Private Matters Today - Winter 2016

Issue 03 • Winter 2016

e s n o p s e R ’ s r e d Len to DOF s e g n a h C HOW THESE CHANGES CAN BE LEVERAGED TO BOOST YOUR BUSINESS! ➲ p.12

PLUS Syndicated Mortgages Debunked with David Mandel ➲ p.08

The Technical Aspects of MICs ➲ p.16

➲ p.14

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CONTENTS

CONTENTS WINTER 2016 EDITION 6

EDITOR’S NOTE

Highlight on how the new Department of Finance changes have brought forth new opportunities to the mortgage industry.

12 COVER STORY Learn from the lenders what advantages have been created for brokers working with non-traditional lenders as a result of the new DOF changes.

14 RISK MANAGEMENT LMS ProLink’s Derrick Leue guides you through the top 3 ways insurance can help with the new mortgage rules in his quarterly feature “From Derrick’s Desk”.

16 LEGAL Part 2 of a series on Mortgage Investment Corporations. Get all the technical aspects from the expertise of Jeff Levy of Levy Zavet PC »»p.16

»»p.12

4 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

Lawyers.

»»p.14

FEATURES 8

SYNDICATED MORTGAGES DEBUNKED

David Mandel explains syndicated mortgages and how to mitigate risks when dealing with these types of investment opportunities.

19 FEATURE LENDER »»p.24

PMToday features Paramount Equity Fiancnial Corporation and highlights the benefits of their latest product offerings and services.

20 INFILL PROJECT FINANCING Paul Rayment guides you through seeing the opportunities versus the obsticles, and key takeaways.

24 BILL 55 PMToday caught up with Malcolm Eccles of CIR Mortgage Corporation to understand what effects this bill has on you as a broker.

26 AD INDEX »»p.08

Get a snapshot of who is advertising in this edition.

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 5

EDITORIAL

EDITOR’S NOTE A TIME FOR CHANGE

Approximately five months ago, I recall asking Derrick Leue, President of LMS Prolink Insurance (a regular contributor to PMT) if it might be feasible for him to court some large insurance companies into the world of insuring private mortgages as there may be a substantial need and applicability for such a product in the Canadian private mortgage market. Granted the idea may have been farfetched and rather impractical given the size of the Canadian private mortgage market. However, after Nov 30th, when it will no longer be possible for Canadian financial institutions to portfolio or bulk insure rental or refinanced mortgages through the MBS program, such an idea may have a lot of merit and applicability in the Canadian institutional mortgage market, particularly from the perspective of financial institutions that are non-deposit taking and thus have limited liquidity on their balance sheets to hold on to mortgage assets.

Department of Finance changes particularly the higher qualification rate will once again push a sizeable portion of the mortgage business over to the alternative lenders. Mortgage Investment Corporations as well as Private lenders in general will also benefit and will gain market share. Many monolines will look to secure private funding to competitively fund conventional business and will look to invest in Mortgage Investment Corporations to raise and gain access to capital.

In this issue, we have attempted to cover the implications which by and large should be positive for private lenders and investors from various angles. We have reached out to the key players in the private mortgage market to solicit their feedback and advice so that broker channel at large can better leverage this opportunity to do more private business which the traditional banks generally have no interest in.

We have continued to build on our promise to share the nuts and bolts of how to set up a Mortgage Investment Corporation in Part 2 of the series of articles we will be bringing to our readers. As always, our perspective is to provide timely information and how to articles so our readers can better leverage the information and tools shared to create and sustain competitive advantage. Happy reading.

