An equity participation is a financial arrangement in which a lender has the right to share in the gross profit, net profits, or cash derived from property on which the lender has made a loan.
An equity participation may assume different forms. There are several variations to this type of participation financing, but the most common are the following:
Splitting the Ownership
Corporation--The lender acquires stock in a corporate developer.
Partnership--The lender becomes a partner in a partnership that holds the title.
Joint Venture--The lender becomes a member of a joint venture that holds the title.
Participation in gain on any resale within a designated period; or,
Option to purchase an interest in the developer's real estate, stock, or partnership.
Corporation Ownership Participation
If the lender owns stock in a corporation (the corporate developer), there is generally no problem in insuring title in or a mortgage from the corporation or other entity. Any questions or subordination of debt because of the relationship of the lender and borrower is a matter created by the insured and not insured against.
Partnership or Joint Venture Ownership Participation
If a partnership borrows money from one of the general partners and gives that partner a mortgage on partnership land under some state, the general creditors of the partnership will enjoy priority over the mortgage. This issue is not insured against by the loan policy, because it relates to the debt and constitutes a matter created by the insured.
Similar issues are involved in joint ventures options to purchase, sale and leaseback.
See also Joint Ventures, Options to Purchase, and Sale & Leasebacks Transactions.