Common use of Due-on-Encumbrance Clause in Contracts

Due-on-Encumbrance. With respect to mortgage loans on residential property containing four or less units, federal and California law prohibits acceleration of the loan merely by reason of the further encumbering of the property (e.g., execution of a junior deed of trust). This prohibition does not apply to mortgage loans on other types of property. Although most of the Partnership's second mortgages will be on properties that qualify for the protection afforded by federal law, some Mortgage Investments will be secured by apartment buildings or other commercial properties. Second mortgage loans made by the Partnership may trigger acceleration of senior loans on such properties if the senior loans contain due-on-encumbrance clauses, although both the number of such instances and the actual likelihood of acceleration is anticipated to be minor. Failure of a borrower to pay off the accelerated senior loan would be an event of default and subject the Partnership (as junior lienholder) to the attendant risks (See "RISK FACTORS - Special Considerations in Connection with Junior Encumbrances").