What are Syndicate Mortgages? 5 Headache Reducing Considerations!
By Elisa Lau
I think we can all agree that we are beginning to think outside of the box when it comes to investing in their futures. Traditionally, investors diversified their portfolios using the legacy portfolio model, 40 percent stocks and 60 percent bonds. This model has proven to be insufficient in the ever-changing investment landscape.
With wounds from the recent recession still lingering, investors are turning towards hard assets, such as real estate, to further diversify their portfolios and achieve their financial goals. We have more investment options than ever before. Only 20 years ago, it was difficult or impossible to invest in a REIT, a hedge fund, a managed commodity fund, an international index fund, a derivative, a swap, etc.
A syndicate mortgage investment provides investors with the opportunity to earn real returns by investing in the communities they live in. So what exactly is a syndicate mortgage? A syndicate mortgage is where several investors combine funds together to create one financial instrument; in this case, a mortgage. Some sophisticated mortgage brokerages are now creating investment structures like this for the everyday investor. When investors invest in a syndicate mortgage, they are funding a larger instrument; however, their investment is always registered and secured directly to the land under the individual s name, which translates into direct collateral for them against a real asset.
A syndicate mortgage provides developers with the capital and equity they need to take their project from conception to completion. How? Well, a syndicate mortgage works in conjunction with bank financing and developer equity. The syndicate mortgages are typically used to help fund the soft costs of development – hiring consultants and experts; engaging zoning and architecture firms reno (or elsewhere); and marketing costs such as a sales centre.
By providing these funds via a syndicate mortgage to a developer, it allows the developer to do more in a shorter period of time. And just like paying off your own mortgage, this works the very same way.
You work out fixed terms, meaning interest payable and amortization. Most of the time, a syndicate mortgage acts like an interest-only loan, meaning the borrower will agree to pay a steady amount of interest on the investment (monthly, quarterly or annually) and agree to pay off the entire loan amount on a certain day as defined by the terms of the agreement.
In a syndicate mortgage, investors can invest directly into real estate, and the only way for investors to access this type of investment is through a mortgage agent or broker. A syndicate mortgage investment structure is a rather simple one. Just like a traditional mortgage, where you put down a certain amount of collateral, like 20 percent, and the bank lends you the remaining amount to acquire your home. Well a syndicate mortgage moves and acts very much the same way. In a syndicate mortgage, investors become the lender to a developer to fund a project. It could be a high-rise condo, low-rise single-family development or a commercial complex. Building any of these properties would be quite a task, and requires large capital to even get started with the foundation. Then comes the construction of the entire structure, not to mention HVAC, plumbing, finishing, and interiors that require a number of providers to come together- a firm providing Commercial Restroom Concrete Sinks and Countertops not least of all. Accomplishing all of these things can be made possible with a syndicate loan.
Still, there are a couple features unique to the syndicate mortgage process.
First, a syndicate mortgage allows investors to select which projects in which they wish to invest. If the investor feels more comfortable with commercial properties over residential properties, the investor has the ability to select this.
Another unique feature of syndicates is that they allow the individual investor additional security by having their name registered on title as a charge holder against the property. This feature gives the investor added security. Much like if you neglected to make a mortgage payment on your own home, the bank would likely call you to remind you that you owe them money, and then if you missed another payment, the bank might send a letter. If you miss a third one, they may send a foreclosure notice. Syndicate mortgages allow for the same fall-back scenario if a lender neglects to service the debt.
Now this all sounds great so far, right? Let s look at some not so pretty scenarios.
What happens if the developer defaults on the mortgage payments? This is one of the best features of this style of investment. Syndicate mortgages are secured against the land, whereby investors are actually registered to the land or building and real estate law dictates that charges against the land are to be paid off before shareholders and debts to the corporation, (you can find more at Zelcer Law for an example of a real estate lawyer). So, basically, what this means is in the event something should go wrong, the bank will get paid first, then the syndicate mortgage, then everyone else.
5 Syndicate Mortgage Considerations:
- Reputation and track record of the developer does the developer have the expertise and experience to complete the project?
- Permits and zoning is everything in place to move the project along?
- Location are there strong economic fundamentals, such as job growth, in-migration, infrastructure expansions, etc.?
- Pricing and built-form of the project is the neighbourhood absorbing the project and generating sales?
- Bankability have banks lent to the developer in the past and are there banks willing to finance the construction loan for the current project?
If you are looking for a short-term investment managed by industry experts with a proven track record, syndicate mortgages may be the answer. The beauty of syndicate mortgages lies in its simplicity: fixed terms, direct collateral, consistent cash flow AND a hard asset that provides security.
Do you invest in a syndicate mortgage? Share your experience and insights in the discussion below!
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Elisa Lau, CPA, CA, CPA (Illinois) is a Real Estate Investment Advisor. She is also a licensed Mortgage Agent (Lic #M13001507) with FMP Mortgage Investments Inc. (Lic #12373), a leading distributor of Fortress Real Capital syndicate mortgages. Elisa has over a decade of experience working at all of the Big Four global accounting firms in Toronto: Deloitte, KPMG, Ernst & Young & PricewaterhouseCoopers, specializing in cross-border taxation & planning for corporations, partnerships & individuals. Follow her on twitter: @_ElisaLau or on Facebook at elisalau.realestate.
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