Having an Interest

I hope that many people have an interest in the idea of a Farmstead Cooperative.

In this case I’d like to address the concept of “interest” when addressing a financial transaction of LLC shares over time, and how that transaction compares to a typical mortgage agreement.

Typically mortgage holders are paid interest over and above the payback of the mortgage amount/principal. Interest is the cost of borrowing a big chunk of money to purchase real estate, repaying it in bits over time a set time period — usually 15 or 30 years for most mortgages held by US banks. The mortgage is secured by a lien on the title of the land, which remains in the bank’s name for the duration of the mortgage agreement. Once the entire principal of a mortgage note is repaid on schedule (or ahead of schedule), and all interest due during the term of the mortgage is paid, the bank releases the real estate lien, and the title of that real estate is ‘free and clear’ of any claim by the bank.

Interest payments are the primary means of income for commercial banks all over the US. Borrowers are willing to pay to borrow money because they believe that they will benefit more by having the use of a big chunk of money for a set period of time than the cost of borrowing that money.

That’s the simple way to explain a financial instrument that is also tied up (in the US at least) in a tangle of financial regulations and insurance products. The fine-print documents that make-up a typical US mortgage can run from 30 to 60 or more pages requiring at least an hour of ‘signing on the dotted line’ — much more if you wait to read the mortgage agreements at the closing itself.

However, transferring shares of an LLC — especially if done over a set period of time like a mortgage — is very different. The title of any real estate owned by the LLC is held by the LLC of which all members own a share. An agreement to gradually sell the shares of an LLC is very different from the agreement to gradually pay back a large loan. Still, the word ‘interest’ remains an important factor in both agreements.

In the case of a gradual transfer of shares the seller of LLC shares retains an ‘interest’ in the property owned by the LLC as long as they continue to own shares. That ‘interest’ gives the seller all the benefits of being a member of the LLC as defined in the By-Laws. Literally this is a ‘common interest’ between the purchaser and the seller who both maintain some control of the present and future use of the property owned by the LLC. A bank cannot tell the mortgagee what color to paint the house, but an LLC member can.

I believe this is an important concept for both parties to digest when writing up any Purchase and Sale Agreement to transfer LLC ownership shares.

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