The Benefits and Drawbacks of Investing in Alternative Mortgage Lending

The Benefits and Drawbacks of Investing in Alternative Mortgage Lending

With increased prime rates and more government mortgage regulation, private lending has seen an increase in activity and market share. Private lending is a multi-billion dollar industry.

Outside of investing as an individual private lender; the two most common ways for investors to enter alternative lending is by way of a syndicated mortgage or in a Mortgage Investment Corporation (MIC). Both of these entities lend money to borrowers considered higher credit risk, but it is important to know which represents the better opportunity for your portfolio, as well as the key differences between the two.

Syndicated mortgages involve a combination of two or more individual investors lending their money to a particular borrower on specific real estate. The funds could go toward financing a condo, a single-family home, a sizable project for a developer, and anything else where real estate is being used as collateral.

Benefits:

  • Syndicated groups can appear on the title
  • Syndicated loans are direct loans to the borrowing entity without any fees for a third party, which means there is more return for the investor, usually above 10 percent.
  • Mortgage brokers who are looking to reduce risk on investment generally look for syndicated mortgages.
  • Investors know who is borrowing their money and what project their money is funding.
  • Syndicated mortgages bring in cash each month.

Drawbacks:

  • All of your investment is going to one entity.
  • If the entity (individual or developing company) can’t pay the note, you could end up having to take him or her to foreclosure.
  • If you are new to real estate investing, you may not have the will (or the savvy) to push the process to foreclosure.
  • If you end up having to go to foreclosure, that cash flow comes to a halt and your eventual return can end up having to wait for months. If the loan went to a project that was still in the building phase at foreclosure, you might not recoup much of your investment at all.
  • Borrowers can pay back their syndicated loans early, depending on the contract, which means that you may have your money sitting idle while you’re waiting for the next borrower.
  • Not all syndicated mortgages are eligible for TFSA or RRSP.
  • Mortgage Investment Corporations (MICs) are capital funds that shareholders raise and then lend to a pool of commercial and residential mortgages. When you invest in a MIC, you buy shares in the corporation, and it invests money for you.

Mortgage Investment Corporations (MICs) are capital funds that shareholders raise and then lend to a pool of commercial and residential mortgages. When you invest in a MIC, you buy shares in the corporation, and it invests money for you.

Benefits:

  • Investing in a pool of mortgages eliminates much of the risk that comes from investing in a single project.
  • MICs employ professional underwriters who review the applications and make decisions about whether those potential mortgages meet risk guidelines.
  • MICs provide monthly income that can be eligible for TFSA or RRSP deposits.
  • The monthly cash flow comes from a pool of payments that come in each month, which means that there is no term for the loan to expire; the money comes in continuously, so your money is not sitting idle between loans.
  • In case of default, a mortgage is just a small percentage of the larger risk pool, so cash distributions do not undergo anything close to the risk associated with syndicated mortgages.
  • Returns on investment average between 7 and 8 percent annually.
  • MICs offer memoranda that indicate the general rules and restrictions, such as the highest loan to value ratio allowed by the project.

Drawbacks:

  • MICs have more overhead, which means you will pay a management fee. This is why your return will be often 2 or 3 percent lower than what syndicate mortgages target.
  • Make sure that your MIC has a third-party advisory board that reviews loans to make sure that they fit the parameters in the memorandum.

When choosing between a syndicated mortgage and a MIC for your investment, the key questions have to do with your experience in real estate investments and your capacity for handling risk. MICs offer significantly less risk because they have the personnel to screen mortgages, and the risk is diluted by investment in a pool of loans. If you are a partner in a syndicated mortgage, you and your group are responsible for pursuing foreclosure; if you invest in a MIC, you have none of that exposure.

An Overview of Syndicated Mortgages

An Overview of Syndicated Mortgages

The Basics

If you’re looking to make money by investing in mortgages, you’re far from alone. Canada has a number of markets – notably Vancouver and Toronto – that are red-hot right now, and there are ways to make money as a lender. For people who don’t live in one of the hot markets, you can still make money by investing in homes that could be all the way across Canada from you.

