Equity Participation without Equity: An Analysis of Hope Notes

John F. McDonald

Heller College of Business, Roosevelt University, Chicago, USA.

DOI: 10.4236/me.2013.45038                

Abstract

The paper examines the case of splitting a defaulted mortgage loan on a commercial property into an A note that earns interest and a B note that earns a return only if the value of the property increases. The B note is known as a “hope note.” The paper shows that the current methods for structuring such a deal often produce a B note that is worthless. A state-preference model is employed.

Keywords

Hope Notes; Asset Valuation; Commercial Real Estate

Conflicts of Interest

The authors declare no conflicts of interest.

References

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