Syndicated mortgage option

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What is a “Syndicated Mortgage"?

A syndicated mortgage is an investment tool that allows you the investor an opportunity, along with many other individuals, to earn real returns by “lending” your money to a larger scale real estate development. Several investors combine funds together and create one financial instrument; in this case, a mortgage.

Often your investment is registered and secured directly to the land or the project, via an addendum to the mortgage or directly on title.

A syndicate mortgage provides developers with a portion of the funding (usually about half) that they will need to successfully complete their project. Then, a major financial institution will be asked to provide the balance of the money, usually in the form of a construction mortgage. Typically, the money invested by clients in the syndicate is used to fund the soft costs of development – things like architectural design, zoning, marketing and in some cases, even the land acquisition.

Clients often ask why these large developers don’t borrow “the other half” of the money from an institutional lender - this is often referred to as “mezzanine financing”. Even after paying the investor a fair (and usually fixed) return, the cheapest way to raise these funds is through syndicated clients like you or me. And with this “just in time” approach to financing, the project does not receive all of the funds at once, thereby saving further on the costs of borrowing. Most syndicated investments pay interest only over the term of the loan (usually three or four years) and then return the principal in a lump sum upon “exit”.

What to look for in a Syndicated Mortgage?

First, we should consider who the builder/developer is. Do they have a track record of doing this before and have they successfully exited previously completed projects? And does the organization bring experience and expertise to business?

What is the demand for the units being built?

One of the key considerations is what will happen when the construction is complete? Will the building be sold? Another excellent option is to refinance the project and exit the investors. If this is a “purpose built rental” building, what is the demand for such units in this marketplace? Always be sure to review the Proforma to compare the costs with the future projected value.

What is the process if I want to invest in a syndicate?

Only a licensed mortgage agent can process your investment into a syndicated project. During the meeting, he/she will assess the suitability of such an investment for you and then complete the required subscription documents and funds transfers (if RSP, LIRA or TFSA funds are coming from another institution). It’s extremely simple and easy from the client perspective but it will take a little time for the funds to transfer from the other institution, often up to a month. Shortly after landing at the new trust company, your investment is registered and interest begins.

And most importantly……

Is the owner or developers best interest fully aligned with yours? In some cases, the owners will even be subordinated to you the investor, meaning they stand behind you in the order of repayment. Typically, the bank that holds the construction mortgage will be in first position with the investors immediately behind them in second.

Why invest in a Syndicated Mortgage?

For many years, we have been told to “diversify our portfolios” and that is great advice. But if our real estate investments are inside our stock portfolios and mutual funds, we are exposed to the volatility of the public markets. Just like all other stock market investments, even the real estate funds are at risk to a down turn. Having a portion of your RSP, TFSA LIRA or cash investments in a syndicated mortgage secured to real property and earning a fixed return, may be a great option for you.

What are the risks?

One of the biggest concerns with a real estate project is time and time is a real risk factor. Knowing that these kinds of investments usually run three or four years, you are at “risk” of needing the money sooner, but not having access to it. So be sure that your time horizon suits this kind of investment. Always make sure that you are working with a dedicated team of professionals who are committed to raising the funds that are needed to complete the project and that the developer is also aligned and committed to the same goals. Look for projects where some or all of the zoning is complete or nearing completion as delays from city planners can add to the costs.

What about a conversation?

Let’s have a conversation to see if putting a portion of your investment funds into a hard asset such as real property might be suitable for you. You may be surprised to learn how easily you too can become a successful real estate investor without becoming a landlord.