Straight 14 percent or 10 percent plus a fifth of the profit on a $250k gap piece

Can I ask what last-dollar exposure means here? I read it as the highest point in the value stack that your money reaches, so $2.35M out of $2.6M of cost, which is 90% of cost. Is that the right way to read it, and is 90% just normal for this kind of piece?

How the participation is documented matters more than the split. A profit share written into the note itself reads differently from a separate participation agreement, and in some states there is an argument about whether a lender taking a share of profits has stepped into an ownership role, which affects usury analysis and remedies. That is an attorney question in the state governing the loan, and worth resolving before you pick between the two structures rather than after. The definition of net profit also needs nailing down, because sponsor fees, an asset management fee and a disposition fee can all come off the top before your 20 percent is calculated.

Run the second one out. 20% of $400k is $80,000, plus 10% on $250k for 18 months is $37,500, plus a point is $2,500. Call it $120,000 on $250k over 18 months, roughly a 32% annualized. The 14% version is $52,500 of interest plus $5,000 of points, about $57,500. So you're paid double for taking the outcome risk. The question is what the sponsor does at month 14 when the profit is tracking to $150k instead of $400k, because at that point your participation is nearly worthless and their incentive is to hold for a better price using your subordinated money as the carry.

The monthly cash matters for a reason beyond yield. A borrower who goes late on 14% current pay tells you something in month 9. A borrower who owes you everything at the exit tells you nothing until it is too late to do anything about it.