GUIDE TO INVESTING IN PRIVATE SYNDICATE MORTGAGES

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1 GUIDE TO INVESTING IN PRIVATE SYNDICATE MORTGAGES High Yielding Investments Secured by Real Estate BY BRUCE RAMSEY Copyright 2014, All rights reserved.

2 PAGE 2 TABLE OF CONTENTS WHAT IS SYNDICATION? 4 FORMS OF SYNDICATION 6 WHAT IS A SYNDICATOR? 8 WHAT IS A MORTGAGE? 8 WHAT IS A PRIVATE MORTGAGE? 8 WHAT IS A SYNDICATE MORTGAGE? 9 WHY INVEST IN MORTGAGES? 9 YOU ARE THE BANK PRIVATE MORTGAGE INVESTING vs. RENTAL INCOME 11 HOW IS THE MORTGAGE SECURED? 13 RISK FACTORS 14 HOW IS THE RISK MINIMIZED 15 FIRST MORTGAGE vs. SECOND MORTGAGE 18 DUE DILIGENCE 19 DUE DILIGENCE BY THE SYNDICATOR 21 MORTGAGE INVESTING USING REGISTERED ACCOUNTS RRSP, LIRA, TFSA, RESP 23 FREQUENTLY ASKED QUESTIONS 25 INVESTING STRATEGIES 28

3 PAGE 3 Disclaimer: The content contained herein is for informational purposes only, and is the opinion of the author only. The author is not responsible for nor verified the accuracy on the site of any links contained herein which are provided for convenience only. Particular investment strategies should be evaluated relative to each individual s objectives and in consultation with their financial advisor. The information contain herein should not be relied on, or be a substitute for professional accounting, investment or legal advice. Please consult your legal and tax advisor prior to implementation. The author is not liable for any errors or omission in this information or any loss or damage suffered.

4 PAGE 4 Welcome to the world of high yield mortgage investing. Never again will you want to accept the paltry returns available from banks and other lending institutions. Once you understand private mortgages, you will realize that high investment returns do not necessarily mean high risk. If you understand what you are doing and use common sense, you will find that mortgage investments can be safer than government bonds. Money, in the real estate context, is the fuel which feeds the engine of investment or development activity. Having money allows an investor or developer to tie up a property, complete due diligence, obtain development approvals, close the purchase and build the project. Without it, the developer or investor is simply someone with a good idea, a lot of energy and time on their hands, but no project. We all know that "money doesn t grow on trees", and it remains a continuing challenge for real estate entrepreneurs to obtain the capital necessary to do their business. One way for them to do so is through syndication and private mortgage loans. WHAT IS SYNDICATION? Syndication is the process of fractionalizing a loan or mortgage into several partial interests in order to divide the required capital into smaller parts. The intent of syndication is: to allow the real estate entrepreneur to expand the pool of potential investors by offering them a smaller, more affordable investment unit, and to provide investors who have limited capital with the opportunity to participate in the ownership or development of properties which would otherwise be too large for them to acquire or develop on their own.

5 PAGE 5 Increasing popularity Syndication is nothing new, it has been used as a financing method for a very long time, however in today s real estate environment, syndication is becoming more prevalent. In previous economic cycles, lenders were willing to lend higher proportions of the cost of a project, reducing the amount of equity required from the developer or investor. In many cases, the banks were willing to lend up to 90% of the value of the property. After the global financial crash in 2008, banks changed their lending criteria and reduced the amount that they would lend to developers to between 60% to 65% of the value of a project. This change required developers to put more of their own capital into projects and therefore forced them to cut back on the number of projects that they could do in a year. The change also created the opportunity for syndications to become a mainstream investment and for real estate developers to source the additional capital they required from these syndicates. In addition, the stock market has produced poor returns in the last ten years and with low interest rates being paid on fixed income investments such as GIC s and T-bills, many investors are looking for the sort of secure, high yield returns which is offered by a well-structured investment syndicate. Investment syndicates allow individual investors to participate in loan structures that they could not otherwise participate in. For example, an individual investor could participate in a mortgage syndicate on a $10 million development with a minimum investment of only $25,000. Syndication is the means whereby investors of limited resources can pool their financial resources with experienced and skillful management to financially benefit from projects that was once only available to wealthy investors and institutions.

