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.