The other side of the syndicated mortgage story

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Following a deluge of criticism in the mainstream media, one industry professional who specializes in syndicated mortgages tackles – what he argues to be – misleading information.

They may be the most polarizing product in the mortgage industry, and Glenn May-Anderson, broker of record for FDS Brokers Services, argues there have been inaccuracies in some of the reports about syndicated mortgages.

The Toronto Star recently took syndicated mortgage provider Fortress Real Developments to task after one of its projects, the Mady Collier Centre in Barrie, filed bankruptcy and protection from creditors. May-Anderson argues the article left out some key facts.  

“There is … no discussion (in the article) of the 13 successful exits so far, returning a minimum 8% annual simple interest and full principal to investors,” May-Anderson told “There is also no discussion of the additional eight exits planned for this year.”

The Star piece, entitled “The high-risk world of syndicated mortgages,” features David Franklin, a real estate lawyers currently representing an investor who put $80,000 into the Mady Collier project. Franklin argues his client would not have invested had the risks been disclosed up-front.

However, May-Anderson says the risks are always disclosed to potential investors.

“All risks are disclosed multiple times prior to a client lending their money to a developer.  More importantly, we take care to ensure potential clients understand the risks associated with this type of lending before they proceed,” he said.

May-Anderson also took issue with the article’s subtitle – and general undertone – that Syndicated mortgages “are now being pitched to ordinary consumers with promises of low risk and high returns.”

“We do not market these investments as low-risk.  We do not market them to ‘ordinary people,’” he said. “Our customers typically have over $100,000 in investable assets, and our minimum investment is $30,000.”

In the case of the Mady Collier Centre -- which the Star article says investors’ claims against the property were “wiped” -- May-Anderson says the project was purchased by Fortress Collier Inc., a single-purpose entity created to take over the project, and investors were issued  new mortgage charges worth the same as their original investments.

“The project construction is currently being completed by EllisDon, and there is a plan in place to exit all syndicate investors in the next 18-24 months,” he said.
  • Mortgage Guy Geoff on 2016-05-05 10:02:40 AM

    The old adage "don't let the facts get in the way of a good story" seems to apply here.

    Of course its incumbent on us as professionals to properly inform potential investors. However where is the personal responsibility, and the common sense to realize that if it sounds too good to be true...

    No one is going to look after MY money better then ME. I would think investors might want to remember this when trying to blame others for their own lack of due diligence.

  • Jeff Young on 2016-05-05 10:18:03 AM

    Syndicated Mortgage Investments are one of the toughest things to sell. Everything is disclosed and must be so that the investor is educated and empowered to make the right decision to either stop the process or to continue to complete it. Risk factors are reviewed 2 - 3 times in the 2 - 3 week process. Even a $30,000 minimum investment requires 3 - 4 hours, if not more to bring to the point of the Indépendant Legal Advice interview. It is every step we are creating negative hurdles that the investor needs to understand and then jump over. I would dare say that once through the process, an Syndicated Mortgage Investment client who invested via FDS Broker Services into an Fortress Real Developments Inc. related project is better informed about Syndicated Mortgage Investments than most financial advisors. My clients have made 8% fixed return, and that includes me, for the last 5 years. That is Fantastique!