6 PAGE 6 FORMS OF SYNDICATION A syndicate can be a simple agreement between two investors to purchase a single family residence or it can be as complicated as the syndication of a condo building involving hundreds of people in group ownership. Syndications are used to acquire ownership in land, to construct subdivisions, to rehabilitate older properties, to acquire and operate shopping centers, industrial parks, commercial office buildings, mobile home parks, hotels and resorts, and all types of real estate investments. A Syndicate can be formed as any one of several types of legal entities such as limited partnerships, REIT s, or Joint Ventures, however syndicates usually come in two forms, Equity or Debt or a combination of the two. Equity Syndicate A syndication of equity typically takes the form of a general partnership, limited partnership or joint venture. The partnership or venture brings together the real estate developer or owner (with expertise, ideas, energy, and a property under consideration) and the investors (with money). The investors are generally passive, in that they take no role in the day-to-day operation of the development or investment, although they retain votes on major issues such as financing, sale, and the selection of management. The developer / owner takes on the active role of developing or operating the property. Investors typically receive: a priority (or preferred) return on their invested capital that is, they receive some stated annual return on invested capital prior to the developer / owner receiving payment. In some cases, this may be a guaranteed minimum return, which is guaranteed by the developer / owner a priority of repayment of capital in the event of a sale or re-financing of the property

7 PAGE 7 a percentage share of the profit from the property s operation or sale the right to vote in major decisions affecting the property The developer / owner typically receives: fees for services provided to the partnership / venture, which may include any or all of structuring the syndication, identifying the property, managing the development of the property, providing property management for the finished property, managing the partnership / venture, managing the disposal of the property; a share of the profits after payment of a preferred return on the investors capital and the return of their capital; a return on whatever equity it has contributed to the venture. Mortgage Syndicate Syndication can also take the form of a mortgage or other debt offering. In these cases, investors act as lenders of a portion of a mortgage loan for a real estate development or property. The return on investment is a fixed stream of interest payments to the investor, and is generally secured by a charge on the real estate, giving the investors security for their investment. In these cases, however, the investors return is limited to the interest rate on the loan, and any appreciation in the value of the real estate will accrue to the developer /owner, and not to the syndication investors. Note that if the underlying property is in Canada, then these offerings are eligible for investment by RRSP s, TFSA s, RESP s, LIRA s and RRIFs. For the purposes of this booklet, we are going to focus on investing in private mortgage syndicates in the remaining pages.

8 PAGE 8 WHAT IS A SYNDICATOR? A Syndicator / Promoter is an individual or entity who analyzes and structures the investment opportunity, packages the investment documents, raises the funds, organizes and manages the investment and shares in the profits and other benefits of full involvement in the project. The functions described above can be done by two syndicators i.e. the packaging/fund raising syndicator and the organizing/managing syndicator. WHAT IS A MORTGAGE? Generally speaking a mortgage is a loan obtained to purchase real estate. The mortgage itself is a lien (a legal claim) that is registered on the title of the property and secures the promise of the borrower to repay the debt. WHAT IS A PRIVATE MORTGAGE? A private mortgage is similar to a bank mortgage, except that it is provided through an individual investor or by a group of investors or a private corporate entity, instead of a bank or other financial institution. Private mortgage lenders have the same legal security in a mortgage as banks and other institutional lenders. The legal obligations of the borrower or mortgagor, and the legal remedies available to the lender are identical.

9 PAGE 9 WHAT IS A SYNDICATE MORTGAGE? A Syndicate Mortgage is where several investors combine their capital and then lend that capital as one mortgage. What is unique about a syndicate mortgage is that every investor has their full investment registered proportionally on title at the Land Registry/Title office. This provides a direct charge against the real estate and the collateral for the investment. This is a unique feature of syndicate mortgages. Investing in a syndicate mortgage is different from investing in a mortgage pool or fund as there are no shares or units that change or fluctuate in value. In a syndicate mortgage, investors all have an interest in a single mortgage. When the mortgage liquidates, the investment liquidates. In a pool the investors have an interest in the overall pool and not in a particular mortgage. WHY INVEST IN MORTGAGES? There are many reasons why people invest in mortgages, however there are a few keys reasons that I have listed below. Consistent fixed income payment. Mortgages can provide attractive, above average, steady rates of return, when compared to other types of fixed income investments such as GIC s, Bonds and T-bills. This is especially attractive to investors who want to supplement their existing income. Lower volatility. There are no shares or units that change in value due to short-term market forces. An investor can therefore feel comfortable that the value of their

