Posted by Alex Gurevich, TX on June 07, 2000 at 18:53:04:
There’s a danger in this particular approach with so called “shared appreciation mortgage”. I once withnessed a case where the lender in that relationship got into troubles with IRS. IRS looked into lender’s assets and discovered the equity in the property created by this loan with “equity participation”. IRS further proceeded to put a $1.2 mln lien against the $800K value property. Moreover, the lender was also indicted on the racketering and telemarketing fraud charges and the feds were about to confiscate the property altogether. The original partner got grey hair over the course of that relationship.
So as you say, the best partnership is no partnership, but a straight lender-borrower link.
Perhaps, if the party with funds wants the equity in the business, share of stocks without much voting priviliges would do, assuming the size of the business justifies that.