Lenders are faced with an ever-increasing number of defaultedcommercial real estate mortgages, forcing them to either modify theloan or foreclose on the collateral Workouts remain attractive forlenders with loans in which the value of the property isinsufficient to repay the outstanding balance.

This active workout market has caused lenders to employ variousnon-traditional means to make themselves whole. One such method isthe use of an equity kicker, equity participation, sharedappreciation or contingent interest loan, in which the lenderreceives, in addition to traditional interest payments, the rightto a percentage of the income or profits from the property. Withthe promise of future income, a lender may be more willing tonegotiate terms with the defaulting borrower.

A mortgage loan with an equity participation generally involvesa below market, fixed interest-rate payment to the lender at a highloan-to-value ratio and additional interest payments. It is basedon the gross or net cash flow generated by the operation of theproperty. Shared appreciation payments may also be calculated basedon a percentage of the appreciated value of the property at thetime of any stipulated equity event, such as a sale or othertransfer.