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Our coop is about to begin a capital project that will require a relatively small mortgage (we currently have none). One of our wealthier shareholders has made an unusual offer: she wants to lend the coop her own money, at an interest rate considerably more favorable than any bank.
I remember reading an article about such a situation; has anyone had any direct experience? Is the interest paid to the shareholder/lender tax-deductible just like a conventional mortgage? Of course we're going to discuss this with our attorney before deciding anything, but I'm interested in hearing from people who have actually made -- or at least contemplated -- such a deal.
I have to agree that it's a bad idea to do business with friends. I don't know what the project entails but it could present problems with control as well. Not unlike the current TARP situation on Wall Street, if this wealthy shareholder lends the corporation money, she could feel entitled to control the project because she is providing the money and the board may feel obligated to agree.
You say that the amount is relatively small - with that in mind I don't think the savings you may realize is worth the potential risk to the relationship with your shareholder.
I agree with WAB that borrowing money from a SH for a capital project could also present control problems. The SH might want a say in how "her" money is spent. She might want to see contractor bids, have a say in deciding what contractor the project is given to, see and OK invoices for the work before they are paid, etc. Unless she is a BM or is on a committee for the project, there are aspects of this that she shouldn't be involved in. There are many ways the relationship between coop and SH could suffer in this situation, and the project could suffer too.
CDT: Legal issues aside, if your SH lends money to your coop, she's really lending it to all the SHs. I don't think it would sit well with them no matter how good the terms are. She may hold it over them, and unless she's a very community-conscious, selfless person, she expects something out of it. Maybe just having everyone say how wonderful she is, or maybe she wants to run for the Board and hopes SHs will vote for her out of guilt because she did something for them. I'd question the motives of anyone who made an offer like this. Just my opinion.
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I would rather borrow from a spiteful in-law than have my co-op borrow from a shareholder.
Even if your attorney, accountant and property manager give you a thumbs-up (and I'd bet a year's maintenance that they don't), doing business with friends is never a good idea.
Do business with a business whose business is making loans. If you borrow from a neighbor you'll probably be back here in a few years asking for advice on how to get out of the deal.
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