Question
nnnnA 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:
nnnnSelections
nnnnA. Package loan
nnnnB. Participation loan
nnnnC. Open-end loan
nnnnD. Take-out loan
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Answer: B
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5 Keys Summary
nnnn• 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.
nnnn• A Participation Loan means the lender (creditor) wants to be part of the project.
nnnn• The lender wants to have an interest in the project and requires participation in the development.
nnnn• This structure allows the lender to receive a share of the profits or appreciation, in addition to the base interest on the mortgage loan.
nnnn• 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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