Take-Out Lender

A take-out lender is a type of financial institution that provides a long-term mortgage or loan on a property. This mortgage will replace interim financing, such as a construction loan. Take-out lenders are normally large financial conglomerates, such as insurance or investment companies.

Take-out lenders replace short-term lenders such as banks or savings and loans. These entities usually view the properties for which they provide mortgages as investments. Take-out lenders expect to make a profit on the properties they finance by receiving mortgage payments and interest, as well as by receiving a portion of the capital gains when the property is eventually sold. If the property is rented out, the take-out lender may be entitled to a portion of the rent.

Take-out lenders allow construction companies to pay off shorter-term construction loans. For example, Company A, a real estate development firm, purchases land in a good location and wants to build a residential apartment complex on it. Company A facilitates this plan by taking out a construction loan in the amount of $10 million from a bank. The loan allows Company A to buy materials, pay contractors and cover all the other expenses associated with constructing a new apartment building.

However, the loan has relatively short repayment terms; it must be paid back when the construction is complete, 18 months later. The construction site can’t really turn a profit until it is completed. Because the construction site hasn’t realized its full value, the bank charges a high interest rate of 9.5 percent on the loan.

When the apartment complex is finished, Company A now has a valuable piece of real estate that can be used as collateral on a longer-term loan. Company A goes to a take-out lender and gets a 30-year mortgage on the apartment complex. Since the real estate is complete and is now fully functional, Company A can get a lower interest rate of 4 percent and use the money from the 30-year mortgage to pay off the 18-month loan it obtained to finance construction.

Now the take-out lender can collect mortgage payments and interest on the loan to Company A. It may also collect a portion of the rental profits Company A makes from the property. If Company A sells the property, the take-out lender will receive a percentage of the difference between the property’s sale price and the cost of its construction.