Participation Mortgage

A participation mortgage is a loan agreement that provides for a lender to receive part of the income fiom an investment in addition to the interest payments. Participation mortgages became popular during periods of high interest rates and are used by lenders to increase their yields. The participation feature enables them to share in the expected success of income-producing properties. It also, protects the borrower fiom abnormally high payments, if income projections are not realized. The participation can be a specified percentage of gross or net income, a share of proceeds at sale, or both.

The use of a closely related term, mortgage participation, occurs when the two or more lending institutions combine their funds to finance a real estate project. For example, a lender does not want the risk of a project of the magnitude for which an investor is seeking a loan. In this case the “primary” lender may call upon another lender to “participate: in this loan, thereby creating a participation. For example, an investor needs $100 million to purchase a large hotel complex. The lending institution to which the developer applies for a loan may not be able to lend that much money. By obtaining one or more “participants,” the original lender is able to obtain the money needed for the investor. In return, all lenders receive evidence of debt from the borrower, as well as an instrument pledging the property as security for each lender’s note.