by Neil Mathieson, CPA, FICB

Neil MathiesonI have worked for many years with my friend and colleague Mr. Neil Silvert from Real Wealth Mortgage to provide our clients with alternative investments such as syndicated mortgages.

Many Canadians are beginning to recognize the benefits of investing in syndicate mortgages. This type of investment combines the funds of several investors in order to create a single, harmonized mortgage and are usually used to fund prime developments.

One current offering is the Aurora Mills Town Centre development located in Aurora, Ontario which offers an 8% return on investment.

Investing in syndicate mortgages allows you to have direct collateral for your investment and ongoing returns from the interest earned by the mortgage. The minimum amount required of an investor for a syndicate mortgage is on average $25,000. Regular interest payments are paid while the investment is in progression.

Mortgage investments can be an exceptional way for someone to invest their money, however every mortgage investor needs to educate themselves about what mortgage investments are and the individual merits of each transaction since not all syndicated mortgages provide the same opportunities.

Due diligence can be a lot of work, but investors should learn how to familiarize themselves with the development prospect for a particular property. A prospective investor should look at how the property is being evaluated, where the project is and what state the project is currently in, and how much time will be needed to complete it. Often the investment is not sound because of poor evaluation methods or an investor might not get all the information required due to poor transparency between the developer and the brokerage firm. The investor has to satisfy themselves that what is communicated is accurate.

Four key elements are required in order to obtain a syndicate mortgage;

  1. you need representation by a mortgage broker;
  2. a lawyer;
  3. independent legal advisor and;
  4. you would be required to fill out a fiscal disclosure form.

One common question we are often posed is why real estate developers might opt for this type of financing option instead of using their own cash or obtaining a mortgage though one of the major banks. Basically the reason is resources. There has always been a need for private investors to help fund these types of projects. Banks do not give developers enough money for the entire project, so the latter parts of projects are raised through private offerings by way of a second mortgage with developers’ funds.

Determining a great syndicate mortgage investment requires due diligence. The first factor is the location of a property. Is it close to public transit and major highways? Are the development plans well within the long term planning objectives of the city or town? It is also prudent to examine what is happening in the area such as population growth. On the other hand, an investment can be risky if the investor hast not received all the information due to lack of transparency..

One main expenditure that a developer incurs is known as a soft cost which would be for the consultants needed to prepare a site plan application. Examples of consultants that a developer would use are engineering consultants, a planner, project manager, architect, as well as traffic and wind studies specialists. In some cases the services of an aeronautical engineer are needed to review how high to construct the building. A hard cost would be excavation of a site, removal of dirt, and pouring of concrete; these are necessary because they add value to the site.

As a potential investor, you need to be aware of any legal issues before choosing an investment. Ensure that what has been communicated, either verbally or via marketing material is actually reflected in the legal paperwork. The use of a mortgage administration agreement is also essential and the lawyers that are involved in the transaction must be without conflict.

Appraisals and valuations are important since they help assess the loan to value ratio of a deal. Since an investor is secured against the land or property, the value of that asset is essential in the event of any problem with the project. The asset can be sold to help recover your principal investment. For example, the appraiser can take a look at the surrounding areas and determine for what value similar pieces of land have been sold. This gives the investor a great idea as to what type of property they are about to invest in, what it is worth, and what are the risks.

Source, Mr. Neil Silvert, Licensed Mortgage Agent with Real Wealth Mortgage.