Kicker

What is a Kicker in Real Estate?

A kicker is an additional payment required by a mortgage lender in addition to the typical principal and interest payments. This additional payment often depends on certain financial performance metrics like gross sales or profits. The aim is generally to provide an incentive or share in the upside of the borrower’s success.

Examples:

Retail Store Financing:
- Example: Abel obtains a loan to purchase a retail store building. The lender requires a kicker equal to 10% of gross sales in excess of $100,000 per month, in addition to principal and interest.
Commercial Real Estate Loan:
- Example: A developer secures a loan for a new office building with terms that include a 15% kicker on rental income exceeding $250,000 annually.

Frequently Asked Questions (FAQs)

What types of mortgages typically include a kicker?

Kickers are common in participation loans or performance-based mortgages, often used in commercial real estate and development projects where lenders seek to share in the operational success of the property.

How is a kicker calculated?

A kicker is calculated based on predefined performance metrics such as gross sales, net income, rental income, or another agreed-upon financial measure. The specifics of these metrics are usually defined in the mortgage agreement.

Why do lenders require kickers?

Lenders require kickers as a way to secure additional return on their investment, particularly when financing projects with high potential for increased revenue. This arrangement aligns the lender’s interests with the success of the borrower.

Are kickers common in residential real estate?

Kickers are more prevalent in commercial rather than residential real estate due to the nature of commercial project revenues and the structure of these types of loans.

Can a kicker be negotiated?

Yes, the terms and structure of a kicker can be negotiated between the borrower and lender during the mortgage agreement process.

Participation Loan:
- A loan structure where the lender offers financing to the borrower in exchange for not only interest and principal but also a share of the property’s future income or profit.
Principal:
- The amount of money borrowed that must be repaid, excluding interest or additional fees.
Interest:
- The cost of borrowing money, usually expressed as an annual percentage of the principal.
Mortgage:
- A loan secured by the collateral of specified real estate property, which the borrower must repay over a predetermined set of terms.

Online Resources

Investopedia - Mortgage Basics:
- Mortgage Basics
The Balance - Understanding Real Estate Finance:
- Understanding Real Estate Finance
National Association of Realtors:
- NAR Resources

References

“The Encyclopedia of Real Estate Terms” by Damien Abbott
“Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
“Real Estate Investment: Analysis and Strategy” by David Geltner, Norman G. Miller, and Jim Clayton

Real Estate Basics: Kicker Fundamentals Quiz

### What is a kicker in real estate financing? - [ ] Extra principal payment - [x] Additional payment based on financial performance - [ ] Prepayment penalty - [ ] Loan origination fee > **Explanation:** A kicker is an additional payment required by a mortgage, often based on specific financial metrics, in addition to regular principal and interest payments. ### How is the kicker typically structured in a mortgage agreement? - [x] Based on financial performance metrics like sales or profit - [ ] As an additional fixed annual payment - [ ] Consistent monthly amortized payments - [ ] As a one-time fee > **Explanation:** Kickers are usually structured based on performance metrics such as gross sales or profits rather than as a fixed payment. ### In what type of mortgage is a kicker most commonly found? - [ ] Residential Mortgages - [ ] Subprime Mortgages - [x] Participation Loans - [ ] VA Loans > **Explanation:** Kickers are predominantly found in participation loans where lenders anticipate sharing in the success beyond regular principal and interest payments. ### What primary benefit does a kicker provide to the lender? - [ ] Increased equity in the property - [x] Higher returns tied to borrower’s success - [ ] Reduced loan principal - [ ] Immediate cash flow > **Explanation:** Kickers provide lenders with higher returns tied to the financial success of the borrower or the property being financed. ### Can kickers be negotiated? - [x] Yes - [ ] No - [ ] Only in commercial loans - [ ] Only in residential loans > **Explanation:** The terms and conditions of a kicker can be negotiated between the lender and the borrower during the mortgage agreement process. ### Which of the following is NOT a common metric used to calculate a kicker? - [ ] Gross Sales - [ ] Net Income - [x] Property Tax Rates - [ ] Rental Income > **Explanation:** Property tax rates are not typically used to calculate a kicker. Metrics like gross sales, net income, and rental income are commonly used. ### What is the main reason lenders include kickers in mortgage agreements? - [ ] To charge higher interest rates - [ ] To reduce risks - [x] To share in the borrower’s financial success - [ ] To attract more borrowers > **Explanation:** Lenders include kickers to share in the financial success of the borrower, adding a variable component to their returns. ### How often are kickers adjusted or collected? - [ ] Monthly - [ ] Daily - [x] As specified in the mortgage agreement, often annually - [ ] Quarterly > **Explanation:** The frequency of kicker adjustments or collections is usually specified in the mortgage agreement, often on an annual basis. ### Is a kicker likely to be included in a home mortgage for a personal residence? - [ ] Yes, frequently - [ ] Yes, always included - [x] No, it is rare - [ ] Only for valued high-end properties > **Explanation:** Kickers are rare in home mortgages for personal residences. They are more common in commercial real estate financing. ### What kind of properties are most likely to have mortgage agreements with kickers? - [ ] Single-family homes - [ ] Personal vacation homes - [ ] Residential rental properties - [x] Commercial properties with variable income > **Explanation:** Commercial properties with variable income such as retail stores or office buildings are most likely to have mortgage agreements with kickers.