Before investing in a syndicated mortgage

The Financial Services Commission of Ontario (FSCO) has taken considerable action in the syndicated mortgage investment (SMI) marketplace to help consumers. While there are many legitimate SMI opportunities, FSCO warns consumers to be wary of SMIs with advertisements promoting a high return or ‘fully secured’ investment.


FSCO considers mezzanine-style SMIs to be high risk, and notes they may not be suitable for the average investor. Before you hand over your hard-earned money, make sure you are aware of your rights and responsibilities.

If something goes wrong with a project, where are you in line for payment?

 

The risks:

  • No guaranteed high return. Although some companies or individuals offering syndicated mortgage investments may say they offer ‘guaranteed’ high returns, it is actually against the law to do so. In general, the higher the rate of return, the higher the risk of the investment.
  • A lineup for repayment. Often, at minimum, you are second in line to be paid, behind any bank that provides a loan for the project. If the project fails, there may not be any money left over to pay you. You may even be further back in line behind other investors.
  • ‘Secured’ does NOT mean guaranteed. Some advertisements promote SMIs as ‘safe’ or ‘fully secured’. It is true that your investment will be used to create a mortgage that is registered and secured directly with the land or building associated with that mortgage. But remember, if something goes wrong with the project – and the value of the security is limited to the value of the land – you may rank behind other lenders and investors and may not get your money back. This is because the value of the land may be only enough to pay these prior-ranking lenders.
  • No investor protection fund. Syndicated mortgage investments are not backed by the Government of Ontario or any other investor protection fund; there is no way to guarantee you will get your money back.
  • Lack of liquidity. If you want to withdraw your money before the end of the term, there is no assurance that there will be a market for the resale or transfer of the mortgage.

Your rights and responsibilities

  • Check for a license. Only mortgage brokers and agents licensed with FSCO can engage in syndicated mortgage transactions, and only licensed mortgage brokers (not agents) can sign the required forms. Find a licensed broker, agent or brokerage by checking FSCO’s list.
  • Ask where you are in line for payments. If something goes wrong with the project, you need to know which lenders and investors the borrower will repay, and in what order. Ask whether the syndicated mortgage is a first, second or subsequent mortgage; this is important because if the project fails, the first mortgage would receive any proceeds from the liquidation first. Second and subsequent mortgages only receive payments if and when the first mortgage has been fully paid off.
  • Ask about the property value. Your security is only as good as the value of the property. Ask to see the appraisal the brokerage used to determine the value. You want to ensure the appraiser has valued the property in its current "as is" state without any assumptions concerning the successful completion of the property. If the appraiser has made such assumptions, the sale price of the undeveloped property would likely be lower than the value indicated in the appraisal. This would create more risk in terms of recovering your investment. For more complex SMIs as of July 1, 2018, your mortgage broker must provide you with a property appraisal prepared by a member of the Appraisal Institute of Canada in accordance with the Canadian Uniform Standards of Professional Appraisal Practice.
  • Get independent advice. You are strongly advised to obtain independent financial and legal advice from someone not connected to the investment, before investing in a syndicated mortgage. This includes getting professional advice on how your investment could impact your income tax.
  • Investment limits. For more complex SMIs as of July 1, 2018, some investors and lenders may not be able to invest more than $60,000 over a 12-month period.
  • Read and understand all associated paperwork. Your mortgage broker must complete investor/lender disclosure Form 1 as listed on FSCO’s website, and provide it to you. The brokerage must also keep appropriate documentation on file, including records that detail discussions with you. For more complex SMIs as of July 1, 2018, your mortgage broker must complete investor/lender Forms 3.0, 3.1 and 3.2 as listed on FSCO’s website and provide them to you. Form 3.0 collects information about you that will help the mortgage broker determine if a particular investment is suitable for you. Form 3.1 documents your broker’s analysis of why the investment is suitable for you. Form 3.2 provides you with important information about the proposed investment. You must sign all three forms. Before you sign, ask questions and make sure you understand everything.
  • Ensure full disclosure. Mortgage brokerages must take reasonable steps to ensure that the mortgage investment they recommend is suitable based on your needs and circumstances. They must also advise you of the material risks of the investment, disclose potential conflicts of interest, and provide evidence of the borrower’s ability to meet the mortgage payments. For more complex SMIs as of July 1, 2018, your mortgage broker must complete investor/lender disclosure Form 3.2, as listed on FSCO’s website, and provide a copy to you.
  • Inspect the project. Consider going to inspect the actual property. Ensure you have sufficient documentation to support the property valuation. Keep in mind, property values in commercial developments are subject to market forces, and can decrease. Ensure you understand the marketplace in which you are investing.

Please note there may be additional risks to investing in a syndicated mortgage. You should take all possible precautions before committing to invest.

 
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