What Is Your Share of Mortgage Refinancing Proceeds?

We have examined syndicate brochures where the investors are to get 80% of the overage of any funds borrowed, others where they are to get 50%, and even some where they are to get as little as 33.3%. The rest goes to the syndicator or seller or lessee, or is divided between them. This bears repeating. We have seen brochures where on property owned by a syndicate, money may be borrowed in such a way that the investors get only $1 out of every $3 borrowed. Yes, for each dollar the investors receive, $3 will have to be paid back with interest out of the earnings of the property.
We would like you to be able to recognize such a situation, and set forth below clauses which produce the result which we just described. The first clause is usually part of the provisions of the net lease.

The lessee shall be entitled to 50% of the amount by which the net proceeds of any mortgage refinancing shall be in excess of the amount of the refinanced mortgage. Suppose that there is $150,000 excess money from refinancing available for distribution. So far, the lessee gets 50%, that is $75,000. That leaves $75,000 to be distributed.

You may find the next clause under Cash Distributions, Distributions to Partners, or Summary of Partnership, Refinancing or similar headings. A sample clause follows: Any monies received by the partnership from the excess proceeds of mortgage refinancing are to be prorated 662/3% to the limited partners in accordance with their respective original capital contributions. The balance shall be paid to the General Partner.

The syndicator, the General Partner in the last clause, gets one third of the remaining $75,000, that is $25,000. There remains $50,000 out of the $150,000 received for distribution among the limited partners, that is all the cash investors. The investors end up with one dollar out of every three dollars borrowed on the property.

We emphasize once more that provisions like the two set forth above will ordinarily not be found in one spot of the brochure. It is up to you to read all the provisions of the brochure. In the case of a net lease the lessee will probably have to pay to the syndicate a constant sum every month, and the additional payments necessary because of the increase in the mortgage will also have to be met by the lessee. Just the same that additional money is income produced by the property owned by the syndicate, by your property. Mortgages play an important part in the growth potential of real estate. The mere fact that you can use part of the income of the property to reduce the mortgage indebtedness and increase your equity adds to the growth potential. But if new money is borrowed on the security of your property and you don't get that money and if the mortgage indebtedness is increased each time, that growth factor is taken away from you.

The refinancing of mortgages or the recasting of mortgages, as it is sometimes called, will affect the value and growth potential of your investment greatly. You owe it to yourself to examine the brochure carefully for the mortgage refinancing provisions. You will want to know what percentage of funds borrowed will go to the investors and what percentage to the syndicators, managers or sellers.

Next: Will You Get Your Share of Profit If the Property Is Sold?