What is a Kicker?
A kicker refers to a right or other feature added to a debt instrument, making it more attractive to potential investors by offering them the potential option to purchase shares of the issuer. In real estate, it is typically an added expense included in a mortgage for loan approval, such as an equity stake in a property’s receipts.
A kicker is also known as a sweetener or a wrinkle.
Key Takeaways
- Extra Incentive: A kicker, alternatively terms as sweetener or wrinkle, is added to debt instruments to attract investors by increasing their expected return on investment (ROI).
- Enhanced ROI: Kickers provide additional ROI for investors through features like warrants to purchase stocks or convertible bonds.
- Real Estate Application: In real estate deals, common kickers might include the lender receiving a share of total income or gross rental receipts from the property. These can assist in loan approvals.
How a Kicker Works
Kickers are introduced to enhance the appeal of a financing deal for lenders by bolstering their expected return on investment. For instance, a lender skeptical of funding a startup may find the deal more enticing with a kicker offering equity ownership in the rising company. In return for financing, the lender gains a stake in the startup, potentially reaping future profits.
Example of a Startup Kicker
A lender might hesitate to fund a startup due to its lack of financial history. To ensure successful funding, the startup may offer a kicker like equity ownership to appease the lender, guaranteeing future profit-sharing from their budding business.
Equity Kickers
Equity kickers are extra incentives embedded into debt securities such as bonds or preferred shares. By offering investors the right to purchase equity at a discounted price, these kickers attract bondholders by promising potential gains from future equity value hikes.
Types of Equity Kickers
- Convertible Bonds: Bonds that investors can exchange for shares of stock.
- Warrants: Sold in tandem with new bond issues, granting the right to purchase stocks.
Equity kickers commonly appear in contexts like leveraged buyouts (LBOs), management buyouts (MBOs), and equity recapitalizations, risky ventures not suitable for standard senior, secured loans.
Practical Example
A bondholder with the right to purchase shares at $20/share will utilize this perk only if the stock trades above this price, ensuring financial advantage.
Real Estate Kickers
In real estate lending, a kicker could manifest as a share of the total income or gross rental receipts from the financed property, offered to make the loan deal more profitable for the lender. Such kickers can come into play when the borrower’s circumstances present a credit risk, requiring additional incentives to secure funding.
Real Estate Scenario
If a borrower struggles to make a substantial down payment, they might propose an equity kicker to the lender. This could involve a share of sales proceeds post-renovation and resale of the property at a profit.
Special Considerations
It’s essential to differentiate a kicker from a kickback, which is an illegal payment for preferential treatment. Violators of kickback laws in real estate can face serious legal repercussions. For instance, the Real Estate Settlement Procedures Act (RESPA), effective since June 1975, guards consumers against dishonest settlement practices by mandating disclosures from lenders, mortgage brokers, or loan servicers about real estate settlement costs.
Related Terms: sweetener, wrinkle, ROI, preferred share, convertible bond, leveraged buyout, return on investment, embedded option
References
- Federal Reserve Board. “Consumer Compliance Handbook, Real Estate Settlement Procedures Act”.