If you have Googled ways to make money in mortgage investment, you have likely seen websites pop up for organizations that want to educate you about investigating in a syndicated mortgage. However, there are some aspects that you need to know about before you send off a check, particularly in such areas as investing in mortgages across provincial lines.

There are many different ways to take part in a syndicated mortgage, but for the most part, they generally take one of two forms:

  • Indirect participation on a mortgage pool, through the purchase of units or shares in a private or non-publicly traded mortgage investment consortium
  • Direct or indirect participation in a particular mortgage through a syndicated mortgage interest

The purpose of this article is to provide an in-depth look at syndicated mortgage interests.

Direct Participation

If you are joining a program that involves direct participation, each individual in the syndicate becomes a co-lender of their own particular share, known as a pro rata share, or syndicated interest. Every co-lender enters an obligation under a loan agreement to fund a particular committed amount. This also entitles each co-lender to its own pro rata share of income from payments or benefits should the borrower go into default.

In many cases, the co-lenders will select one from among them, or choose a third party agent, to represent the co-lenders as a sort of administrator to manage the loan and interact with the borrower over the term of the note.

The security for the mortgage loan consists of the mortgage and may also have one or more promissory notes, an assignment of purchase, sale contracts, assignment of leases and rents and a general security agreements. The co-lenders enter the security as joint parties in some cases, which creates a direct contractual relationship between the borrower and each co-lender, or in other cases, the administrator is the only one to enter a direct relationship on behalf of the co-lenders.

It is also possible to participate directly in a syndicated mortgage after the initial closing; a co-lender can sell some or all of its pro rata share, either through the administrator or directly, to one or more parties interested in investing in the loan. Either an assignment and assumption agreement or an assignment and acceptance agreement will document this change, and as a result, each incoming lender receives the particular interest from the selling lender in both the loan and in the security.

Indirect Participation

In instances involving indirect participation, co-lenders enter an agreement with the originator or arranging lender (but not the borrower) to purchase syndicated or undivided interests in the mortgage loan and the security that the borrower will issue. This leads to a funding obligation and an agreement to reimburse the lender for expenses that are associated with originating the loan. The co-lenders may receive participation certificates to serve as evidence of their interests, or they may not, depending on the agreement.

Indirect lenders are not parties to the mortgage loan security at the loan’s initial closing and do not have any contractual relationship with the borrower of a direct nature. Borrowers may not know all of the indirect lenders attached to their mortgage and may not even know that the mortgage has been syndicated.

It is possible to participate indirectly in a mortgage after closing, just like with direct participation.

There are some syndicated loan structures that are hybrids of direct and indirect, with different priority levels among the various lenders with regard to receiving payment and carrying out a variety of remedies in case of default.

Remember – Syndicated Mortgages Are Securities

All of these types of syndicated mortgages come with different issues about securities law for lenders and borrowers, as well as any intermediaries or advisors involved in the process. It is worth stopping at this point to note that a mortgage is a security. Also, a syndicated mortgage is a mortgage in which at least two persons participate, directly or indirectly, as a lender within a debt that the mortgage secures. It is true that both dealer registration and prospectus exemptions can be obtained by licensed mortgage brokers, those exemptions require special qualification in Alberta and British Columbia.

So a borrower or arranging lender who offers the opportunity for direct participation (or an arranging lender offering indirect participation) to private investors in Alberta or BC may have to fulfill special criteria for those provinces. Ontario, in contract, permits dealer registration and prospectus exemptions for licensed mortgage brokers, when syndicated mortgages are involved, and the Financial Services Commission of Ontario (FSCO) has very specific guidelines for investor solicitation and the dissemination of information.

