What Is a Kicker?
Let me explain what a kicker is in straightforward terms. A kicker is essentially a right, an exercisable warrant, or some other feature that's tacked onto a debt instrument to make it more appealing to potential investors. It gives the debt holder the option to buy shares in the issuing company down the line.
Now, if we're talking real estate, a kicker takes on a different form—it's an extra expense you have to pay on a mortgage to get the loan greenlit. Think of it as offering an equity stake in the income from a retail or rental property.
You'll also hear it called a sweetener or a wrinkle in these contexts.
Key Takeaways
- A kicker, also known as a sweetener or a wrinkle, is a feature added to a debt instrument that makes it more desirable to prospective lenders or investors.
- Kickers provide investors with an extra incentive to purchase debt securities (such as a preferred share or bond) because they add to the investors' expected return on investment (ROI).
- Two popular types of equity kickers are convertible bonds and warrants to purchase stocks.
- For investment real estate loans, a common type of kicker is for the borrower to offer the lender a share of the total income or gross rental receipts generated from the investment property.
How a Kicker Works
Kickers are all about sealing the deal—they're added features that benefit lenders exclusively, boosting their expected ROI. Take a startup needing cash for early operations; without a solid track record, getting a loan is tough. That's where the startup might offer an equity kicker, giving the lender ownership stake and a cut of future profits in exchange for the funds.
Equity Kickers
Essentially, an equity kicker is that extra push to get investors to buy into debt securities like bonds or preferred shares. If a bond comes with an option you can exercise to buy equity in the company at a discount, that's your kicker— it lets you cash in on any rise in the company's stock value.
Common ones include convertible bonds that you can swap for stock shares, or warrants bundled with new bond issues for buying stocks. These are especially handy in risky setups like leveraged buyouts (LBOs), management buyouts (MBOs), or equity recapitalizations, where traditional lenders shy away.
When a company adds a kicker, say a rights offering, to a bond, it's just to ensure the whole issue sells. The kicker might not even be usable right away—it often needs a trigger, like the stock hitting a certain price. For instance, if you have the right to buy shares at $20, you'll only do it if they're trading higher; otherwise, it's pointless.
Real Estate Kickers
In real estate loans, a kicker could mean the lender gets a piece of the property's income or rental receipts on top of interest, but only if earnings top a set amount. You might offer this as a borrower to sweeten the pot, or the lender might demand it.
If you can't swing a big down payment or there's some risk factor, the lender might insist on an equity kicker—like a percentage of sales proceeds after you flip the renovated property for profit.
Special Considerations
Don't mix up kicker with kickback—that's an illegal payoff for special treatment, and in real estate, it can lead to serious legal trouble. All settlement costs must be disclosed in consumer loans as finance charges.
That's why Congress passed the Real Estate Settlement Procedures Act (RESPA) back in 1975 to shield consumers from shady practices like kickbacks. It mandates that lenders, brokers, or servicers disclose the full details and costs of the settlement process.
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