- Harry Singh

WWW.PMTODAY.CA ISSUE 03 • WINTER 2016 EDITORIAL

CONTRIBUTORS

Editor Harry Singh

Ajay Kaith Bryan Jaskolka David Mandel Derrick Leue Jeff Levy Malcolm Eccles Paul Rayment Rosa Shirani

ART & PRODUCTION Production & Design Kayla Patullo

EDITORIAL & ADVERTISING INQUIRIES tel: 647 872 6807 info@pmtoday.ca Private Matters Today Inc. 3280 Bloor Street West, Suite 1140 Toronto, Ontario M8X 2X3 tel: +1 647 872 6807 www.pmtoday.ca

Private Matters Today Inc. is a B2B publishing company that produces a quarterly magazine dedicated to providing educational content surrounding private lending and investing, as it relates to mortgage brokers and agents operating in Ontario.

Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. Contributors are invited, but copies of work should be kept, as the magazine can accept no responsibility for loss.

6 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

FEATURES

SYNDICATED MORTGAGES DEBUNKED

Q&A WITH DAVID MANDEL

1

EXPLAIN THE KEY DIFFERENCES BETWEEN A PRIVATE RESIDENTIAL SYNDICATED MORTGAGE DONE BY BROKERAGES VS. A COMMERCIAL PROJECT FINANCING SYNDICATION? There is no real comparison here. A private residential syndicated mortgage is generally smaller in size, has a more easily quantifiable risk: Ie: LTV, Quality of Property (it is complete and can be inspected), the Borrower risk is also quantifiable including proof of income, does the income suit the job, credit worthiness/credit report.

The more easily quantifiable risk in a residential syndicated mortgage also reduces the risk to the mortgage agent and their brokerage as against the probability of E&O claims if they follow generally accepted and practiced underwriting, policies and procedures which would otherwise leave them vulnerable to a claim for negligence in the event of a loss.

Commercial project financing syndications the likes of what we have been reading about in the newspapers is substantially riskier than a syndicated mortgage on a residential property.

8 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

Generally, the project financing syndicated mortgage is an early stage funding. It represents risk capital that is being used to fund project soft costs such as architectural fees, development charges, commissions, and marketing materials. Although it is secured on the land for the project, it is generally considered as a mezz loan or mezzanine loan whereby it ranks just above the owner/developer’s equity in the project and is subject to postponement for required priority security. Priority security may be one or more mortgages including construction financing, bonding for city works, a charge securing an insurer allowing the builder to utilize deposits during construction. Often commercial project syndication security in mortgage form can end up ranked in 3rd position or greater and any cushion in LTV being diluted too near zero of possibly negative depending on the stage of development. Often this risk rewards astute investors with an equity kicker or profit participation in advance of the developer receiving any profit. However, risk is a double edged sword and the development and construction risks are huge. For example, the project may not get approved, the project could be approved but with changes to density such that the profitability model for the project is severely impeded or denied rendering the project a failure and a loss to investors. Typically, these loans also require investors to have

their investment remain during construction which adds a whole other level of complexity. During construction there is the risk of trade disputes or trade strikes causing delays, or changes in prices of major components such as steel or concrete, or there can be cost overruns due to weather or all of the above or the budget was incorrect. More importantly, how does a mortgage agent or broker adequately disclose these risks to a potential investor? Are mortgage brokers and agents sufficiently qualified to sell and/or syndicate this type of investment? I suggest that many of the mortgage brokers and agents that have been selling these products may have left themselves wide open for an investor assault against them and their brokerage E&O for no other reason than lack of knowledge and understanding relating to these mezzanine development syndicated loans where their investors have even less knowledge and may claim reliance on the expert advice of their representative mortgage broker or agent.