10 PAGE 10 investment remains the same and does not fluctuate like a stock or mutual fund. Inflation hedge Real estate is a hard asset that appreciates over time and has a history of protecting against the destruction of wealth caused by inflation. What this means as applied to mortgages is that over time the investment becomes less risky because the value of the asset should increase and the debt (mortgage) secured against the property either remains the same or is paid down. This gives the lender increased security for their capital over time. Double collateral Investing in mortgages is less risky than mutual funds and stocks, because you are secure in both the borrower and the property. What most people don t realize is that you have double collateral with a mortgage investment. You have the actual property itself as collateral but you also have in many cases, the personal guarantee of the borrower. What this means is that in case of default, the borrower is responsible for any shortfall between the value of the asset and the outstanding mortgage balance. The lender has control over choosing the property and the borrower to invest in. As an investor / lender you have choices. You can be selective with which property or project you want to lend on. You decide on the type of property (commercial or residential), the mortgage term (2yr, 3yr, 5yr), the amount you want to invest and who you want to lend their money to. You can invest in real estate without becoming a landlord. Investing in a private syndicate mortgage allows you to participate in real estate without all of the hassles and headaches of managing a property. You don t have to deal with the management issues of dealing with tenants, rent collection, property maintenance, accounting etc.

11 PAGE 11 Earn passive income while staying tax-sheltered. Investing in mortgage allows you to earn passive income that can be tax sheltered by holding your investment in a registered account such as an RRSP or TFSA. No time and no real estate expertise is required. You don t have to be an expert at real estate investing to participate in a syndicate mortgage. Also it does not require you to allocate a lot of your time to managing your investment as you would have to do if you were a landlord. Population trends are growing and more people need housing every day For a mortgage investor this means that there will always be a demand for private mortgages and therefore the opportunity to earn above average rates of return. There are many more reasons why you should invest in a syndicate mortgage. You can find additional reasons in the Frequently Asked Questions (FAQ) section of this book. YOU ARE THE BANK PRIVATE MORTGAGE INVESTING vs. RENTAL INCOME Let s imagine that you buy a house and rent it to tenants for $1,000 per month. If the house cost $100,000 you re getting a return on investment of 12%. This sounds great, but it s not the whole picture. In real life, if you buy a rental property, where will most of your rental income go? It will go not only to the bank in the form of a mortgage payment, but it also goes into the maintenance of the property. Every time

12 PAGE 12 a toilet leaks or something gets broken, part of your rent is eaten up. Yes you are building equity, but at a very slow rate. In the meantime you are dealing with tenants. It seems banks have it pretty good, they just collect interest payments and don t have to deal with property management issues. Even if a property goes into foreclosure, banks have attorneys to take care of the recovery of their capital. They make money while the borrower does the work. How would you like to be the bank? This is what private mortgage investing is all about. You get the monthly mortgage payments, and the real estate investor deals with everything else. Let s look at a simplified loan transaction: 1. A potential buyer finds a piece of property 2. The buyer heads to the local bank to take out a loan. If he or she qualifies, the loan is approved. 3. After approval, the ownership of that property is transferred to him/ her. 4. The previous owner gets paid from money out of the loan. 5. The new homeowner begins making mortgage payments to the bank In a private mortgage transaction, the property is bought, not with money from a bank, but with money from an individual private lender - you. You become the bank, and make money from the transaction. The mortgage note you hold is fully secured by the real estate. At the end of the mortgage term, you receive the full amount of your initial loan. In the case of default, if the borrower can t pay, you can take possession of the property, sell it, and recoup your principal.

13 PAGE 13 HOW IS THE MORTGAGE SECURED? As with bank mortgages, all documentation, security registration and disbursement of funds are prepared and handled by an independent lawyer. You have a direct contract and legal agreement with the borrower on the specific property you choose to invest in. You get the same documentation that a bank would require for securing their mortgage. Promissory Note / Loan agreement This is the document where the borrower promises to pay the mortgage based on specified conditions such as interest rate, payment dates, payment amount etc. Mortgage 1st or 2nd lien This is the amount of the mortgage and in what position the mortgage will be registered against the property in the land registry/title office. The mortgage is registered in the lenders name and is a direct charge against the property and collateral for the loan. The borrower cannot sell the property without first paying off the mortgages registered against the property. For new construction / development projects the mortgage is registered against the land and in case of default, charges against the land have priority over all unsecured debts, monies owed by the corporation and even construction liens. Canadian law dictates that mortgages secured against the land get paid out first before debts to the corporation or any shareholder group.

