National Industrial Investors, Inc. - Page 9

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                  I'm going to make you start paying for it, and you're going                          
                  to be paying the side who has to pay attorney's fees,                                
                  because you're not practicing the law the way you should be.                         
                  The parties subsequently settled.  The agreement required                            
            McMahon to relinquish any interest in NII and the Burke Building.                          
            In return, it required petitioner and the other named defendants                           
            to pay McMahon the sum of $32,500 and also required petitioner to                          
            issue a $252,500 note to McMahon and his wife (McMahon Note).                              
                  The McMahon Note provided for 7-percent interest per annum                           
            compounded annually starting on January 1, 1988, with any unpaid                           
            principal and interest due and payable on December 31, 1997.  If                           
            the Burke Property were to be sold, however, the note would                                
            become immediately due and payable.  The note was nonrecourse                              
            and, because a first mortgage holder with a superior claim to the                          
            property already existed, was secured by a second deed of trust.                           
                  Around the time petitioner settled the McMahon litigation,                           
            it was trying to refinance the Burke Property and also exchange                            
            it under section 1031 for another piece of property.  Both of                              
            these transactions might have replaced the current first mortgage                          
            holder with another.  Consequently, as part of the settlement                              
            agreement, petitioner negotiated for and received a subordination                          
            agreement.  The agreement provided that, so long as the amount of                          
            the first mortgage did not increase, petitioner could refinance                            
            or enter into a section 1031 exchange without a "sale" occurring,                          

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Last modified: May 25, 2011