2

HOW CAN MORTGAGE BROKERS/AGENTS COVER THEMSELVES WITH RESPECT TO SUITABILITY AND MITIGATE POTENTIAL RISKS ON EITHER COMMERCIAL OR RESIDENTIAL SYNDICATED MORTGAGE INVESTMENTS? My suggestion is until Brokers and Agents have enough experience with commercial development financing that they do not get involved in selling existing commercial development syndications or trying to syndicate them independently. There is simply too much risk. The required due diligence, underwriting and disclosure is daunting to say the least. In order for brokers and agents to cover themselves with regard to “suitability”, provided they understand specifically what it is they are offering an investor and the risks, to make sure that the investor is a “sophisticated investor” which for them is generally anyone that falls into a “special class” of investor set out in FSCO regulations. The definition of someone who falls into a “special class” of investor is quite similar to securities legislation defining an “accredited” investor. Know your investor client, over disclose, have your investor read and sign all of the required investor disclosure forms, and insure that your investment offering contains all of the details of a comprehensive loan summary including details and history of the Borrower, Guarantors, Property, Location, Marketing & Sales, Projections, Profitability, Loan Details all culminating into a recommendation for a loan you would put your own money into. Also make sure that “all” of the risks of the investment have been disclosed and acknowledged even if the investors are accredited or meet the requirements of a special class of investor.

With regard to residential lending syndications much of the above still applies the difference is the probability of default in the loan is reduced by the relative risk between the two very different loans.

3

WHAT IS THE DIFFERENCE BETWEEN SYNDICATION IN COMMERCIAL MORTGAGES? HOW DO YOU RAISE CAPITAL IN COMPARISON TO LARGER COMPANIES? There are several differences in how we operate as a syndication company and our syndicated mortgages in comparison to say Fortress or Titan. Unlike these companies we do not typically do any second mortgages or higher ranked mezzanine development loans and certainly do not postpone our mortgages to additional priority charges. Our mortgages are not designed in contemplation of dilution of equity by allowing priority charges. Our mortgages are lower risk, secured in first position on quality real estate with preservation of capital and reasonable returns to investors being our primary objective. We do not accrue interest as payments are required

monthly although we may create an interest reserve similar to higher risk lenders but still we maintain a constant or decreasing Loan to Value Ratio which is on average in the 65% and selectively 70% range and rarely higher.

Our rates also reflect the lower risk being typically lower than the double digit loans characteristic of secondary or higher ranked mortgage syndications or of mezzanine debt. Our process of underwriting and due diligence is very rigorous not that others are not as thorough but rather we operate in an open and very transparent way.

As a syndicator we raise money from our investors directly. Other companies like Fortress and Titan used third parties to raise money for their syndications. The obvious trouble with this is the old story of broken telephone, the syndicator cannot be confident that the deal message is being properly disseminated and the other challenge is that the syndicator has little or no direct contact with investors. However, the syndicator is ultimately responsible to the investors. Fortress and Titan have or had well developed high commission models which pay middlemen to raise funds and gather investors for their syndications. We on the other hand have built our business by word of mouth with no investor advertising and no middlemen to raise funds. Rather we have earned the confidence and respect of our investor base through performance over time. This is not to say that paying commission to find investors for every mortgage syndication is bad, rather it may simply add an undesirable level of complexity. Investors may find their trusted sales representative conflicted between quality offerings and greed.

Accountability can in this event be highly diminished. We have no choice but to be accountable as our only business is lending our own funds and funds of our precious investors.

4

WHAT IS YOUR TAKE ON THE MARKET SIZE AND DEMAND FOR SYNDICATED MORTGAGES RIGHT NOW?

I believe that the market size and demand for syndicated

mortgages both commercial and residential is huge. I expect that the new government imposed rules - which will include stress tests for all insured loans will likely drive an increase in demand for higher rate private and private syndicated mortgages for a large group of borrowers who are simply not prepared to be forced out of the housing market. Others will opt not to change their purchase plans or be influenced by government legislation but rather borrower alternatively avoiding primary lenders and flocking to private lenders and syndicators or private lenders. There is also demand from new immigrants who may have money but need to borrow for business or investment. On the commercial side there is a large segment of Borrowers who simply do not meet the requirements of main stream lenders or do not have the time or patience to deal with institutional lenders, or their property or the current status of their property or lack of experience precludes them from dealing with low rate primary lenders. As long as interest rates are low stimulating the economy and stimulating borrowing, I believe that private lending and private mortgage syndication as well as private and institutional mortgage syndications will remain strong. If you are a mortgage professional with little experience in private mortgages, it’s time to get educated.