Dealing Syndicated Mortgages

If you are a borrower with an active business outsides the securities field and you only occasionally issue syndicated mortgage interests in one particular loan directly to private investors, you should not have to register as a dealer or need a dealer registration exemption in order to do this, because these issues are just a way to finance your business (which is not involved in securities) instead of trying to build a trade in securities. However, you would need a prospectus exemption for each transaction.

However, if you are an arranging lender/originator or a mortgage broker, and you take part in this sort of a transaction on a regular basis, and the purpose of these transactions is to benefit a business that deals in securities, you would need to register as a dealer as an exempt market dealer (EMD) unless you have an exemption. Typical examples of exemptions are the Minimum Amount Investment Exemption or the Northwestern Exemption. Both of these work in BC and Alberta.

In Alberta, the intermediary must have a mortgage broker license from the Real Estate Council of Alberta (RECA) unless there is an exemption. In BC, the intermediary must hold a mortgage broker license from the Office of the Registrar of Mortgage Brokers at the Financial Institutions Commission (FICOM) unless you hold an exemption.

Distributing Syndicated Mortgages

The Accredited Investor Exemption, the Private Issuer Exemption and the Minimum Amount Investment Exemption are the most common exemptions that borrowers and intermediaries use to distribute interests in syndicated mortgages. Any resale or first trade by a co-lender of any portion of its interest in a mortgage loan that had previously closed is treated as a distribution that requires an exemption. The OM Exemption, or the offering memorandum exemption, can also work, but the investment limits differ between BC and Alberta, so many Alberta co-lenders may find that it does not work for their needs.

Alberta and the OM Exemption

This provision applies when any borrower or issuer distributes syndicated mortgage interests to an investor/lender or resident purchaser in Alberta, or when an issuer/borrower in Alberta makes a similar distribution to any purchaser/lender/investor, in or out of Alberta. There are several requirements:

  • The investor/purchaser/private lender buys the interest as principal;
  • The cost of acquiring all of the securities (not just the syndicated mortgage interest but also any other investments in distributions by different issuers or from multiple offerings from the same borrower/issuer of the syndicated mortgage interest) in the last twelve months by one individual investor/private lender/purchaser who is:
    • A non-eligible investor, is capped at $10,000, or
    • An eligible investor, is capped at $30,000, or
    • An eligible investor who also received advice from an investment dealer, portfolio manager or exempt market dealer that this is a solid investment, is capped at $100,000;
  • Before or simultaneous with the signing of the security purchase agreement by the investor/private lender/purchaser, the originator/arranging lender or the borrower/issuer:
    • Secures a signed acknowledgment of risk in the required from the investor/private lender/purchaser, and
    • Provides an offering memorandum in the required form to the investor/private lender/purchaser.

An “eligible” investor :

  • Has assets as an individual or with a spouse of no less than $400,000;
  • Is an individual who has pre-tax net income, either alone or with a spouse, of no less than $125,000 in each of the most recent two calendar years and has a reasonable expectation to exceed that minimum in the present calendar year;
  • Is a person pre-tax net income or profit in excess of $75,000 in each of the most recent two calendar years and has a reasonable expectation of exceeding that minimum in the present calendar year;
  • Is a person of which most voting securities are in the beneficial ownership of eligible investors, or the majority of the directors consist of eligible investors; and
  • Is an accredited investor.

If the individual investor/private lender/purchaser qualifies as an accredited investor or non-individual, such as a partnership or corporation, those investment limits do not apply. A borrower/issuer cannot use the Amended OM Exemption to distribute syndicated mortgage interests to a person that is used or was created just to hold or buy securities through that exemption.

Because of these investment limits, many borrower/issuers will not be likely to use this exemption to distribute syndicated mortgage interests.

BC and the OM Exemption

The exemption rules are virtually the same in British Columbia as they are in Alberta, with the exception that the investment limits do not apply. Also, the form of the offering memorandum is different in BC, and the form must be certified by the mortgage broker.

