Participating Loan Arrangements

Are you an investor who needs money but is having difficulty finding a lender to loan you money at an interest rate or on terms that will make your deal profitable? Are you a lender who would like to increase your return on the money you are lending to investors? If the answer to either of these questions is yes, then consider adding the following two alternative financing arrangements to your negotiating arsenal.

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Participating Loan Arrangement (PLA)

A participating loan is a financing arrangement containing provisions in which the lender participates in the revenues of the property. Sometimes this arrangement is known as a “kicker” because it provides a lender additional incentive to make the loan. From a borrower’s perspective, a PLA can be an effective strategy to negotiate a more favorable interest rate and terms because the lender has a greater financial stake in the outcome of the project. From the lender’s point of view, a PLA provides a fixed minimum return with a greatly increased maximum.

When creating this form of financing arrangement, a lender might structure the loan as follows:

The lender will forgo collecting 10% interest on his loan and will instead opt for 6% simple interest with participation in 30% of the gain from the sale of the property or 50% of rent if the property is not sold in six months.

Convertible Mortgage Option Agreement (CMOA)

A convertible mortgage option agreement is a financial arrangement wherein the lender has the option to convert his note to equity in the project. This form of arrangement might be used in situations where the lender has a genuine interest in participating in the project but is unsure of its viability at the outset. In other instances, a lender may not want ownership due to outstanding obligations but would like to be able to participate in the future.

When creating this form of financing arrangement, a lender might structure the loan as follows:

The lender will loan the borrower 100K at 10% interest and pay the borrower 2K for an option to purchase 80% of the property (or LLC if a project is held by a company) before the note’s maturity date.

CMOAs can be an effective tool when properly structured––and the key is properly. Some states have held these mortgages unenforceable for reasons of equity clogging. Thus, great care must be taken when drafting this form of financing arrangement to ensure the option is upheld.

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Jonas Taylor: Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.