Question

A lender agrees to make a loan on a large commercial complex provided the borrower gives the lender a 2% interest in the ownership. This type of loan would be known as a: 

Selections

A. Package loan

B. Participation loan

C. Open-end loan

D. Take-out loan

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Answer: B

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5 Keys Summary

• This loan, where the lender requires an interest in the ownership of the project in addition to the repayment of the debt, is known as a Participation Loan.

• A Participation Loan means the lender (creditor) wants to be part of the project.

• The lender wants to have an interest in the project and requires participation in the development.

• This structure allows the lender to receive a share of the profits or appreciation, in addition to the base interest on the mortgage loan.

• In contrast, a Package loan covers both real and personal property as collateral, an Open-end loan allows for additional future advances, and a Take-out loan is long-term permanent financing used to pay off a construction loan.

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