How Qualified Syndicated Mortgages Work in British Columbia

In British Columbia, Commission Rule 45-501 (BC) Mortgages from the British Columbia Securities Commission (BCSC) supersedes any limitations on prospectus exemptions and dealer registration exemptions when it comes to syndicated mortgages, in cases where distribution of the syndicated mortgage is going to an institution, like a mortgage broker or a registered portfolio manager.

This rule also provides that these requirements do not apply when the transaction involves a qualified syndicated mortgage. To qualify, these conditions must be met:

  • The sale must go through a mortgage broker
  • The mortgage must secure a debt on property that is solely used for residential purposes and has no more than four separate units
  • The mortgage does not secure a debt that will go toward development or construction
  • The mortgage cannot lead to debt in excess of 90% of the fair market value of the property, when combined with any other debts that the property secures; and
  • The mortgage in question is limited to a single debt obligation.

Distributing Syndicated Mortgages across Provincial Lines

When you are dealing with investors and mortgages in several provinces, the best practice is to follow the laws in the most restrictive province for the entire deal. That way the laws in the province where the issuer is based, for example, will not scuttle a deal that involves a property in a less restrictive part of Canada.

Mortgage Investments Based in Ontario

Ontario does have less restrictive provincial regulations regarding the distribution of syndicated mortgage interests. However, when they do business with entities in other provinces, the laws of Ontario are not sufficient. If an FSCO licensed mortgage broker in Ontario solicits investors/private lenders in BC or Alberta, it is important to keep the following in mind:

  • The broker must have registration:
    • With FICOM or RECA or retain a broker who is registered in FICOM/RECA (whichever applies) for the transaction, and
    • With Alberta or BC (depending on the location of the transaction) as an EMD or retain an EMD with the proper registration to handle the deal; and
  • Both parties must be able to utilize one or more of the prospectus exceptions available in Ontario, as well as one available in either BC or Alberta, depending the location of the transaction.

Reporting Distributions of Syndicated Mortgage Interests

If any of the exemptions listed in this article are used for the distribution of syndicated mortgage interests in BC or Alberta, reports of those distributions must be made in the required form with the securities commission of the relevant province. The borrower is responsible for filing the report. Some EMDs have filed the reports as underwriters, but as they are not actual underwriters, that is not appropriate. Borrowers need to maintain control of the filing. In Alberta the SEDAR (System for Electronic Document and Analysis and Retrieval) platform is the appropriate destination for electronic filing. In BC, BCSC eServices is the destination.

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 or email info@amansadfinancial.com.

The Ten Most Important Facts about Investing in Syndicated Mortgages

If you’re looking to invest in the real estate market, you may have heard about the syndicated mortgage and wondered how it could help you. Not everyone understands exactly what they are or how they work, so we’ve put together this fact sheet to help you make the best investment choice.

Syndicated mortgages are loans.

Just like any other mortgage, the syndicated variety also involves a lender or investor providing money to a borrower. The only difference that the word “syndicated” adds is that syndicated mortgages have multiple investors or lenders. The contractual obligation that borrowers face when it comes to repaying the amount they took out with interest makes this a much more secure investment than putting money into the stock market or into mutual funds, because there is no contractual duty to cover your initial investment or to pay interest on what you lent.

Syndicated mortgages do involve risk.

Every investment that offers a significant reward carries risk. If you put your money into a government-backed savings account, you will earn the lowest interest rates possible on the market. Why? Because there isn’t any risk – if the bank fails, the government gives you the money that you had on deposit. When you buy a stock, you are risking more, because the value of the company could plummet to zero, and you would be left with nothing. This is why people expect double-digit returns from the stock market. Mutual fund investments carry a similar risk, but the expected return might hold right below 10%. The fact that there is a mutual fund manager lowers the level of the risk, but your fund can still tank.