David Mandel is the president of First Source Mortgage Corporation, a private commercial real estate mortgage lender and syndicator offering flexible term and construction lending solutions in southern Ontario.

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 9

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WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 11

COVER STORY

LENDERS’ RESPONSE TO THE NEW DOF CHANGES PMToday caught up with Bryan Jaskolka of Canadian Mortgages Inc. and Ajay Kaith of MCOCI to get a better idea of how much the private side will be impacted and how brokers can leverage these

changes to gain new business.

On October 17, the Department of Finance implemented the new mortgage ‘stress test’ rules. Among these new rules included a higher qualification rate for uninsured mortgages, changes in reporting regulations for the primary residence capital gains exemption and a proposed lender risksharing model. These changes have many new homebuyers looking for alternative solutions to ensure their planned home purchase is not altered.

How do you see the changes affecting the private lending market?

According to Bryan Jaskola of Canadian Mortgages Inc, stricter lending guidelines could create more demand for alternative mortgage lending. This effectively means more business for private lenders who are free to set their own lending guidelines.

Ajay Kaith of MCOCI says that private 12 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

lenders will definitely see an increase in applications for not only second mortgages but first mortgages as well. Private lenders will be exposed to a better-quality client and therefore less defaults on mortgages.

Jaskolka adds, there has already been a large uptake in mortgage broker services since the financial crisis, as more consumers seek alternatives to the big-five banks.

The so-called “stress test” on consumers could create more opportunities for private lenders to fill the gap for consumers who want to purchase a home but can’t meet the eligibility criteria.

What do you think the marketplace will look like when the dust settles? (what impact do you see as it relates to lenders, insurers, brokers etc. in the market) We can begin by looking at what the Finance

Department thinks. Per their analysts, the new lending guidelines could depress home sales by up to 8% over the next 12 months.

Jaskolka continues, beyond 12 months, the performance of the Canadian economy will largely dictate demand trends. Overall, we see more prudent lending practices because of these new guidelines, but a significant portion of the population will be squeezed out of traditional mortgage lending. Once again, this will create more opportunity for private lenders and mortgage brokers tasked with finding the best product for the consumer. Unlike the banks, they have considerably more wiggle room in matching borrowers with the right terms.

Ajay adds, the banks will see a decrease in total mortgages funded, MICs will gain market share within the purchase space and second mortgages on purchases will also

increase. Insurers’ will like this approach as it will slow down the real estate market and potential defaults on the mortgages they have insured.

Overall, we wouldn’t be surprised if private lending grows as a share of total mortgage originations. We see this as just another step in a continuing trend of targeted measures to increase the official quality of the residential mortgage credit stock, while also de-risking the federal balance sheet.

Finally, Kaith points out that brokers will be left with the difficult task of having to adapt and learn how to sell private products.

What opportunities exist for brokers in the face of all these changes and how can they capitalize on it?

Ottawa’s new proposed changes will make it more difficult for certain borrowers to obtain mortgages. Lower income homebuyers or those looking to make a down payment smaller than 20% will be especially impacted.

Many brokers are shocked by the news and complain that they haven’t been given enough time to adjust to the new reality. The Department of Finance moved awfully fast on this one; from the time Finance Minister Bill Morneau announced the measures to when they were implemented took just two weeks.

Ajay Kaith adds that brokers should re-educate themselves on the benefits of using private lenders and MIC’s for short term mortgages. Brokers can use private lenders and MICs to close on new purchases and help get their clients into the home they are looking to purchase. In the mean time, brokers are able to take the time to educate their clients on their next financial steps. Clients will therefore potentially not lose their deposits and there will be less uncertainty amongst first time home buyers.

There have been early assessments that costs will rise with respect to default insurance premiums, how do you see this affecting the pricing and fee structures currently in place in the private market?