  • David Franklin on 2016-05-05 11:34:37 AM

    Glenn said “All risks are disclosed multiple times prior to a client lending their money to a developer.” And also “We do not market these investments as low-risk.”
    My client completed a suitability form and the box for medium risk was checked being 2 on a scale of 1-4 with 4 being high risk and the box stating “I would rather accept a lower rate of return to reduce my risk” was checked. Based on this form my client should have been advised not to invest as the Fortress mortgage product is high risk and the Ministry of Finance in 2004 stated that syndicated commercial mortgages were riskier than house mortgages.
    My client was not told that the Barrie property was purchased for $4 million with $500,000 down and a postponeable $3.5 million mortgage was taken back by the City of Barrie. The closing was in July 2012 and the investor mortgage for $16,923,077, 4.23 times more than the purchase price, was registered one month later in August 2012. My client was not advised of the purchase price and was not provided with the agreement of purchase and sale as is required in the FSCO Form 1. An appraisal was not provided, however there was an opinion of value which stated that it was not an appraisal. It was represented that the mortgage was RRSP eligible but there was no written opinion provided confirming this and CRA only allows mortgages up to 100% of fair market value as being eligible. The mortgage being 423% of the purchase price would not appear to be RRSP eligible and if it was not then there is a tax penalty of 50% of the amount invested.
    My client was not told that the interest payments to be paid were coming from the capital being invested and that the amount of money going into the project was about 45% of the amount of the mortgage.
    My client was not told that Fortress Real Development Inc. was the lender to Mady, as set out in their loan agreement dated July 17, 2012, and was receiving a 50% profit share, would only be advancing into the project $11 million from the funds raised and that $5,000 would be paid to a charity.
    My client was provided with the free independent advice by a lawyer from Sorrenti Law over the telephone. According to the Law Society of Upper Canada this was not independent legal advice.
    If my client had been advised of this information, no investment would have been made.

  • Ron Butler on 2016-05-05 12:20:11 PM

    Geoff, I can tell you with absolute certainty that FSCO does not agree that "personal responsibility and common sense" move part of our responsibilities over to the client. Our "duty" is to make sure the mortgage is suitable for the client: full stop.

    Jeff, I accept what you say but I can also tell you I had a long conversation with a 5 year mortgage agent who made an FDS / Fortress investment themselves.

    That person had no clear idea what position the mortgage may end up in. They had zero concept that they were funding soft costs ONLY, they thought their money paid construction workers and bought concrete. They had ZERO concept what the cost of borrowing was for the mortgagor. They thought they borrower was paying around 10% interest. Well if the investor is getting 8% to 12% and the referring mortgage broker is getting 3% to 8% and FDS is getting paid and Fortress is getting paid then what exactly real interest rate is the mortgagor paying?

    Look, i am very happy that many of the projects have "exited" and the principal was returned to the investor, however, as any mutual fund sales person will tell you: past performance is not indicative of future results.

    Most importantly the last 7 years have been the best possible environment to to invest in Canadian real estate, if the next few years do not follow that pattern many investors may feel they wished they had
    understood the syndicated mortgage offering in much better detail.

  • David Franklin on 2016-05-05 12:20:40 PM

    Glenn said “…and the investors were issued new mortgage charges worth the same as their original investment.”
    What Glenn did not say, based on the documentation sent to the investors, was that Fortress could mortgage the property to $99,325,000 and that the new gratuitous mortgage, which was non-recourse to the new Fortress company that owned the property, would be paid after these debts were paid first. Also he did not set out that Fortress valued the property when it was acquired in July 2012 when completed, condos sold and rented at $76,358,782. What are the chances that the property will increase in value to nearly $116 million so the investors can be repaid? By the way, Barriston Law and Sobeys advised that they were no longer leasing and their space is about 49,000 square feet.

  • Leslie Fallaise on 2016-05-05 12:47:44 PM

    It amazes me anyone selling syndicate mortgages insults syndicate mortgage investments and those who offer them! It would be like me, an Ontario mortgage broker, insulting and tearing down a fellow mortgage broker. The result would be, in my view, insulting our broker community as a whole thus making it a challenge to build my own business. Seriously? How about those of us who find the value in investing in syndicate mortgages work as a whole to raise the bar when it comes to investment disclosures, compliance and caring for our investors first. Together we can challenge the other forms of investment options to do the same. Wouldn't this be a positive result for all investors? I applaud Fortress and FDS for the quality of product they turn out, while at the same time ensuring the tools exist to provide our investors with all they need to make an informed decision.

