO legal entity level.
The first feature requires that the legal structure we could use to implement the FARJHO concept and method under whatever legal jurisdictions should not hold more than one home.
The second feature advises that, there should better be no more borrowing once the FARJHO legal entity that holds the property is formed. The potential participants of a FARJHO, i.e. the JPIs, or even the AHO, could borrow to their hearts’ content before they come to the table to form the FARJHO structure but once the FARJHO is formed there should better be no more borrowing at the legal entity level to use the property itself a collateral in order to ensure that the possibility of foreclosure of the property to endanger the homeowners’ occupancy rights and neighborhood’s stability would no longer exist.
Any leverage-loving speculative investors who tried to achieve high leveraged returns as they were often used to do in real estate investments in the past could drop off individually if and when they ever lose their monthly income capability to service their own individual debts. They could go away quietly by liquidating their own member interests in the FARJHO legal structures without affecting the stability of the home occupier/partial owner of the FARJHO structure.
Therefore, many of the conventional reasons why people normally would incorporate a business activity do not necessarily apply to the FARJHO concept to own homes. By those standards, the LLC application of the FARJHO method in the US would therefore also vary drastically from the reasons why many people in various countries have been using something similar to LLCs or a TIC (tenancy-in-common) structure to own a commercial property or a group of properties in the past. The reasons of the conventional use of LLCs or TICs by the commercial property investors have usually been to facilitate borrowing and to shield the individual members from personal liability of the debt. If the real estate market goes sour, the idea for them is to get the lenders to hold the bag and the property investors could simply walk away and have the property foreclosed.
The purpose of using LLC to implement FARJHO on residential properties one home at a time can’t be farther way from those punting purposes. The main purpose of FARJHO is to use the legal structure to implement the equity sharing purpose only. The corporate level financing would be turned off in order to kill the possibility of foreclosures to ensure neighborhood stability and social harmony.
From this angle, it is also the very reason why that FARJHO is drastically different from all kinds of residential applications of the “equity sharing” concept, such as SAM (Shared Appreciation Mortgage) or SEM (Shared Equity Mortgage) that have been practiced in the UK and a few other countries for over past 30 years already. It is pathetic to see how the press allow some old school economists to have an eureka moment to discover the old “equity sharing” concept and promote those old and obsolete methods that have already been proven not working for over 30 years.
In any case, in order to appreciate the beauty of FARJHO, one may want to focus on the bottom-line economic benefits inherent in this innovative concept and methodology. The legal structure and/or the tax advantages are only secondary or tertiary considerations and should never be the driving force or motivation of why people would embrace the new FARJHO method. The economic advantages such as those built-in incentives to upkeep the property derived from the partial ownership by the renter of the same property that he/she occupies, the detachment of the sheltering functions from the management of the investment functions of a property ownership as well as the elimination of foreclosure possibility etc. are truly universal, no matter what prevalent legal structures and/or tax rules a country may happen to have.
I have expressed before my disdain about those financial innovations aimed at or designed only to circumvent the legal structures or to dodge any particular potential tax liabilities by those hacker financial engineers and/or bonus driven investment bankers. Their intelligence and hard work should better be re-directed to creating something truly original that could provide some real economic benefits to our human society. Otherwise, those genius efforts wasted on designing tax advantaged products could at most out smart some of those incompetent law makers or crony politicians. No respect from me on that. The effort may probably be better spent on simply voting those cronies and the ruthlessly taxing government officials out of their offices directly.
Therefore, tax rules in many countries would indeed evolve to direct the societies towards more economic equalization and social harmony by future proposals made by more intelligent and responsive public servants in the future, given the more and more people power provided by the modern transportation and telecommunication innovations. Unintelligent, bureaucratic governments and autocratic policy establishments would no longer be able to hang on for long since there is no way for them to stop the vast consumers to be educated and learn what is best for them in this modern era. They’d better learn to accept new economic concepts and methods way before their electorates do.
We have fortunately received very good interests from many senior foreign central bankers and high-level foreign government officials regarding the academic concepts and models of SwapRent(SM) and FARJHO(SM) over the past few years. Academically, there have also been many graduate level researchers doing their research thesis on the feasibility study of locally implementing the housing finance innovations of SwapRent(SM) and FARJHO(SM) in a few countries at the moment.
We can’t wait to focus our resources on the potential implementations in those foreign countries as well after we have successfully launched these innovative housing finance and home ownership structures in the US. Many FARJHO(SM) projects overseas would be conducted on a not-for-profit basis through PeoplesAlly.org.