Jaskolka states that some non-bank lenders have already announced that the new rules will impact a large chunk of their insured residential mortgages. First National, Canada’s biggest non-bank mortgage

lender, expects its originations to drop 10% because some of its loans will no longer qualify for insurance. The pricing and fee structures could depend on how private lenders perceive the level of systemic risk in the market. Some experts think private lending will explode because of the new rules. Others believe the new guidelines will merely cool an overheated housing market, which in turn could make private lenders more risk averse.

In light of potential boom on the private side, what kind of additional protection might come down for novice investors?

The same risks and opportunities that exist in the institutional mortgage market also exist in the private side, says Jaskolka. Investors should weigh every opportunity based on risk versus reward. They should evaluate borrowers using a consistent criterion and be weary of debt-crazed homebuyers.

Investors should also be weary of high

We’ve already gone through some targeted and broad based measures to moderate the market, is this the end or do you foresee further changes?

Its hard to say exactly if there will be more rule changes, says Kaith. But we should all anticipate additional changes and govern our businesses accordingly.

Broadly speaking, Canada’s housing market remains strong and resilient, Jaskolka adds. The new measures could ensure that the market doesn’t overheat, or continue to overheat in the minds of others. Some forecasters are predicting a slight correction, but the prospect of a major crash doesn’t appear to be on the radar. Ultimately, credit guidelines and overall lending parameters industry-wide have been on a tightening trend for much of the last decade, and right now, we see this trend continuing so long as the housing market remains robust. It’ll be interesting to see how the red-hot markets of Vancouver and Toronto respond. This could determine whether the government enacts stricter measures in the future.

Do you foresee more regulations being put in place on private lending?

Private lending currently plays an important role in a market that is already structured.

Regulators may start looking more closely at the alternative market if risk-taking becomes excessive and private lenders are not judicious. Jaskolka continues by stating that if words like “subprime” and “systemic risk” get bantered about with more frequency, policymakers may look to regulate private capital. Most of the regulatory action with respect to private funds revolves around better protection for retail and individual investors involved in this growing asset class. I am in favor of anything that provides a more transparent and ethical marketplace.

Brokers need to re-educate themselves on the benefits of using private lenders and Mortgage Investment Corporations.

LTV ratios and set a clear guideline on the amount of risk they can take. Unfortunately, there will always be those in the market who take risk lightly. For investors to protect themselves, they should ensure they are seeing copies of all FSCO required disclosures (or other provincial regulators depending on the market), as well as the supporting documentation such as appraisals, credit reports and income statements.

Ultimately we are in a time where a lot of changes are taking place. The best thing that brokers can do is to educate themselves of various funding sources that are available to them.

In our cocmmitment to providing best resources, PMToday is busy at work to publish an online database for brokers to easily search Private Lenders and MICs in Ontario.

Kayla Patullo.

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 13

RISK MANAGEMENT

FROM DERRICK’S DESK TOP 3 WAYS INUSURANCE CAN HELP WITH THE NEW MORTGAGE RULES I may not be as busy as mortgage brokers and lenders after the new mortgage rules were announced on Oct. 3rd. However, I do receive regular questions from mortgage lenders asking how insurance could help them if the changes contribute to a market correction. While no one can predict exactly how the new mortgage rate stress test will impact real estate prices, we do know that the marketplace risk exposure has increased since the finance minister’s announcement.

This regular column is focused on risk management for the private mortgage lending community. I thought it would be valuable to help mortgage lenders understand the top 3 ways that insurance could help given the marketplace uncertainty.

#1 – DIRECTORS AND OFFICERS LIABILITY My inaugural edition of this regular column was focused on Directors & Officers (“D&O”) Liability insurance because it is probably the most misunderstood insurance product available to protect private lenders. .

So how can D&O Insurance really help you now that we have new mortgage rues in place? First item to check, make sure you have a proper D&O policy to cover your exposure. Most private company D&O policies provided by insurers are not appropriate for MIC/Fund Managers or the MIC/Fund. You don’t have the appropriate D&O policy if there is an exclusion related to securities claims in your policy.

