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Bridge over ocean
1 January 1979 Financial Analysts Journal Volume 35, Issue 1

The Value of a Participation Clause in a Loan Contract

  1. D.G. Tyndall

Recent years have witnessed a growing use of participation clauses in mortgage financing. Lenders find participation—which can mean a share in total gross revenues of a project or a share in gross revenues after deducting certain categories of expense—particularly attractive in an inflationary environment. They are often willing to sacrifice some yield on the mortgage itself in order to obtain it. Using no mathematics beyond elementary calculus, the author derives formulas for the present values and overall yields of a variety of combinations of mortgages and participation terms.

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