Are Syndicated Mortgage Investments Safe? By Perrii Muthuraman

Developers are real estate entrepreneurs with great ideas, energy and the contacts to visualize and achieve exciting projects. To translate these ideas into soaring buildings or sculpted neighborhoods, they perform extensive due diligence, acquire the lands, obtain development approvals and build the project. The whole process requires ‘soft cost’ and other capital. To raise all the money required, developers can offer the project property as security for investors and the banks. Banks will not finance the “soft costs” and always impose many conditions before financing.

Syndicated Mortgage is a mortgage funded by a group of private (small) investors, who participate in one mortgage at a time. Each investor is individually registered and secured proportionally; In an era of volatile stock markets and mutual funds, syndicated mortgage is an alternative to traditional fixed income options. However, in reality, syndicated mortgage has caused so much distress and anguish for many unsophisticated small investors, mainly due to the inability or ignorance to ask right questions, before investing.

Any investment carries risk, and syndicated mortgage is not an exception. You also have to remember that RETURNS ARE NOT GUARANTEED BUT SECURED BY THE PROJECT. Often the so-called security carries inflated value, and practically that makes the security inadequate and potential cause for a failure.

Generally speaking, you would like to consider the following aspects before choosing any investment that meets your goals.

  • Cash flow
  • Capital appreciation
  • Your risk tolerance (means comfort level with real losses, if and when happens)
  • Safety of principal or getting back the principal amount
  • Tax benefits
  • Liquidity or easy saleability
  • Inflation protection or guarding against losing the value of money
  • Leverage or using other people’s money to accumulate wealth
  • Suitability for RRSP, TFSA etc.

Applying the above criteria,

  • usually, an investor in a syndicated mortgage will receive a regular fixed interest payment for his or her investment in a project (say 8% per annum or 2% per quarter).
  • There may also be the potential for additional earnings through a profit sharing arrangement based on criteria presented to the investor at the time of his or her investment (say additional 4% per annum if the investor agrees to remain with the project, after the initially agreed period).
  • Thus the extended period may be another two years or more after the initial period of 2 to 4 years. In any case, Investor has to stay in the investment for the minimum committed period.
  • No special tax benefits are available.
  • Real estate investment is considered as a protection against inflation. This is a form of real estate investment that provides direct charge/ security against the land. Remember real estate also has cycles, similar to business cycles.
  • Minimum investment (say $25,000) is specified to an investor for participating in the syndication. However, there is no ceiling or maximum amount that one can contribute. When the loan matures and is paid out, the funds are returned to the investor.
  • The rate of return is higher when compared to most bonds with similar terms.
  • Suitable for RRSP, TFSA etc

The underwriting process offers more options than traditional banking institutions. This flexibility allows Mortgage Syndication to fund a variety of large-scale projects such as downtown condos, malls, and multi-story complexes. With an ever-increasing population, there is high demand for this type of financing in Canada.

A successful track record of the developer and quality appraisals are critical. “Loan to value” ratio on the current status (and not projected one) of a deal ensures the safety margin available for investors. Since investment is secured against the land/property, the valuation of that asset is key. In the event of any problem with the project, the asset must be capable of being sold to help recover the principal investment. Appraisals must have been provided by qualified professionals such as AACI designated members and similar other professionals.

As already mentioned, syndicated mortgage investment certainly carries risks. Some of them are

  • Failure of the developer or development.
  • Real Estate Cycles & Bubbles.
  • Cost overruns and delays.
  • Zoning risks
  • Low pre-sales &
  • Inadequate financing.
  • Fraud

Often, small investors are not capable of taking (or ensuring) the following essential risk protection steps. Relying on a dishonest promoter and/or greedy sales people is a sure way to losing the investment. Appropriate steps, to be ensured, are:

  • Proper critical appraisals and engaging third party research companies to provide detailed analytics to assess the value of a property or parcel.
  • Ensuring proper equity margin of the developer in the project. Loan to Value ratio is one of the criteria in this regard.
  • Ensuring proper zoning before committing to the project. (Zoning approval delays have been the major cause of failure in many projects)
  • Promoter’s successful past track record & strong sales objective.
  • Insuring and bonding of all high-rise projects (This step will insulate investors from delays and budget stress).
  • Obtaining performance bonds (Performance bonds are a type of insurance taken out on high-rise construction that protects the development and investors from a variety of exposures. Together with labor 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 investors are protected).

Despite all these precautions, if the developer or development fails, the lender in advance, usually work with the developer to find a solution that could include:

  • a payment to investors in exchange for an extension
  • an institutional refinance to buy out the Syndicated Investors
  • If these cannot be achieved, then the process would commence selling the property to recover the investor monies. Recovery of the syndicated investment will take priority over all unsecured debts.
  • Finally, all markets are cyclical, and real estate is no exception. That is why many syndicate lenders focus on shorter development cycles of about three years to avoid getting caught in lengthy re-zoning delays that can hurt projects. The key is a sound strategy that can be repeated as a long term cash flow and growth model.

Readers are reminded once again that this is a general information post presented with much care and research. However, no warranty for accuracy or completeness of the information is given.

Actionable Ideas:

  1. Never invest if you don’t understand
  2. Never be guided by the blind trust.
  3. Know to ask all the right questions
  4. Understand the genuineness and implications of such answers
  5. Finally, if you are inclined to invest, google on the promoters and the sales people.

Are you looking for some guidance in building wealth? Alternatively, are you trying to figure out how to acquire debt freedom? You should check out the author’s book: “Building Wealth from Debt & Acquiring Debt Freedom”. If you would rather speak in person, you may contact Perrii at (416) 473-6100 or by email at


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