When you invest in a syndicated mortgage, there is the possibility that you will most if not lose all of your money that you put into the project. The borrower does have a contractual obligation to pay you back with interest, and there is collateral in the form of real estate associated with that contract. However, the borrower could default, and while the property could be sold to recoup some of your money, the fact that the property is likely to sell for less than what the market value should be means that you might not get back your full principal, and you definitely won’t get the interest from future payments.

Provinces regulate the syndicated mortgage market.

In Canada, each province has its own set of rules for syndicated mortgages. For example, in Ontario, the MBLAA (Mortgage Brokers, Lenders and Administrators Act) governs all mortgages, including the syndicated variety. Any person providing a syndicated mortgage in Ontario has to be licensed as a mortgage broker or mortgage agent.

You need to pay attention to the value of the project.

Are you considering several properties? You need to understand the nature and value of the project. Such variables as the location, the intended use and the zoning for a site will all play a role in the risk level that the investment will bring you.

The loan to value ratio is very important. (as well as priority)

In basic terms, Let’s say that you require $200,000 financing on a $1,000,000 property. If you only have $400,000 equity with a 200,000 balance; the loan to value is 80%. However, if you had $800,000 equity with a $200,000 balance with the same request, the loan to value is 40%. Even though the lender is being asked for the same amount. The 80% loan to value represents a greater risk to a lender. Let’s say you default and the property value loses transaction and you factor in interest arrears, the 1st position lender is highly likely to get his monies back, but as a second position lender the lower loan to value offers more safety and buffer. The lower your loan to value ratio (the ratio of the principal to the appraised value of the property), in conjunction with the mortgage priority…the safer the investment for the lender.

Syndicated mortgages do not guarantee a rate of return.

When you read a brochure or a website from a syndicated mortgage provider, you may see that they offer rates of return of 8% or even more. However, this is just the expected rate. There is no guarantee, like there would be with a bond. If the project succeeds, then you’ll likely get your whole principal back. This is why you want to look into the background of the builder, the accuracy of the appraisal and the chance that the borrower might sell the project before paying off the note or getting another mortgage.

Syndicated mortgages are not securities.

Securities are straight investments that do not offer collateral. Syndicated mortgages have the contract between borrower and lender requiring repayment with interest.

Syndicated mortgages are not liquid.

Once you have invested in a syndicated mortgage, you can’t let it go into a secondary market – because there is one. The borrower is bound by the terms of the contract, and so are you.

Syndicated mortgages are generally RRSP eligible.

You’ll want to make sure with your provider, but in most cases syndicated mortgages are RESP, RRIF, LIRA, TFSA and RRSP eligible.

Each syndicated mortgage is different.

Each project and each property is unique, so if you have a terrific experience investing in one project, don’t assume that you will on the next just because it’s another syndicated mortgage. Do your due diligence on the syndicated mortgage provider, the builder and any other parties who are involved with particular syndicated mortgage.

Get professional advice before you sign on the dotted line.

This article contains general information about syndicated mortgages. This is not intended to promote syndicated mortgages or to indicate that they are superior to other investment vehicles. Each investor has a particular risk tolerance level, and you want to get your own advice before you sign a contract. Not every investor can lock up money in a mortgage for the amount of time that the contract requires.

Real Estate Syndicate Guide

The Basics of Real Estate Syndicates

One by-product of recent government regulation in Canada is that financing is more difficult for real estate investors to come by. However, as is often the case, problems beget solutions – and that is where syndicate financing comes to bear.

How does it work? If you can’t afford to buy a property all by yourself, then you can find a group of people interested in pooling cash, and then finding a third party to organize the deal. This is what is known as a real estate syndicate. Every investor (also known as a Limited Partner) has the opportunity to join an investment that they would not have been able to put together by himself.

You can’t just get four friends together and form your own syndicate, though. You have to have two distinct groups, the money partners (or the limited partners), and the managers (or the general partner). You can have hundreds of limited partners in that first group, each putting in as much as $25,000 so that the general partner, who has the real estate know-how, and the GP is the one who makes all of the decisions – which properties to purchase, how to manage them, and when to sell them. This, of course, is the key – finding a general partner who has actual expertise in the field.