The major risk private lenders could face is a market correction of more than 10% in a short period of time coupled with a recession. The 10% reduction would likely only affect mortgages with an 85% or higher LTV; however, job losses in the greater Toronto area could mean a tangible increase in defaults. This double-whammy should lead to higher reserves for impaired mortgages being recorded in the financial statements for MICs/Funds.

D&O insurance now becomes important because investors could bring forward claims against the corporation and its directors for failing to accurately recognize the value of the underlying security of the Fund’s mortgage investments.

14 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

#2 – ERRORS & OMISSIONS LIABILITY A financial institutions D&O policy on its own might provide adequate protection for the MIC/Fund in the event of claims from investors; however, the MIC/Fund Manager should consider proper E&O coverage. There are customized D&O policies available to protect Mortgage Fund Managers.

These unique policies bundle together E&O and D&O coverage. In our experience, claims brought against Fund Managers will typically include allegations of professional negligence. Allegations range from failure to accurately disclose the nature of the mortgage fund’s investments to placing an individual into an unsuitable investment vehicle.

You need proper defense even if the allegations are frivolous. A standalone D&O policy is unlikely to defend allegations of professional negligence.

You need a policy combining D&O and E&O in order to have proper protection.

#3 – MORTGAGE IMPAIRMENT INSURANCE A market correction could lead to a recession in the GTA given how important the financial services sector is to the overall economy in the GTA. This combination would likely lead to a higher mortgage default rate in the Southern Ontario market. Lenders then have the headache of protecting their security for the mortgage as borrowers stop paying their property insurance premiums. There are almost a dozen insurance companies happy to collect premiums to insure your asset on a short-term basis at a fairly high rate.

There is a better way to protect your investments.

Mortgage Impairment insurance is a policy specifically tailored to mortgage lenders. This policy is essentially a blanket property policy for your entire mortgage portfolio. The policy protects lenders under two scenarios: 1. You become aware that the borrower has let their property insurance lapse. The mortgage impairment policy automatically provides primary property insurance in cases where there is no homeowner’s insurance in place.

2. There is property damage sustained by a property that represents the underlying security for your mortgage and the mortgagor did not have property insurance in effect.

Lenders typically take advantage of the coverage feature outlined under Scenario #1 during every policy year. The benefit afforded under Scenario #2 is less tangible, but represents important “peace of mind” coverage. Mortgage Impairment insurance also provides administrative benefits because you no longer require an employee to arrange for short-term policies when insurance has lapsed.

Sometimes worry is good.

It’s my job to worry about all this stuff – not to threaten you that the sky is falling, but to remind you what could happen if it does. The likelihood of a market correction and recession is, thankfully, not all that great.

Your business and reputation is everything. It needs to be protected against misfortunes that could undo everything you and your team have accomplished, and result in punishing financial losses. There are unique insurance products available to protect private mortgage lenders.

Derrick Leue, President of PROLINK Insurance.

Please contact PROLINK Insurance to learn more. 1-800-663-6828 or DERRICKL@LMS.CA

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LEGAL

T HE T ECH NICAL AS P ECTS OF A MORTGAGE INVESTMENT CORPORATIONS Often when reading up on articles regarding mortgage investment corporations the authors leave out the technicalities and “literal rules” in creating, sustaining and maintaining a mortgage investment vehicle as a qualified MIC for purposes of CRA only. This article is an attempt to provide a quick reference to the hardline rules qualifying mortgage investment vehicles as MICs. Again, this article is in no way meant to provide legal advice or substitute the readers’ requirement to complete their own due diligence.

TYPE OF ENTITY FOR A MORTGAGE INVESTMENT CORPORATION A Canadian Corporation throughout the taxation year where its business only undertakes to invest its funds, and thereafter qualifies as a MIC, is deemed to be a public corporation under the ITA, and therefore must have its financials audited.

