Partials Hypothecation Method - Have you used it and why?

Question

We're working on something and have come to love the idea of the Hypothecation method for closing partial notes. We're trying to get an expert opinion on it to be more well rounded on the subject as we dive deeper into that.

Has anyone ever run into any snags, what would be worse case scenarios with it, do you like that over other closing methods?

Really just trying to do a deep dive on the subject matter. Thanks in advance.

Bob Malecki · Answer

Hi Brett, if you have a lending resource in place who is willing to hypothecate then all you need is the forms to facilitate the collateralization of the note, the valuation of the note and underlying asset, and the structure for repayment. I recall that there was money available thru BlackRock about 5 years ago on NPL pools at around 7% with 50-70% financing on the UPB

Jay Hinrichs · Answer

I have done hypothecations for my projects when I wanted to pull cash out of an owner finance deal. I did them with my bank.. pretty simple and bullet proof.. only risk is if my buyer defaults I have personal guarantee on the money I borrowed through the hypo  although my bank would only front 50% of the note .. so while if we had a default I would theoretically have equity to cure but the interim cash flow stoppage would need to be addressed.. IE my buyer stops and I have to continue paying my bank

Chris Seveney · Answer

@Joe Mercer

The owner of the note would be taking some big risk. Could it be done - yes. Do I know anyone who does it? No

Jay Hinrichs · Answer

would take a private lender who is willing to go into second position a bank generally would not do it.. unless it was a very premier client.

Roman M. · Answer

Finding a bank that will lend against the note is a real issue at hand. But in theory is a fun project.

Chris Seveney · Answer

@Brett Burky

I have reviewed hypothecation and partials at great lengths with my attorney. A few comments:

1. Hypothecation is a loan against an asset and the lender should file a lien or UCC filing against the company / entity / property to protect their interest in the asset.

2. A partial is they agree to payments from the loan. It took a while for my attorney and I to come up with this agreement as a collateral assignment and partial agreement in one document. Where it got fuzzy and needed protection is if the original lender maintains control over the asset then it could be Construed as an investment vehicle per the howey test and gets complicated if the loan goes into default as the partial buyer needs to have an active role.

Where it goes bad is when the loan goes in default and / or the individual has multiple partials / hypothecations on the same note.

Be happy to discuss further as I spent a great deal of time dealing with the legalities of these issues (while not a lawyer)

Account Closed · Answer

@Jay Hinrichs Is it possible/common to hypothecation a 2nd position note?  I suspect not.

Jay Hinrichs · Answer

my bank required fresh title insurance on my deals..  and the amount of swapping assignments etc with no title insurance has always struck me as somewhat risky.

Partials Hypothecation Method - Have you used it and why?

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