Additional Capital Contributions
Additional capital contributions consist of improvements to the property that increase its value. Examples could be a new roof, a remodeled kitchen or bath, or an additional room or deck. Allocating additional capital contributions is important as each owner is unlikely to contribute proportionally to each capital improvement. They are not reimbursable unless the owners agree to reimbursement beforehand. More than likely the occupying owner will be the driving force behind improvements or remodeling. As such, there are a few important issues to consider and perhaps note in the equity share agreement.
Owners contribution to capital improvements - If the owners contribute to capital improvements proportionally to ownership share, there should be no issues in allocating additional capital contributions as the ownership percentages are pre-set. Problems arise when one owner contributes to the improvement of the property and the other doesn't. Unfortunately this is also the most likely scenario as the occupying owner will generally drive any improvements to the home. When only one owner contributes to capital improvements of the home, careful consideration must be made to determine the fair market value of the improvements and allocate them appropriately.
Value may be subjective - The exact value of a remodeled kitchen or a new room addition is impossible to assess. As such, it will be difficult for the owners to calculate the appropriate capital contribution to attribute to the owner who pays for the improvement. Did the new kitchen make the home more or less valuable?? Because the value of a home improvement is subjective, it is difficult to assign more capital contribution to the owner who paid for it. For example, if the occupying owner remodeled the kitchen and spent $50,000, it would seem logical that the occupying owner should be allocated $50,000 more in additional capital contributions (and thus "own" more of the overall property). However, what if the occupying owner had unusual taste and the new kitchen wasn't an improvement over the old kitchen at all? Even worse, what if the new kitchen actually lowered the value of the property? It's impossible to know for sure.
The flip side is that the kitchen could be a dramatic improvement over the old kitchen and worth far more than the $50k spent by the occupying owner. Again, it's impossible to know for sure. One solution is to pay the occupying owner interest on the money they invested in capital improvements. The owners then continue to derive the value by the original ownership percentages. The interest serves to offset any unmerited gains by the non paying owner while also not overly compensating the paying owner for what may not be a value added improvement.
Improvements - For better or worse, any major remodeling or home improvement project has the potential to change the value of a home. The equity share partners should draft specific guidelines regarding the approval of the scope of work to be done, the approval process for choosing a contractor, and the cost of the work.
Monthly Capital Contributions - If the monthly expense payments (mortgage, insurance, property taxes, etc) are substantially higher than the corresponding rental rates for a similar property, the occupying owner should be allocated monthly capital contributions as a reimbursement for covering an inordinate amount of the monthly expenses on behalf of the unoccupying owner. In other words, the occupying owner may be paying more than their share so minor changes to the capital contributions are made to "make up the difference".