Reasons for Mortgage Refinancing

If a building is held for any length of time, it often becomes necessary or advisable to give a new mortgage. (Note, the owner borrows money and gives a mortgage to the lender). For instance, suppose that a syndicate buys a building for f 600,000, $200,000 cash and a mortgage of $400,000. Suppose that the unpaid balance on the mortgage becomes due 10 years later. If at the expiration of 10 years, there remains $200,000 due on the mortgage, the syndicate would not want to pay out that sum. To raise $200,000 the syndicate would have to ask the investors to pay in an amount equal to their original investment, possibly as much as was paid out to them during the 10 years the syndicate was in existence. As a prac tical matter the syndicate manager cannot do that.

He will rather try to renew the loan or get a new one and give a new mortgage. Perhaps at the time of purchase, money was in tight supply and the interest rate was high. If the interest rate drops, it would be a good idea to borrow money and give a mortgage at a lower rate of interest and pay off the old one. There could also be tax reasons to refinance a mortgage.

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.

Next: What Is Your Share of Mortgage Refinancing Proceeds?