STG Contingent Interest Endorsement Guideline 2
Explanation:In connection with commercial transactions, a mortgage may secure payment of an equity kicker to the lender which consists of contingent interest, such as a share of the cash flow or profits or a shared appreciation interest which is contingent upon increased value of the property. The endorsement insures the priority of the mortgage to the extent it secures such contingent interest.
Underwriting Requirements:(1) A Senior Underwriter must review the endorsement and documents.
(2) The contingent interest should generally not exceed 50% of a share of profits if tied to profits or appreciation.
(3) Control by the lender must be analyzed: problems would consist of review and approval of all tenants; joint execution or negotiation of leases; right to direct day-to-day operations; power to require sale or refinance; power of the lender to retain a right to future contingent interest or appreciation after payment of principal. However, the following provisions would be acceptable: review of annual operating statements; right to disapprove leases; standard form leases; right to approve a management company; and disclaimer of partnership relationship (a requirement).
(4) We should review applicable state law (for example, California has a statute authorizing shared appreciation loans).
The underwriting guidelines contained herein have been provided for general reference. The facts, circumstances, and location of the subject property should be considered when determining the issuance of the requested form or endorsement. Please note that all of the forms and endorsements included in this system may not be available in all states. Accordingly, please contact the appropriate Stewart Title Guaranty Company underwriting personnel in order to determine availability.
Compliance with the underwriting guidelines contained herein in no way obligates Stewart Title Guaranty Company to issue any form or endorsement.
This guideline applies to the following form(s):