14 PAGE 14 RISK FACTORS Any type of investing has risk including investing in mortgages. Mortgage investments are not guaranteed by the government. Understanding risk is an important part of making an informed investment decision, it is therefore important to recognize the risks of an investment and try to minimize them as much as possible. The risks vary depending on the type of property or project. The risks will be different for an existing cash flowing commercial property than for a land development/new construction project. The risks outlined below relate to land development and new construction. Failure of the developer or development. A default would occur if the developer cannot pay back the funds by the maturity date of the mortgage contract. The lender would, in advance, work with the developer to find a solution that could include: A payment to investors in exchange for an extension of the mortgage term A refinance to pay out the current mortgage holders. If these cannot be achieved, then the process would commence to sell the property to recover the lenders monies. This is a significant advantage to being secured via a syndicate mortgage. Recovery of your investment will take priority over all unsecured debts, monies owed by the corporation and construction liens. Sales Risk - Failure to achieve required pre-sales Everyone has seen or heard horror stories where construction projects have either stalled or sat unfinished for years at tremendous cost to investors. This is often a result of a failure to achieve zoning approvals or not achieving the required pre-sales of units if it were a condo project.

15 PAGE 15 The sales risk is the length of time from when the mortgage funds are advanced to the developer and the developer achieving the required presales necessary for construction financing to take place. On average the developer must sell 60% to 70% of the units in a condo project before a bank will approve the construction mortgage. If it were an office building or shopping center, then a certain amount of space would have to be preleased. Consideration should be given to projects with strong sales objectives to protect the lender from protracted delays. Zoning risks This is a major risk to any development project. If the project is unable to get the required zoning it cannot proceed and can be stalled for years. Private lenders should be careful to lend on projects that don t look to alter or change the zoning plan for the area. Rather, look for projects that work with the current zoning to ensure that the envisioned development will be viable. By working with the current planning, the risk of potential development delays that can stall a project is reduced. HOW IS THE RISK MINIMIZED With every mortgage, lenders try to minimize the risks as much as they can in the event of default by the borrower. Lenders utilize various methods and tools to accomplish this. Loan to Value Ratio (LTV) This formula is one of the most important means to determine the value of your collateral and security. LTV is a calculation that shows the total of all debt against a property as a percentage of its market value. This is a simple calculation of the loan amount versus the property value. Loan amount / Property value

16 PAGE 16 When buying a home, the borrower might provide a down payment of 25% and then borrow the rest of the money (75%) from a bank. This is a 75% LTV mortgage where the debt is 75% of the total value of the property. In a syndicate mortgage, you would employ similar LTV ratios of about 75% to 80%. In the event of a sale of the property, the construction mortgage and the syndicate mortgage gets paid before the remaining equity in the property is paid to the developer. Appraisal Appraisals should be provided by AACI (Accredited Appraiser Canadian Institute) designated members. These professionals are tasked with providing hard reliable valuations of property values to banks, especially when land is being purchased. This baseline for value provides a key element of assessing the current value of a project. Insurance and Performance Bonds Performance bonds are a type of insurance taken out on construction projects that protects the development and lenders from a variety of risks. Together with labour and material bonds and a builder s risk policy they form a complete risk management solution. This does come at a cost to the project and is a necessary expense for any project so that the lenders are protected. The savings and/or increased profit of not having these

17 PAGE 17 protections in place is not worth the risk. Interest Reserve Depending on the type of project, borrowers are sometimes required to set aside funds in a lawyers trust account (escrow) to cover the interest payments to the lender for the duration of the mortgage. This is common in land development and construction projects because there is no cash flow from rents until the project is completed and occupied. This is also sometimes called capitalizing the interest. Pre-Sales Before a project can get the final approval of their construction financing, banks require that the developer pre-sell up to 70% of the units in the project/building. This is to ensure that the developer will have enough capital to pay off the construction mortgage on completion of the project. In land development and new construction projects, the greatest risk is from the time mortgage funds are advanced to the borrower and when construction starts. Once construction starts then the risk is reduced considerably because it means the project would have met all of it s financing requirements such as zoning, site plan approval, environmental, pre-sales etc. Insurance and performance bonds would ensure that the project would be completed in the event of developer/builder default.

