In high-cost markets, a great pastor or key staff member can be priced out of homeownership. An equity sharing agreement lets the employing church contribute part (or all) of the down payment in exchange for a clearly defined share of future value. Done right, it’s transparent, ethical, and sustainable for both the church and the employee. As a CFO, I personally crafted a half-dozen of these arrangements to help ministry leaders locate in strategic high-cost areas.
What is an equity sharing agreement?
An equity sharing agreement (ESA) is a written arrangement where the church contributes funds—typically toward the down payment—and receives a contractual share of the home’s future value (or appreciation) when a triggering event occurs (sale, refinance, move, or after a set number of years). The pastor owns and occupies the home; the church holds a secured interest and a right to repayment plus its agreed share.
Why churches use ESAs
- Keeps compensation predictable while addressing a real housing barrier
- Helps staff put down roots in the community
- Avoids the long-term upkeep and liability of owning a parsonage
- Funds can recycle to help future hires
Common structures (pick one and keep it simple)
- Shared-Appreciation Loan (most common)
Church records a junior deed of trust for its contribution. At exit, church receives:- Return of its original contribution, plus
- An agreed percentage of appreciation (e.g., 25% of the gain), adjusted for capital improvements the homeowner paid.
- Equity Share as a Percent of Total Value
Church gets a fixed % of the home’s entire value at exit (not just appreciation). Simpler math, larger swings. - Co-Ownership / Tenancy-in-Common (least common)
Church is on title with a defined percentage and a use agreement. Clean in theory, but heavier on paperwork and lender coordination.
Most churches choose #1 because it’s lender-friendly and easy to model.
How the math works (quick example)
- Purchase price: $400,000
- Pastor down payment: $20,000 (5%)
- Church contribution: $40,000 (10%) as a shared-appreciation loan
- Mortgage: $340,000
Exit scenario: Home sells later for $550,000.
- Gross appreciation: $150,000.
- Agreement says church receives return of $45,000 + 30% of appreciation.
- Church receives $45,000 + (0.30 × $150,000) = $90,000.
- Pastor receives remaining equity after paying off the mortgage and costs, plus full credit for documented capital improvements they funded.
You can tweak the percentage and whether you share appreciation only (recommended) or total value.
Guardrails: governance, tax, and ethics (read this twice)
- Arm’s-length terms & board approval. Treat this like any related-party transaction. Document comparability data (local down-payment assistance norms, market appreciation rates), obtain independent board approval, and keep minutes. This helps avoid excess-benefit concerns.
- Structure it as a loan/investment, not disguised pay. If you forgive amounts based on service, the forgiven amount is taxable compensation and may raise deferred-comp issues. Keep it repayable per the contract.
- Charge at least the IRS Applicable Federal Rate (AFR) or use a shared-appreciation note that is clearly non-forgivable to avoid below-market loan imputed-income problems.
- Secure the church’s interest. Record a junior lien (deed of trust/mortgage) and get lender consent if required.
- Clergy housing allowance still works. The pastor can still designate a housing allowance for mortgage payments, taxes, insurance, and utilities; the church’s ESA is separate.
- Don’t create undue leverage. Include humane exit clauses for relocation, disability, or retirement so the arrangement never feels coercive.
This is general guidance, not legal advice—state real-estate and lending laws vary. Your agreement will require legal review.
What to spell out in the agreement (term-sheet checklist)
- Amount & form of assistance (loan with shared appreciation; co-ownership; or % of value model)
- Use of funds (down payment and allowable closing costs)
- Security (recorded junior lien; subordination rules; lender approvals)
- Occupancy (primary residence requirement; vacancy rules)
- Term & triggers (sale, refinance above $X cash-out, move, end of employment, death/disability, or year N)
- Repayment formula (return of principal + % appreciation, with a clear improvements credit method)
- Improvements vs. maintenance (define and document—permits, invoices, before/after photos)
- Carrying costs (pastor responsible for taxes, insurance, HOA, maintenance; proof on request)
- Insurance & risk (church named as additional interest on homeowners policy)
- Prepayment (allowed? discount curve?)
- Default & cure (timeframes; remedies; mediation)
- Death, disability, or pastoral transition (generous timelines; buyout priority for the church if desired)
- Dispute resolution & venue
- No tax advice disclaimer + employee acknowledgement
Accounting corner (church books)
- Record a “Shared-appreciation loan receivable” at the cash amount funded.
- If your rate is below AFR, record a discount and amortize to income over the term.
- Classify as long-term with current portion if a trigger is expected within 12 months.
- Disclose as a related-party arrangement with key terms and risks.
- Consider a board-designated housing assistance fund for transparency.
(Your auditor may prefer a memo documenting the valuation approach and exit assumptions.)
Implementation steps (fast track)
- Board policy: Adopt a one-page policy enabling housing ESAs (purpose, caps, eligibility, approval process).
- Term sheet: Fill in the amounts, percentage, triggers, and improvement rules.
- Lender coordination: Confirm your mortgage lender allows a recorded junior lien/down-payment assistance.
- Documents: Equity-share promissory note, deed of trust/mortgage, and a short use/occupancy agreement.
- Close & record: Wire funds to escrow; record the lien; get additional-interest endorsement on insurance.
- Admin & tracking: Annual proof of occupancy/insurance and a simple ledger of the church’s receivable.
- Exit: On sale/refi/trigger, settle the payoff per formula; recycle the proceeds to help the next staff member.
FAQs
What if the market falls?
Decide up front: most ESAs return the church’s original principal only (no share of depreciation). You can also share losses proportionally—but keep it simple.
Can we cap the church’s upside?
Yes. You can set a floor/ceiling (e.g., minimum return of principal, max IRR or max multiple).
What if the pastor adds a major addition?
Give full dollar-for-dollar credit for documented capital improvements before calculating appreciation.
Is this better than a parsonage?
Different tools. ESAs build home equity for the employee and keep maintenance risk off the church’s books.
Bottom line
An equity sharing agreement can be a mission-aligned, fiscally responsible way to help staff live where they serve. With a clear formula, fair documentation, and thoughtful exit provisions, the church preserves stewardship while empowering its people to be fully present in the community in which they minister.
Want more info?
I can help by providing a template that you can take to your lawyer to have a state-specific agreement drafted.