• Depending on which province your MIC is registered, it will have to comply with securities legislation in that province; • Depending on which province your shareholders or investors are, it will have to comply with securities legislation in that province; TYPE OF ACTIVITY & INVESTMENT/ASSET BASE 1. Mortgages secured against real estate in Canada • Mortgagors can be individuals or corporate • Mortgagors can be Canadian non-residents 2. Deposits in banks or credit unions or other that is insured by the CDIC 3. Real estate in Canada • Cannot manage or develop but can retain experts to manage the MIC’s portfolio solely in an attempt to protect its investments. However cannot directly or indirectly manage a rental as renting is not the “mere investing of funds”, also if acquired by way of a foreclosure.

• Can be freehold or leasehold 4. Shares of Canadian resident corporations MIN & MAX LEVELS OF INVESTMENTS/ ASSET BASE 1. Throughout the taxation year, the original cost base of any combination of 1 & 2 above (under Type of Activity etc…), whereby 1 is strictly in regards to those mortgages on houses (“a building or movable structure, or any part thereof, that is intended for human habitation and contains not more than two family housing units, together with any interest in land appurtenant to the building, movable structure or part thereof”) and properties within housing projects (“any building or movable structure, or any part thereof, that is intended for 16 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

human habitation, or any property that is intended to be improved, converted or developed to provide housing accommodation or services in support of housing accommodation, or any property that is associated with housing accommodation, including, without limiting the generality of the foregoing, land, buildings and movable structures, and public, recreational, commercial, institutional and parking facilities (e.g. a condo development , government housing, retirement & nursing homes, but NOT hotels)); must have been at least 50% of the cost of all properties, investments and assets (the “Property”) made by the MIC. The mortgages must be direct and not through a fund that invests in mortgages.

2. Throughout the taxation year, the original cost base of 3 (under Type of Activity etc…) above could not have been more than 25% of the cost of all Property of the MIC. • This does not include any properties acquired by way of mortgage enforcement proceedings such as foreclosures. However, if the property acquired by way of foreclosure requires rental management or development, the MIC will lose its status.

3. Throughout the taxation year, the total liabilities are not more than three (3) times the NET ASSET VALUE (i.e. net-worth book value) of the MIC (the original cost of all Property minus liabilities), whereby at any time in the year there was an occurrence in which paragraph 1 above (under Min & Max Levels etc…) was less than 67.67% (2/3rds) of the cost amount of all Property of the MIC. Otherwise, if paragraph 1 above (under Min & Max Levels etc…) is more than 2/3rds the total liabilities cannot be more than five (5) times.

• This means that if all the residential mortgages and bank deposits of the MIC equate to less than 2/3rds of the MIC’s Property on an original cost basis, then the MIC can borrower up to 75% of its Property cost.

• If the MIC invests more in residential mortgages or bank deposits (essentially more secure, and inline with policy by providing more loans on Canadian real estate) the MIC can borrow up to 83.33% (5/6th) of it Property cost.

SHAREHOLDINGS: LIMITS AND REQUIREMENTS By the last day of the first taxation year of the MIC there are at least 20 shareholders going forward and throughout every taxation year thereafter, and no shareholder would have been a “modified” specified shareholder of the MIC at any time in the year.

“Modified” in that instead of owning 10% or more it has been increased to more than 25%

of the issued shares of any class of the MIC. Furthermore, included in this number are those shares owned by related persons, changed from anyone not dealing at arm’s length (broader inclusion). Also not included are shares owned in other corporations that are related to the MIC. Related persons was further narrowed to not include, brothers, sisters, parents, in-laws, and children over 18. That means your parents, inlaws, adult children, brothers and sisters can own shares in the MIC without pushing anyone into the specified shareholder classification. A large family can start there own MIC. Trusts that are Registered Pension Plans or Deferred Profit Sharing Plans will count as 4 shareholders if they hold shares in the MIC but only as one “modified” Specified Shareholder.