18 PAGE 18 FIRST MORTGAGE vs. SECOND MORTGAGE A first mortgage is one that is registered in first position against the property. This mortgage has to be paid first in the event of a sale or default. A second mortgage is a mortgage in second position, meaning that the mortgagee is next in line on the property after the first mortgage holder and is paid out second in case of default. The mortgages are secured by registering them on the title, thus the owner cannot sell the property without paying back the mortgage. Which mortgage is safer? A lot of people get hung up on not wanting to invest in second or even third mortgages because of the perceived risk. A second mortgage is more risky than a first mortgage and a third mortgage is riskier than a first and a second mortgage. However this is not always the case as the example below will illustrate. Consider two properties with mortgages registered against them. The first property has two mortgages, a first mortgage at 5% and a second mortgage at 9%, but with an LTV of 50%. The second property has a first mortgage with an interest rate of 5% and a combined LTV of 80%. Which one of the mortgages is riskier as an investment? If you answered the mortgage on the second property then you are right. Investing in the first mortgage on the second property would be considered riskier because the LTV is 80%. This is assuming that all other risk factors being equal. Lenders should not focus on what position the mortgage is in, but they should focus on the total LTV. If you lend money for mortgages, focus on two things to reduce your risk: Earning as high an interest rate as reasonably possible and minimizing the loan to value ratio in order to protect your investment.

19 PAGE 19 DUE DILIGENCE The single most important aspect in real estate investing is due diligence. Due diligence is the focused attention given to research and study about a specific project being considered for investment or sale. In the syndication process there are two sets of due diligence that are performed: due diligence by the investor/lender and due diligence by the syndicator. The quality and attractiveness of the offering material and presentation is not necessarily reflective of the quality of the project itself. The greatest failures often have the most beautiful brochures and professional presentations. An overly elaborate brochure and or seminar presentation is often an attempt to make up for deficiencies in the project itself. Be suspicious of any project which appears to be too good to be true since it often is. The offering materials should be easily understood, with a clear comprehensive summary covering the key factors that an investor should know. If projections are included, the assumptions should be spelled out and must be evaluated carefully by someone qualified to do so. Some of the questions that an investor should ask are: Track Record Is there a verifiable record of accomplishment for the builder/ developer? The Project Is it a mortgage pool or a specific project? What type of project is it? What is the market like for this type of project? Is it in an upward trend or downward trend?

20 PAGE 20 How is the investment secured? What documentation is available for review? What happens in the case of default by the borrower? Are there any fees and expenses? What is the loan to value ratio of the project? When does the debt mature? What is the interest rate or rate of return to be paid? Is there any profit participation? How is the mortgage going to be repaid? Is it from the sale of the property or is it going to be re-financed? What is the experience of the Syndicator/Promoter? Are they operationally experienced (hands on real estate professional) or financially experienced (investment banker) or both? Is this the Syndicator s full time business? Has the Syndicator done this type of project before? What due diligence has been performed by the Syndicator? In addition to the above questions that an investor should ask, the Syndicator has a responsibility to perform due diligence to ensure that the investment is sound, has a high probability of success and that the investors money will be protected.

21 PAGE 21 DUE DILIGENCE BY THE SYNDICATOR Experienced Syndicators usually have a step-by-step process that they go through with every project to ensure that the project meets their criteria and makes sense for investment. Every Syndicator will have a different method of evaluating a project to determine investment suitability. The following steps are on way of evaluating a development project. Step 1: Mortgage Underwriting and Risk Adjudication Determine with the developer how much money is needed and the use of funds Assess developer equity being invested with any lands being vended in Valuation by a 3rd party AACI appraiser Calculation of LTV ratios for acceptable thresholds Review and check zoning, permits, fees, building costs When a lender extends money for a mortgage, the lender puts itself at risk, as the borrower may possibly default on the loan. Mortgage underwriting is

22 PAGE 22 the process for minimizing this risk as much as possible. The most important person in the mortgage approval process is the underwriter. No lender funds or closes on a loan without the approval of an underwriter. It is the job of underwriters to make sure the mortgage meets the particular loan guidelines set by the lender. The lender's underwriting process may include a financial review of the property and the property owner (or "sponsor"), as well as commissioning and review of various third-party reports, such as an appraisal, feasibility study, environmental report etc. The underwriter has final approval and final responsibility for the loan. Step 2: Viability, Absorption and Sales Research Research the strength of the local neighbourhood and extended market Once the underwriters decide that the numbers work on paper, it s time to see if they work in real life. Major research firms are engaged to provide detailed analytics on real estate trends, pricing, sales projections, viability and absorption analysis. It is important that the project sells well in a timely manner and at the right price! Step 3: Monitoring, Estimates and Cost Verification The next step is to look at the developer s pro-forma and budgets to make sure that all the development and construction costs are accurate. The syndicator will usually hire third party Cost Consultants and Engineers to review and assess the numbers and report on their findings. These are the same consultants banks use to monitor and distribute out money on $100 million construction loans.