How do you choose the right syndicate?

Just like with any important business decision, this requires due diligence and research. The Internet has many blogs, websites and forums that will tell you more than you want to know about real estate syndicates. Getting together with other real estate investors, both online and in local networking groups, is helpful too. So is finding ads for syndicates in the reputable real estate publications. You need some money partners, but you also need an expert.

Finding that expert is the hard part – it’s a lot easier to find three or four people with money to invest. It’s the time that goes into finding the right property, negotiating the purchase price and the terms, finding a deal on a mortgage, locating a property manager and then keeping an eye on the whole situation. These tasks are why you need a general partner – and why you need a solid one.

Once you find a general partner or an organization that seems promising, it’s time to do some research on that entity. What do other people say about them online? What is their track record? Can they join in the investment too? You should expect a general partner to be able to put in 5 or 10 percent for the eal himself. That way he benefits or suffers on the basis of his own decisions.

The syndicate contract itself is important as well. If your syndicator wants to ask for a small acquisition fee upfront (which would normally be less than two percent of the asset value), that is standard. However, a bunch of upfront fees is different – and you should definitely think twice before signing your contract.

Some other things to look for in a syndicate include a fee structure that rewards the syndicator when things go well – and he should make the majority of his money when the deal comes to fruition. In the case of a retail syndicate, an example would be a 70-30 split on the end, where the average investor is putting in between $50,000 and $200,000, and the syndicator takes that 30% at the back end.

The contract is the key

Contracts tend to vary, as investors come in with a variety of goals and priorities. Some investors may want to have an exit built in, such as the possible sale of units to third parties after the other investors have been given the right of refusal or at least a first offer. Because the limited partners do not take a part in managing the property, is it crucial to have punctual financial reporting and, when necessary, the limited partners should be able to manage the use of auditors.

While the syndicator makes the decision about selling, but the limited partners have the right to agree to a common exit strategy. Maybe it is a threshold such as a 30 percent increase in market value, or a time frame, such as five or ten years. There might also be a clause that allows one person to get out when he wants, but the others either have to buy him out according to a pre-set formula or appraisals of the current market, or the entire project has to sell.

And now, the fine print

If you’re a limited partner, you possess a direct ownership interest in the purchased assets, which gives you a pro rata flow through when it comes to income, capital gains, depreciation and losses, all with restrictions possible. The limited partners are only liable up to the amount of capital contribution, with the condition that they do not take part in managing the property.

What’s the ROI?

This depends on the type of syndicate. Land development frequently brings greater risk – and greater return as well. Properties to generate income (especially apartment buildings) are seen as less risky, so your return is more secure but will be smaller. In Toronto, you can expect something between six and 18 percent on your return if you invest in an apartment building.

What about the tax man?

Any time there’s money being made, you know that the CRA is going to show up and want some. Every investor should talk to his own tax advisor to get professional counsel. However, there are some rules that are generally true.

Income and net taxable capital gains are allocated to each investor in the same proportion as for the managers.

Distributions can take the following forms of income in which there have been T5013 partnership income statements issued, including:

  • Distributions representing a part of capital gains allocated to investors having to do with a gain on property sale
  • Distributions viewed as a dividend that come from a Canadian or U.S. subsidiary corporation
  • Distributions that are taxable according to current law using regular calculations
  • Distributions that are not taxable right now and will be treated on the return as a capital return

Each province sets its own rules

Some investment sectors have federal regulations, but syndicates right now are governed by different provincial laws. This is a key fact because each province has eligibility requirements for investors, and you want to make sure that you qualify in the province where you want to invest. Generally, the biggest requirement is that the general partner is a legitimate third party entity.

In BC and Ontario, an investor might need an exemption, such as the accredited investor clause. This requires the investor to have a minimum net worth of $1 million and a salary of at least $200,000. In Alberta, investors can be exempt if they have a net worth of at least $400,000, including their primary home, or a yearly income of at least $75,000 before taxes kick in. They also need enough resources on hand to sustain a big loss.

