What is a kicker?

A kicker is an option, warrant, or other feature added to a debt instrument that allows the debt holder to potentially purchase shares of the issuer, increasing the debt instrument’s appeal to potential investors. A kicker in real estate refers to an additional cost on a mortgage that needs to be paid for the loan to be authorized. For example, a retail or rental property’s receipts would constitute an equity interest. Another name for a kicker is a wrinkle or a sweetener.

A Kicker’s Operation

Since kickers are only for the advantage of lenders and are intended to increase their expected return on investment (ROI), they are features implemented to “get the deal done.”.

For instance, a lender might be hesitant to provide funding to a startup, as the latter might require the funds to support its initial operations. Getting capital could be problematic if the firm doesn’t have a track record of consistent sales growth and earnings. It can be necessary for the startup to set out an equity agreement with the lender, providing a kicker of equity ownership in the business. A portion of the company’s future revenues and a stake in the business are what the lender will get in exchange for providing funding to the business.

Kickers for Equity

A kicker is an additional inducement for investors to buy debt assets, such as bonds or preferred shares. A kicker option is an embedded option in a bond that the bondholder may exercise to purchase shares in the issuing company at a discounted price. Buying a bond with a kicker will encourage investors since it allows them to profit from any rise in the value of their equity ownership.

A convertible feature on certain bonds, which enables the bonds to be exchanged for stock shares, and warrants to buy stocks sold in conjunction with a new bond issue are two popular equity kickers.

When a corporation adds a kicker to a bond issue (like a rights offering), it’s only doing so to provide investors access to the whole deal. The kicker might not be genuinely utilized at any point in the bond’s lifespan. Before the kicker has any actual value, reaching a specific breakpoint, such as a stock price over a particular threshold, is frequently necessary.

For instance, a bondholder entitled to buy firm shares for $20 a share will only use this right if the share price is higher than $20. Buying the shares would not be advantageous financially anyway.

Property Kickers

In real estate loans, if the income from the investment property being funded exceeds a predetermined threshold, the lender may be offered, in addition to interest on the loan, a part of the total income or gross rental receipts generated from the property. The borrower may offer this advantage to sweeten the loan agreement, or the lender may demand it.

The lender may demand some equity kicker or percentage ownership in the property if the borrower cannot make a sizable down payment or if other circumstances make the transaction risky for credit. For instance, if the borrower renovates the property and resells it for a higher price, the lender can approve a real estate investment loan if they receive a portion of the sales proceeds.

Particular Points to Remember

It is essential to distinguish between “kicker” and “kickback,” which relate to illicit payments made in exchange for preferential treatment. Individuals and businesses breaking the law against real estate transaction kickbacks risk civil and criminal penalties. Legally speaking, all settlement expenses in consumer loans must be declared as part of the financing charges.

To shield customers from deceptive settlement practices like kickbacks, Congress passed the Real Estate Settlement Procedures Act (RESPA), which went into effect in June 1975. RESPA requires lenders, mortgage brokers, and home loan servicers to disclose to borrowers the specifics of the real estate settlement procedure, including its fees.

Conclusion

• In the world of debt instruments, a kicker, also called a treat or a twist, makes it more appealing to potential lenders or investors.
• Kickers give investors an extra reason to buy debt assets like bonds or preferred shares because they increase the expected return on investment (ROI) for those investors.
• Convertible bonds and options to buy stocks are two common types of equity kickers.
• It is usual for people who want to borrow money for investment real estate to offer the lender a share of the total income or gross rental earnings that the investment property brings in.