What it is:
How it works/Example:
Let's say Company XYZ is a real estate development company. It owns a piece of land at a busy intersection and decides to build a huge apartment complex on the site.
Company XYZ first gets a $5 million construction from Bank A, which Company XYZ uses to pay the general contractor and all the associated expenses of constructing an apartment building. The loan must be repaid in 18 months, at the estimated completion of the construction. Because the collateral -- the construction site -- isn't worth much until it becomes a fully rented and operating apartment building, Bank A charges 9% on the loan.
After the apartment building is finished, Company XYZ gets a $5 million mortgage from a take-out lender, Bank B. This loan has a 30-year , is collateralized by a fully functioning apartment building, and has a 5% interest rate. Company XYZ uses Bank B's loan to pay off -- or take out -- Bank A's loan.
Why it matters:
Take-out lenders are financial institutions willing to make long-term, usually on . The real difference between them and any other , however, is that take-out lenders usually want interest payments as well as a portion of any on the when it is eventually sold. In our example, if Company XYZ sells the apartment building, it might have to give Bank B a percentage of the difference between the construction cost and the price. In some cases, the take-out lender might want a cut of the produced by the (in our example, the rents).