Payment-in-Kind (PIK) in CRE Capital Stacks

In commercial real estate, payment-in-kind (PIK) interest is interest that is not paid in cash during the term of the loan, but rather accrues and is added to the loan balance. It is typically paid upon a capital event – such as sale, refinance, or at maturity.

Example:

ABC Corp secured a $5,000,000 bridge loan with a one-year term. The lender agrees to take a 9% cash-pay rate and a 5% PIK rate, for a total coupon of 14%.

See the loan schedule below. Note that in Month 1, the PIK interest is $20,833 (5%/12 x $5,000,000). This amount is added to the loan balance, which is shown in the Month 1 end balance of $5,020,833 ($5,000,000 + $20,833) and will accrue interest. This process will continue for the loan term or until a capital event occurs.

This type of structure can help reduce the debt service burden for projects that are limited in cash flow early on such as a value-add deal or development phase, while still offering the lender a competitive yield. Something to keep in mind though is that PIK interest accrues and can lead to balloon payment risk. This means that ensuring that the borrower has a solid exit plan to refinance or sell at a value that covers the full balance is essential.