  • David Franklin on 2016-05-05 3:56:10 PM

    The following is the link to FSCO’s FAQ’s on Disclosure of Suitability and Risks to Borrowers, Lenders and Investors.
    Read number 9 on written disclosure of material risks, 20 and 21 on suitability as an investment and 25 on simple referral. Did the brokers ensure that these matters were dealt with appropriately? For example if the investor had not invested in mortgages before did they tell the investor that private residential mortgages up to 80% of appraised value pay about 8% for a one year term and then compare that mortgage and its risks to syndicated development mortgages, which most professionals believe to be the riskiest of all mortgages? When it comes to the simple referral fee, were some referral parties receiving large fees?
    In The Toronto Star article it states: “The Financial Services Commission, which regulates the mortgage brokerage industry, says it has tightened up the rules around syndicated mortgage lending and cracked down on the worst offenders.” They closed down Metrozen in January 2016, but the OSC had to close down Titan Capital in November 2015 even though they were also selling syndicated development mortgages. They know from the court documents on the Mady Collier Centre in Barrie: 1) that 35% was taken for fees and bonuses, that investors were being repaid their capital with it being called interest and only about 45% of the funding went into the project; 2) that Fortress Real Developments Inc. was the lender and that only $11 million of the $16,923,077 was going into the project and that the $5,923,077 was under Fortress’s control pursuant to the agreement and that Fortress was to receive 50% of profits from the project; 3) that the investors were not provided with simple to read and understand disclosure of the fees for all parties nor that Fortress was receiving a 50% share of profits; 4) that the investors were provided with free independent legal advice contrary to the Rules of Professional Conduct of the Law Society of Upper Canada; 5) that this was not a suitable investment for those investors with a low risk tolerance and that the Ministry of Finance stated in 2004 that syndicated commercial mortgages were riskier than house mortgages. Despite having all this knowledge and more, they have not acted against Fortress. Is FSCO, by not acting against Fortress, telling their licensed mortgage brokers and that public that FSCO accepts these practices?
    The website for the court documents on the Barrie project is

  • Versico on 2016-05-05 7:40:33 PM

    Mr. Butler is correct when it comes to the multitude of fees paid out, however there are also fees paid from funds invested by the clients to the solicitor for the non-arms length independent legal advise. In addition, it's arguable that investor funds were used to pay fees to the Alberta trust company
    One other item which seems to be overlooked is the Grant Thornton report to the court identified FRDI as a co-developer in the Collier project. This should have raised the question as to how an FRDI affiliate is able to purchase the assets out of bankruptcy.

  • Joe on 2016-05-06 10:12:32 AM

  • David Franklin on 2016-05-10 10:43:25 AM

    FSCO in its 2014 report on mortgages stated:
    “FSCO views syndicated mortgages as a high-risk investment that is not suitable for all investors. The 23 mortgage brokerages that reported more than 90 per cent of syndicated mortgages as part of their overall mortgage portfolio are considered potentially high-risk entities.”
    Based on FSCO’s statement, only those investors whose suitability for investment was high-risk should have been allowed to invest in the Fortress project mortgages. Do the brokers who had investors who were not high-risk have any liability to their investors?

  • Michele Hall on 2016-05-11 2:16:47 PM

    As a broker I was approached by my private investor for an opinion. They were asked to participate in a syndicated mortgage investment for construction purposes. I can tell you even though the person selling the investment went over the risks they did not understand them, also the individual selling did not take the time to know the investor. The investment would have taken a good portion of their life savings . I advised them not to move forward as the return and risk was not suitable at their life stage. The person selling the project could not have cared less about weather this was suitable for the clients ages and life stage . Thank goodness I did the home work for them. So I agree not suitable for most investors and people do your home work.

  • Keith Prosser on 2016-06-06 10:01:37 AM

    As an Alberta mortgage syndicator and Exempt Market Dealer I believe that the solution is simple - conclude that the sale of a proportional interest in a mortgage is the sale of a security - period. A syndicate is concluded to be one in which there is more than one participant. This is working very well in Alberta, and there is no reason to think that it wouldn't work in Ontario.

    This security should be sold by Dealers to Accredited Investors [the only responsible exemption for investments of this kind].

    The quality of the investment and its underlying security are completely irrelevant and should be disconnected from the conversation.

    In Canada's largest market it seems irresponsible to take any other position.

    The moment of the sale is where the focus should be - ensuring that a licensed individual has completed a comprehensive KYC, and that a well documented suitability conversation has taken place.

    Bringing the sale of this security under the mandate of the OSC is the only step that will clean up this problem.

    I suspect that the lobbying power of the industry is the only thing that has stopped this from happening to date, together with the fact that Ontario has not recently experienced the tide going out - "High water floats all boats".

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