Can someone explain how pik works on a real estate loan? For the life of me I cannot understand what it means, it’s impact on lender irr, or what it means in terms of collateral.
Sorry for being an idiot on this but would appreciate any help
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It just means the loan accrues and is not paid monthly. So if you have a $1M loan at 5% PIK, the interest will accrue and at the end of the year, it is $1.05M. You pay it back when the loan is due. The principal accrues overtime.
On a “paid current” loan, you would pay $50K each year in interest and the loan balance at the end of the year will still be $1M.
Gotcha that makes sense. So it would hurt lender IRR.I'd assume it's typically priced at a higher rate than a conventional fixed/floating loan? Is it most frequently (or exclusively) used for non-cash flowing assets to give the borrower near-term flexibility?Thanks again!
Also, are there situations where a part of the loan could be paid current with a few points of pik? How would that work?
Plug it into excel - IRR is the same due to compounding (IO). However, profit is actually higher on a PIK loan than a paid current loan.
It should be priced at a higher rate - but totally market and deal dependent. Can’t really answer things in absolutes because it depends on deal structure. And yes - I would suspect used on non cash flowing assets but again, never say never.
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