23 PAGE 23 Step 4: Legal Structures and Compliance Drafting and review of contracts by lawyers Ensure compliance with securities laws Once the project passes the first three steps it is approved for funding. The last step is to have the lawyers prepare the necessary contracts and agreements. This includes all the forms, documents and offering memorandums required by provincial securities and financial services commissions as well as the contracts needed to secure your capital and allow it to move as one mortgage as the project grows and progresses. Expert legal advice is key in structuring solid agreements for your protection. MORTGAGE INVESTING USING REGISTERED ACCOUNTS RRSP, LIRA, TFSA, RESP The Canadian Revenue Agency (CRA) allows a wide range of investments to be held within registered accounts. Most people are familiar with holding GIC s, stocks or mutual funds, but few realize that investments may also include: Bonds and Debentures Term deposits and Guaranteed Income Certificates (GICs) Equity linked notes Rights and warrants Covered calls, long calls and puts, and LEAPS Gold and silver certificates And mortgages secured by real property

24 PAGE 24 See: Income Tax Interpretation Bulletin No: IT-320R3 found on Canadian law allows all of your registered accounts such as: Registered Retirement Saving Plans (RRSP) Tax Free Saving Accounts (TFSA) Registered Education Saving Plans (RESP) Locked In Retirement Account (LIRA) Registered Retirement Income Fund (RRIF) Locked In Fund (LIF) to hold a mortgage or an interest therein, on any commercial or residential property that you, or a close relative, do not own. You can hold real estate mortgages as an investment inside your Self- Directed R.R.S.P. account. Your RRSP is able to give out mortgages on real property, and get a return paid to it in the form of interest payments. Mortgages must be placed on Real Property that is, residential or commercial property located in Canada registered at a Land Titles Office. There is no requirement that the mortgage be a first mortgage. Some property types such as mobile homes, boats, leasehold land, co-ops (typically called Chattel Mortgages) are NOT eligible to be a qualifying investment under the Income Tax Act. You are free to use money from your RRSP to lend as a mortgage loan as long as you are receiving regular payments back into the RRSP account.

25 PAGE 25 With a self-directed RRSP, the RRSP becomes the mortgage holder. Each monthly payment is a fixed income payment that goes directly back to your RRSP account tax-free. This creates a regular source of funds for you to re-invest, without taking your savings out of the RRSP. A trustee approved under the National Housing Act must administer an RRSP mortgage, some trustees include: Olympia Trust Toronto Dominion Bank B2B Bank Canadian West Trust Scotia Trust FREQUENTLY ASKED QUESTIONS Does this just work with RRSP money, or can I use cash to invest in Mortgages? Yes, you can use cash in addition to registered accounts to invest in mortgages. Must the entire mortgage fund be provided by one plan? No, mortgages can be funded wholly or in part from the lender s RRSP. Thus, if your RRSP was not large enough to fund the entire mortgage, the mortgage could be split between you and other RRSP funds holders.

26 PAGE 26 Does only residential real estate apply? No, you can lend on single-family homes, multi-family properties and commercial real estate. What happens if the borrower is in default? If the borrower is unable to make his or her monthly mortgage payments, the financial institution administering the mortgage will place the mortgage in default. It will then attempt to collect the proceeds upon a power of sale of the property. Can the borrower deduct the interest paid? If the proceeds from the mortgage are being used on an investment property, the cost to set up the mortgage as well as the mortgage interest may be considered tax-deductible expenses. CRA requires a clear audit trail of the investment and the mortgage. Why Not Just Invest In The Project Corporation Itself? Syndicate mortgages give the lender direct collateral. Owning shares in the development corporation can offer a larger return and more profit, but also presents much greater risks such as cash calls, equity dilution, total loss, etc. Think about how banks lend money and earn profits. You own a $500,000 home. You require a loan. The bank says: put up a $100,000 of your own money, and we will loan you $400,000 secured by a first mortgage charge against your home. If you default on the mortgage, the bank will seize your home. A mortgage loan is an example of a collateralized loan. Syndicate mortgage investments, which are collateralized loans, are designed to pay steady cash flow and profit participation upon completion.

