Pik re loan
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
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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