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Should You Invest in a Syndicated Mortgage?

A Closer Look at Syndicated Mortgages

This is a common question for new & experienced investors alike. First off, what is a Syndicated Mortgage? It is when multiple investors put funds into one loan, that loan is called a syndicated mortgage. Syndicated Mortgages is the cousin to the MIC (Mortgage Investment Corporation). Syndicated mortgages generally involve a large project, such as a developer going in to build a development of single family homes, condos or commercial real estate…. However, it can also be for existing real estate with no plans to develop. The Financial Services Commission of Ontario (FSCO) and other regulatory bodies view syndicated mortgage investment (SMI) to be a high-risk venture, and so there are some details about this sort of investment that they want investors to know before putting their money into one. A lot of SMIs have marketing out there promoting their high level of security or their astronomical returns, but the truth is that there are risks of which every investor should be aware.

What are the risks?

  • Don’t listen to guarantees of high returns. Some companies do put guarantees of high investment returns into their presentation, but those types of promises are against the law. High returns are possible – but they are not guaranteed.
  • Secured” and “guaranteed” are two different things. In the marketing materials for an SMI, you may read that the investment is “fully secured” or “safe.” Your investment will go into a mortgage that has a direct link with a building or piece of land, which will serve as the security. However, if the project goes south, and the security has a value that is just the value of the land, your position on the loan could mean that other lenders would get paid before you would, and by the time your turn came up, there might not be any money left.
  • What position would you have on the mortgage? When you invest in an SMI, you will almost never be the first investor to get repaid – there is almost always a bank sitting in first position that provided the primary loan for the project. There may be other investors sitting in line between that bank and you. The farther down the line you are, the greater your risk.
  • There is no insurance protecting SMI investors. SMI investors do not receive insurance from any sort of fund – or by the government. This means that there is no guarantee of any return from this investment.
  • Difficulty of early withdrawals. If you need your money back before the term comes up, you may have to find a new investor to replace you. There is no guarantee that you will be able to sell or transfer your interest in the mortgage before it comes due.

What are an investor’s rights and responsibilities?

  • Ask the broker/agent to see their license. An FSCO license is required for anyone to market SMI transactions. A licensed mortgage broker is the only party that can sign the disclosure statement forms for investors. FSCO has a list of licensed brokers within Ontario.
  • Find out where you are in the repayment line. Remember – you need to know how many other parties are ahead of you in line for repayment if something goes wrong. Also, ask if the syndicated loan is a first, second or later mortgage, because any mortgages ahead of yours in line would have to be satisfied in full before your syndicated mortgage would see a single dollar.
  • Find out the value of the property. The security you have in a syndicated mortgage depends on the property value. Take a look at the appraisals that your broker used when setting the property value. Find out whether the valuation has come in the present state of the property with no assumptions about the project’s completion. If the valuation made those assumptions, but a sale is necessary before the project is finished, then that sale will bring in less than the assumed value.
  • Talk to an outside party. FSCO advises investors to pick up legal and advice from an independent party before putting money into a syndicated mortgage – including advice on how this could affect your income taxes.
  • Peruse all of the paperwork thoroughly. Your mortgage broker has to finish both of the investor disclosure Forms 1 and 1.1, and you must receive a copy. They have to keep all of these forms on file – as well as records showing the conversations that they had with you. It is your responsibility, though, to ask all of the right questions and make sure you grasp the transaction before you commit yourself.
  • Look at the project yourself. It’s worth going to see the actual project or property yourself and get the documentation that you need to agree with the valuation of the property. Also, research the specific marketplace where you want to invest, to make sure that you understand the conditions.

Syndicated mortgages can bring in a lot of profits for investors. However, they can also lead to significant losses. Be informed about every aspect of a project before you invest.

In the past, Amansad Financial has avoided offering syndicated mortgages because of the risks and other factors involved. However, we have decided that we will offer pre-packaged blocks of syndicated mortgages on a case-by-case basis. We will offer syndicated mortgages primarily on existing residential properties, as well as small to mid-size commercial opportunities and raw land. It is unlikely that we would offer commercial development projects as opportunities.

One example might be a project requiring a $600,000 mortgage at 12%. Three investors could each provide $200,000. The transaction would involve one broker and one lawyer both looking out for the best interest of the investor(s). The borrower would still require their own ILA (Independent Legal advice) on the transaction. Syndicated mortgages will provide more opportunities for investors to fund in collaboration. In most cases, the investment blocks will be provided in equal shares so that risk is distributed evenly.

If you have any questions, or would like to discuss further contact Amansad Financial at 1-877-756-1119.

Daniel K. Akowuah | Mortgage Professional / DLG Underwriter
Toll Free: 1(877)756-1119 | PH:1(780)756-1119 | FX:1(877)238-7794
 DLC Brokers for Life Inc. (Brokerage) - 2nd Floor, 5303 91st Edmonton, AB T6E 6E2

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