posted on 06-06-2019

Take-Out Loan

Updated October 1, 2019

What is a Take-Out Loan?

A take-out loan is a loan that replaces another loan.

How Does a Take-Out Loan Work?

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 loan 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 term, 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 Does a Take-Out Loan Matter?

Take-out loans are long-term loans, usually on real property. The real difference between them and any other loan, however, is that take-out lenders usually want interest payments as well as a portion of any capital gains on the collateral 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 sale price. In some cases, the take-out lender might want a cut of the income produced by the real estate (in our example, the rents).