Hopefully this information will clear the air of some of your questions about the real estate syndicate.

Investing in Syndicated Mortgages

Key Facts About Investing in Syndicated Mortgages

Even though syndicated mortgages might sound like some exotic investment vehicle, the truth is that they are just another way to borrow and lend money…and bring in interest as an investor. Let’s take a look at some facts that people new to this market may not know.

Yes, syndicated mortgages are loans too.

Just like any other mortgage, the person taking one out agrees to pay a lender back over time. The difference is that a syndicated mortgage has multiple lenders or investors providing the funding. A mortgage is one of the more solid investments because the borrower has a contractual duty to pay back the amount owed, with interest. Investing in mutual funds, stocks and other securities comes with no such guarantee.

That doesn’t mean that risk is not involved.

Any investment beyond deposits in a government-insured savings account carries risk. That’s why the interest rates that those accounts pay are always the lowest. The more risk that an investment carries, the higher interest rate the investor can expect. If you buy into a mutual fund, you’re hoping that the return will be as high as 10 or 12 percent – if not higher – because there is the risk that you could lose your whole investment if the value tanks.

With a syndicated mortgage, the borrower could still default, so you could lose your money. In a mortgage, there is collateral involved – if you’ve invested in a residential mortgage, the borrower would have his home foreclosed and sold. In the meantime, though, you wouldn’t be getting any payments, and it’s likely that the home will be sold for less than the amount owed, so you wouldn’t get all of your money back. So while you’re extremely unlikely to end up with nothing, you could get a lot less than you expect. Mortgages do have a lot more security than investing in the stock market does, but you still need to know that there is risk.

You do have the protection of provincial regulations.

Each province in Canada regulates provincial regulations. For example, in Ontario, it’s the MBLAA (Mortgage Brokers, Lenders and Administrators Act) that governs them. The Financial Services Commission of Ontario (FSCO) carries out enforcement of the law, and anyone providing syndicated mortgages in the province must have licensure as a mortgage broker or agent.

You need to research the property before you invest.

Take a look at the loan-to-value (LTV) ratio of a mortgage before you invest. If the LTV ratio is 90%, that means the borrower is only putting down 10%, which suggests a higher risk. An LTV ratio of 60% means that the borrower had enough funds on hand to put down almost half of the purchase price. Also, the property value itself is important. You’ll want to find out how the amount of the loan compares to the appraisal on the property, to ensure that in the case of default you will be able to get something close to what you invested for your share.

Now the good part: Investment returns

When you read the website of a syndicated mortgage provider, you’ll see investment returns of 8% or more. However, this is just your expected rate of return. This is not a guaranteed rate – if it were, remember that there wouldn’t be much risk. This is why you need to pay attention to the builder’s reputation (the one taking out the mortgage for construction), as well as the possibility that the builder might sell the project – in addition to performing due diligence on your appraisal.

Just remember – this is not a liquid investment.

With a liquid investment, you can find a secondary market to sell the paper and take cash when you need it. With a syndicated mortgage, you cannot get your money back until the term or contract comes to an end. The contract terms bind you – not just the borrower.

Can you use RRSP funding to invest in a syndicated mortgage?

Yes, in most cases. Generally you can also use RSIP, LIRA, RRIF, RFSA and RESP funds to invest as well.

So are all syndicated mortgages alike?

Not at all. The contracts read similarly, but each project and property has its own characteristics. You might make 16% on one contract, but you might see the next one go into foreclosure. This is why it is crucial to read up on the reputation of your syndicated mortgage provider, the builder and anyone else involved in the project.

Still have questions? Get in touch with a syndicated mortgage provider today. Each loan is different – and each borrower has different needs. A reputable broker will patiently answer all of your questions and be up front about the balance between risk and reward for each potential loan.