27 PAGE 27 Why Do Developers Need/Use Syndicate Mortgages? Developers frequently require an equity partner or mezzanine lender. A Syndicate Mortgage provides them the additional capital they need outside of the funds the bank provides to buy the land and finance the construction. Why Are Appraisals And Valuation So Important? Appraisals are critical as they help assess the "Loan To Value" (LTV) ratio of a deal. This is one of the formulas that illustrate the degree of risk associated with your investment. Since you're secured against the land/ property, the value of that asset is key in the event of any problem with the project, the asset can be sold to help recover your principal investment. When appraisals aren't available (e.g. lack of direct comparables) third party research companies are engaged to provide detailed analytics to assess the value of a property or parcel. How Do I Make Money? On most projects, you'll make money through 2 different means. The first way is through regular interest payments paid on your money while the project is progressing. The second way depending on how the mortgage is structured, is through "profit participation" upon completion of the project. What are the fees? If you invest with cash there are no fees because the borrower pays all fees (the lender s legal fees as well as their own plus mortgage broker fees). If you invest using registered accounts then you will have to pay an annual trustee fee and a mortgage administration fee. You should check with the bank or trust company that will be holding your self-directed account.

28 PAGE 28 INVESTING STRATEGY 1 USING RRSP S AND TFSA S TO ACHIEVE A 50% RATE OF RETURN IN 3 YEARS In my previous career as a financial advisor and developer of financial planning software, I spent over 15 years devising financial plans and advising clients on how to maximize the return on their investment while trying to minimize their taxes and any risks. The following simple strategy will demonstrate how an investor could achieve a return of 50% in 3 years without taking on any additional risk. To implement this strategy we are going to use a Tax Free Savings Account (TFSA), an RRSP account and a Syndicate Mortgage. To begin the investor would invest $25,000 into a Syndicate Mortgage project using a TFSA. Everyone is currently allowed to contribute up to $25,500 into their TFSA if they have not yet done so. The Syndicate Mortgage in this example pays an 8% fixed return over the term of 3 years, which works out to a total return 24%. In addition, at the end of the term if the project were to meet a projected profit target then an additional 12% deferred lender fee would be paid to the investor. This would bring the total return over 3 years to 36%. (24% + 12%) At an 8% return the Syndicate Mortgage would pay $2,000 per year in interest into the TFSA. This income is tax free to the investor and therefore each year, the investor would withdraw the $2,000 and invest it into an RRSP account (assuming that RRSP contribution room was available). If the investor was in a 40% tax bracket, he would save $800 per year in taxes or $2,400 for the 3 year term of the investment. Finally, at the end of the mortgage term, if the Developer achieves the profit target for the project and the additional 12% bonus interest is paid the investor would receive an additional $3,000. To maximize the investment return the investor would also withdraw these funds from the TFSA and

29 PAGE 29 invest it into the RRSP account. This would then produce a tax saving of $1,200. So let s add it all up. Interest income $ 6,000 Deferred lender fee $ 3,000 Tax savings $ 3,600 Total $12,600 This translates into a 50% return on your investment (12,600 / 25,000) Since investors in a Syndicate mortgage are registered on title and the mortgage is secured against the property an investor would not have taken any additional risk to increase their returns from 24% to 50%. In addition, when the capital is invested into the RRSP account the investor can then reinvest the capital into another investment which would boost the overall returns even higher.

30 PAGE 30 INVESTING STRATEGY 2 COMPOUND YOUR RETURNS TAX FREE Money invested in a 5yr GIC will earn about 3% ($300 per year for every $10,000) A private mortgage yields between 8.0% and 12% ($800 to $1,200 per year for every $10,000) That is over 166% better than a bank deposit (8 3)/3 HOW LONG DOES IT TAKE TO DOUBLE YOUR MONEY - RULE OF 72 For illustration purposes, we will use the Rule of 72 to calculate investment returns. However, the Rule of 72 concept is based on perfect compounding: Calculation: 72 divided by the current interest rate estimates investment s doubling time Using the 3% return that an investor would get from investing in a GIC bank deposit, how long would it take for a $150,000 GIC investment to double to $300,000? 72 divided by 3 = 24 years. By using your RRSP and investing $150,000 in a Private Mortgage earning 8% annually, you can grow your assets in the same time period to $838,426 which is an increase of $538,426 or 180% more than the GIC investment. The table below illustrates how these numbers are achieved in 3-year intervals, the result is as follows:

