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Abstract
This is a theoretical examination of equity participation loans in commercial real estate. The model combines the standard capital asset pricing model (CAPM) with the method developed by Hamada (1969) to demonstrate the Modigliani-Miller (1958) propositions regarding financial leverage and firm value. The results include the following: equity participation has no effect on the borrower's reservation value of the investment, and the expected rate of return to the borrower's equity with equity participation equals the expected rate of return to equity with no equity participation minus the extent of equity participation times the risk premium attached to the investment with no equity participation.