Common use of Use of Leverage Clause in Contracts

Use of Leverage. May Reduce The Partnership's Profitability Or Cause Losses Through Liquidation. The Partnership may borrow funds for the purpose of making Mortgage Investments or for any other proper partnership purpose on any terms commercially available and may assign all or a portion of its Mortgage Investment portfolio as security for such loans. The maximum aggregate indebtedness which may be incurred by the Partnership is fifty percent (50%) of the value of the Mortgage Investment portfolio. The Partnership has obtained from a commercial bank a line of credit in the amount of $3,000,000. As of June 30, 1996 the Partnership has borrowed $2,892,000 which represents 20.37% of the outstanding principal balance of the Mortgage Investment portfolio. The General Partners anticipate engaging in such borrowing when the interest rate at which the Partnership can borrow funds is somewhat less than the rate that can be earned by the Partnership on its Mortgage Investments (See "INVESTMENT OBJECTIVES AND CRITERIA - Borrowing"). Interest rate fluctuations may have a particularly adverse effect on the Partnership if it is using such borrowed money to fund Mortgage Investments. Such borrowed money will bear interest at a variable rate, whereas the Partnership may be making fixed rate loans. Therefore, if prevailing interest rates rise, the Partnership's cost of money could exceed the income earned from that money, thus reducing the Partnership's profitability or causing losses through liquidation of Mortgage Investments in order to repay the debt on the borrowed money or default if the Partnership cannot cover the debt on the borrowed money.