31 PAGE 31 Years Amount Invested Investment Value with Interest of 8% 3 $ 150,000 $ 186,000 6 $ 186,000 $ 230,640 9 $ 230,640 $ 285, $ 285,994 $ 354, $ 354,632 $ 439, $ 439,744 $ 545, $ 545,282 $ 676, $ 676,150 $ 838, $ 838,426 $ 1,039,648

32 PAGE 32 INVESTING STRATEGY 3 USE THE EQUITY IN YOUR HOME TO GROW YOUR WEALTH Question? If you had a mortgage on your home or no mortgage at all, would your house still increase in value? YES, of course!. If you that have equity in your home, you could use a variable rate mortgage or a line of credit secured against your home to invest in mortgages. At a prime rate of 3% you could borrow $150,000 which would cost you $375 a month in interest payments. If you invest that into a Private Mortgage at 8% interest, you will be netting after paying your mortgage $625 a month or $7,500 per year. You could then take that money and invest it into an RRSP assuming that you had the contribution room. With this strategy you have to take into consideration the tax implications. The mortgage interest payments will be tax deductible but the income from the mortgage investment will be fully taxable. Therefore, if you were to invest the net income of $7,500 into an RRSP then it would be like receiving the income tax free because the tax savings from the RRSP contribution will offset the tax payable on the income from the mortgage investment. Let us illustrate assuming that you were in a 40% tax bracket: Total mortgage loan payments $4,500 $375 per month x 12 months Tax 40% $1,800 Net loan cost $2,700

33 PAGE 33 Mortgage Interest Income $7,500 Tax $3,000 Net Income $4,500 RRSP contribution $7,500 Tax 40% $3,000 The table below illustrates how these numbers are achieved. Using your RRSP funds invest $7,500 each year earning an interest rate of 8% per year, the result is as follows:

34 PAGE 34 Years Amount Invested Investment Value plus Interest 1 $ 7,500 $ 8,100 2 $ 15,600 $ 16,848 3 $ 24,348 $ 26,296 4 $ 33,796 $ 36,500 5 $ 44,000 $ 47,519 6 $ 55,019 $ 59,421 7 $ 66,921 $ 72,275 8 $ 79,775 $ 86,157 9 $ 93,657 $ 101, $ 108,649 $ 117, $ 124,841 $ 134, $ 142,328 $ 153, $ 161,215 $ 174, $ 181,612 $ 196, $ 203,641 $ 219, $ 227,432 $ 245, $ 253,127 $ 273, $ 280,877 $ 303, $ 310,847 $ 335, $ 343,215 $ 370, $ 378,172 $ 408, $ 415,926 $ 449, $ 456,700 $ 493, $ 500,736 $ 540, $ 548,295 $ 592, $ 599,658 $ 647, $ 655,131 $ 707,541

35 PAGE 35 By using a line of credit or variable rate mortgage secured by your home and investing in a Private Mortgage you can grow your assets in the same time period of 24 years to $540,795 which is an increase of $240,795 or 80% more than a GIC. Keep in mind that you could also earn returns of 12% or higher depending on the mortgage you choose to invest in. This would make the results even much better than we have illustrated.

36 PAGE 36 NOTES:

37 PAGE 37 FINANCING FOR COMMERCIAL, CONSTRUCTION & INCOME PROPERTIES IN CANADA, USA, CARIBBEAN We arrange 1st & 2nd mortgages for: Land Acquisition New Construction Refinancing Mezzanine/Bridge Financing Apartment Buildings Office Buildings Medical Buildings Shopping Plazas Condominiums Hotels and Resorts Syndicate Mortgage Investments The funds you need on the terms you want CALL BRUCE RAMSEY AT or

38 PAGE 38 About Bruce Ramsey Bruce Ramsey has been involved in the financial services industry since He first started out as an Investment Advisor doing financial planning and selling securities such as mutual funds, stocks and bonds. He has also been involved in raising capital for real estate limited partnerships and joint ventures for projects in Canada and the USA. In 2006 Bruce became a licensed mortgage agent and has been involved in arranging mortgage financing for commercial properties and raising capital for private mortgage syndicates. Bruce is also a real estate investor investing in and managing rental properties in the U.S. and hotel properties in the Caribbean. For more info visit: