STG Contingent or Shared Appreciation Interest Endorsement Guideline 1

Explanation:

In connection with commercial transactions, a mortgage may secure payment of an equity kicker to the lender which consists of contingent interest, such as a share of the cash flow or profits or a shared appreciation interest which is contingent upon increased value of the property. The endorsement insures the priority of the mortgage to the extent it secures such contingent interest.

Underwriting Requirements:

(1) A Senior Underwriter must review the endorsement and documents.
(2) The contingent interest should generally not exceed 50% of a share of profits if tied to profits or appreciation.
(3) Control by the lender must be analyzed: problems would consist of review and approval of all tenants; joint execution or negotiation of leases; right to direct day-to-day operations; power to require sale or refinance; power of the lender to retain a right to future contingent interest or appreciation after payment of principal. However, the following provisions would be acceptable: review of annual operating statements; right to disapprove leases; standard form leases; right to approve a management company; and disclaimer of partnership relationship (a requirement).
(4) We should review applicable state law (for example, California has a statute authorizing shared appreciation loans).