38. How Mortgage Refinancing Clauses Affect Your Investment

The reasons for borrowing money and giving a new mortgage do not matter. Suffice it that very frequently it is done because it is necessary or makes good business sense. Now look at the above example where the mort­gage indebtedness was reduced from $400,000 to $200,000 over a period of 10 years. Since the balance is due at the expiration of 10 years, a new loan must be negotiated and a new mortgage must be given. Suppose now that the syn-dicator borrows $400,000. (Almost invariably do the per­sons controlling the syndicate have the power to borrow money and give a new mortgage as security.) In our case of the $400,000 borrowed, $200,000 would have to be used to repay the balance on the old mortgage.

What happens to the remaining $200,000? You prob­ably feel that this $200,000 should be distributed evenly among the investors in proportion to their investments. After all, this money is borrowed on the security of the building owned by the investors. The principal and in­terest will have to be paid back from the income of the building which they own. There is no question about it. Unless something else is agreed upon, all participants in the syndicate share in the overage in proportion to their investment. The catch is in the words unless something else is agreed upon. You will find in substantially every brochure that the syndicator or the seller and very often both, get a very substantial part of any mortgage funds which may be borrowed on the security of the building. The percentage given to the syndicator or seller is often out of all proportion to his investment. In some cases the syndicator may have made no cash investment at all. In many cases the syndicator may get a substantially greater share of the mortgage refinancing proceeds than is war­ranted by the syndication units which the syndicator may own.

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