Syndicated mortgages are real estate investments where a loan is secured by a lien on land. These loans can be purchased with RRSP, TFSA and LIRA funds.
Investing in syndicated mortgages is not subject to the accredited investor rules and can be a great way for retail investors to get into the real estate market. However, there are some important considerations.
What is a Syndicated Mortgage?
A syndicated mortgage is a type of loan that involves multiple lenders, usually large banks or investment banks. This type of financing is most often used by developers who need to raise money to finance a large-scale real estate development project that cannot be funded with a regular bank loan. The funds are often divided into different types of loans that offer a variety of terms, such as fixed interest rates for the life of the loan or variable interest rates that fluctuate with an index such as the prime rate.
Syndicated mortgages are usually issued to investors by a company called a mortgage investment corporation (MIC). A MIC is a corporation that raises capital from investors and subsequently invests that capital in real estate and other assets. MICs generally have an experienced team of professionals with extensive knowledge of the mortgage industry and a track record of success.
The CSA defines a syndicated mortgage as “a mortgage in which two or more persons participate, directly or indirectly, as lenders in the debt obligation that is secured by the mortgage.” The term issuer of the mortgage is determined under securities laws.
It is important to note that, as of March 1, 2021, the private issuer prospectus exemption found in section 2.4 of National Instrument 45-106 will no longer be available for distribution of syndicated mortgages in all jurisdictions. Instead, reliance will be on prospectus exemptions that include a reporting requirement. This will bring significant harmonization to the rules of the CSA in this area and is intended to enhance investor protection for investors investing in syndicated mortgages.
As a result of these changes, parties involved in the distribution of syndicated mortgages in Canada should carefully review their practices to ensure compliance with securities laws, in addition to the requirements under mortgage brokerage and dealer licensing and registration legislation. In some cases, the new rules will require material changes to existing business practices and involve significant additional costs.
The CSA has also amended its definition of “syndicated mortgage” to clarify that the borrower is generally the issuer of the mortgage and not a party that enters into the mortgage or a subsequent mortgage transaction with the intent to distribute it. In some instances, however, a third-party may be the issuer of the mortgage. This is particularly true where a mortgage is transferred from a single lender to several syndicate members.
What are the Advantages of a Syndicated Mortgage?
A syndicated mortgage provides developers with the capital and equity they need to take a real estate project from concept to completion. It is an attractive way to invest in residential or commercial real estate projects, but it also comes with its own risks.
For one thing, it is often difficult for an individual investor to identify a developer or project that they might be interested in investing in. These types of projects often involve complex construction and planning processes. If a potential investor is not familiar with these processes, they may be tempted to enter into deals with unlicensed developers who can scam them out of their money.
In addition, a single investor can end up losing a large portion of their investment if they fail to repay the loan on time or are forced to sell the property to repay the debt. In a syndicated mortgage, however, borrowers and investors can benefit from the pooling of multiple loans, which will help even out returns and reduce the risk of losing money in a downturn.
Another advantage of a syndicated mortgage is that it is not subject to accredited investor rules. Rather, these investments are regulated by the Financial Services Commission of Ontario and are open to most investors. This means that individuals can use their RRSP, TFSA or LIRA funds to invest in syndicated mortgages.
Syndicated mortgages are sold by a broker or a group of brokers to private lenders or investors. These lenders or investors typically have a small amount of money to invest in a single mortgage, but this can be an effective way for them to earn a higher interest income than they could on their own.
If you are looking to make a larger investment, then it might be more beneficial to invest in mortgage-backed securities (MBS) or commercial mortgage-backed securities (CMBS). Both of these investments are regulated by the Securities Commission of Canada and are available to Accredited Investors only.
The Canadian Securities Administrators have announced that they are proposing amendments to National Instrument 45-106 Prospectus Exemptions and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations related to the distribution of syndicated mortgage interests in Canada. These changes, if adopted, will remove the prospectus and registration exemptions currently available for syndicated mortgages in Canada and introduce additional requirements and investor protections.
How do Syndicated Mortgages Work?
A syndicated mortgage is when a group of private investors band together to provide a mortgage to a single borrower. These groups can include developers, banks, credit unions, pension funds and other financial institutions. They usually work through a mortgage broker. The benefits of a syndicated mortgage are that the transaction is streamlined, and there is no administrative overhead involved.
Syndicated mortgages have been used in BC to finance many different types of projects, including housing developments, retail locations, condo high-rises and trailer parks. In addition to lending money, a syndicated mortgage allows an investor the additional security of being able to register as a charge-holder on the property, which gives them the right to recoup their capital if the project goes south.
While a syndicated mortgage offers the potential for higher returns, it also has its downsides. For one, syndicated mortgages tend to be ranked behind other registered loans in the event that the borrower defaults. This can result in a lower return than if the loan were secured by a second lien on property.
Additionally, syndication mortgages have been associated with fraud and scams in the past. For example, in Toronto, a group of retail buyers pooled tens of millions of dollars to fund condominium high-rises. However, because of their insufficient knowledge of risk and the potential for future declines in the real estate market, these investments have been the subject of several investigations and lawsuits.
In order to reduce these risks, securities regulators in many jurisdictions have introduced or approved prospectus exemptions and dealer registration exemptions for certain syndicated mortgage transactions. For the most part, these local exemptions are substantially harmonized, but details vary from jurisdiction to jurisdiction.
The exemptions are available for qualified syndicated mortgages. In Nova Scotia, a qualified syndicated mortgage is defined in the Blanket Order as one where at least one party involved in the distribution or trade of the syndicated mortgage is a mortgage broker licenced in Nova Scotia investing in their own right and not acting as an agent for a third-party.
In addition, in certain Group 1 Jurisdictions, the mortgage exemptions described above will no longer be available for syndicated mortgage transactions and parties involved in such transactions must ensure that they are relying on alternative prospectus exemptions or involve a registered dealer. Alternatively, the issuer may be required to report exempt distribution and pay regulatory filing fees in connection with the transaction.
What are the Advantages of Investing in a Syndicated Mortgage?
Syndicated mortgages are one of the most popular ways for real estate investors to grow their investment portfolios. They offer an excellent way to diversify your portfolio and earn a higher return than you would by investing in individual properties or even in traditional stocks and bonds.
While they’re relatively new to the Canadian market, syndicated mortgages have grown in popularity over the years and are increasingly becoming a popular choice for investors looking for alternative income-generating investments. They’re also tax-efficient, which helps your money grow faster.
When you invest in a syndicated mortgage, you’re joining with other investors to pool your funds together and get access to more buying power. This means you can purchase a larger property than you could on your own, increasing your potential investment amount.
You’ll also be able to benefit from lower interest rates, which will make your investment portfolio even more lucrative. Depending on the project, you may be able to enjoy an average return of 8 percent or more.
However, you should always consult with a qualified financial professional to ensure your investment decisions are sound. Investing in a syndicated mortgage requires some knowledge about the industry and how to navigate the risks.
The first advantage of investing in a syndicated mortgage is that it offers more investor protection than a Mortgage Investment Corporation (MIC). You’ll have the added security of your name being registered on title as a charge holder against the property. This can help you recover your investment if the project doesn’t work out.
Another benefit of investing in a syndicated mortgage involves the fact that you can choose the projects you want to invest in. This gives you more control over your investment portfolio and allows you to make better decisions about the type of projects that are right for you.
The Ontario government has also introduced a cap on the amount of money you can invest in syndicated mortgages as an individual investor, which is a good move to protect you from over-investing in these types of investments. The government is also working to improve transparency in the mortgage market, making it easier for consumers to find out about mortgages and the people who are delivering them.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.