Participation Mortgages, Income Kickers and Equity Kickers

Blackburne & Sons is rolling out a revolutionary new product for commercial loans called a participation mortgage.  Rather than make a new hard money commercial mortgage at 13.9%, we might now make the same loan at just 7.9%.  The loan, however, would have an income kicker and an equity kicker.

An income kicker is a share of any increase in the gross monthly income of the property.  For example, let’s suppose the gross scheduled income at the time the loan was originated was $10,000 per month.  If the gross monthly income goes to $16,000; then Blackburne & Sons would take a percentage of that $6,000 per month increase.  The typical income kicker would be between 15% and 50%.

An equity kicker is a share of any increase in the value of the property.  For example, let’s suppose a commercial building is worth $1 million at the time we originate a loan.  The borrower renovates the property and then leases it out.  Suddenly the property is worth $1.8 million.  Blackburne & Sons would take a certain percentage of that $800,000 increase in the value of the property, but only when the property eventually sells or our loan is either refinanced or paid off.  A typical equity kicker would be between 15% and 50%.

Why not just make the loan at 13.9% and forget all of this nonsense about income kickers and equity kickers?  The problem is that the monthly payments on a $1 million loan at 13.9% will break the financial back of many borrowers.  Hard money investors want their big yields, so it’s simply not possible to make a hard money loan at 7.9%, absent some sort of additional financial incentive, like these two kickers.