TYPE OF SHARES None so long as you are compliant with the OBCA/CBCA (i.e. between all the classes of shares the right to vote, dividends and participate has been conferred), except when incorporating preferred shares. In that case, any holders of preferred shares of the corporation have a right, not only to any preferred dividends, but to receive any additional dividends with equal right and ranking to the common shareholders, once the common shareholders received a dividend similar to the preferred dividend. Essentially preferred shareholders are to always be preferred!

Where a MIC has two classes of shares with “like” attributes except that only one of the classes is entitled to bonus dividends, both classes of shares would qualify as common shares, so that this restriction (which is relevant only where there are holders of preferred shares) would not apply to require that the payment of dividends be ordered in the specified manner. “Like” being that both common and preferred shares must have rights to dividends in reference to a fixed percentage of its stated capital.

Jeff Levy, HBSc, MBA, CFA, AMP, JD

Managing Partner and Co-Founder of Levy Zavet PC, Lawyers.

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 17

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18 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

S OL UTI ON F O CU S ED

WITH PARAMOUNT EQUITY FINANCIAL CORPORATION

OUR HISTORY Paramount Equity Financial Corporation (PEFC) was founded in 2006 with a vision to provide solutions-focused mortgage options to responsible home owners, while also offering average Canadian families and individuals the opportunity to earn a stable highinterest income through direct mortgage investments secured against screened, appraised real estate. By applying stringent underwriting guidelines and providing fully-integrated Mortgage Administration services at no charge, we have dramatically reduced the typical private mortgage investment risk profile to a minimal level while also making the mortgage investment process as simple as possible for the average investor. All direct mortgage opportunities offered are Registered Plan compatible, and PEFC works closely with Olympia Trust Company as our custodial agent partner.

INVESTMENT OVERVIEW Cashflow aInterest paid monthly TFSA, aRRSP, LIRA, RESP Qualified

security of aThe screened,

underwritten, real estate collateral with appraised equity

Paramount Equity Financial Corporation currently manages a growing portfolio in excess of $115 million.

THE PRESENT Paramount Equity Financial Corporation offers revolutionary mortgage options to the marketplace, rate matching, capping fees, reducing monthly payments. These strategic offerings provide borrowers more options and considerable cost savings, while delivering exceptional interest income for investors.

OUR UNDERWRITERS, OUR DIFFERENCE Paramount Equity Financial Corporation is not a matrix lender who takes a statistical approach to determining the risk of default on a loan or investment.

The team of dedicated underwriters at PEFC thoroughly investigate and assess the strength of every loan application and investment opportunity on the individual merits of the deal, the borrowers, and the collateral equity.

PEFC invests in screening every deal before inviting our clients to invest in it, and only put forward lending and investment opportunities that pass their strict criteria.

Mortgage Administrations Services Paramount Equity Financial Corporation has a fully integrated Mortgage Administration department that is licensed through the Financial Services Commission of Ontario (FSCO) to provide sophisticated management and collections services for all private mortgages arranged through Paramount Equity Financial Corporation. Their Mortgage Administration department supports their Investors by collecting and depositing all payments, ensuring borrowers’ accounts are kept in good standing throughout the mortgage term, communicating with the borrowers, taking appropriate corrective action when necessary, and complying with all lending regulations, to make the

experience of being a lender entirely hands-off for Investors.

SILVERFERN SECURED MORTGAGE LP The Silverfern Secured Mortgage LP, is focused on the alternative market arising from Canada’s tightening bank rules. The fund will invest in residential 2nd mortgages in Canada. The Fund’s investment objective is focused on capital preservation to build a diversified portfolio of mortgage assets that generates attractive fixed stable returns to its Unitholders.

Managed by Paramount Equity Financial Corporation, the fund currently has over $65 million in assets under management, with investments in Ontario, Alberta and British Columbia. The fund offers high yield and diversification due to low perloan amounts and strong underlying residential real estate assets. In addition, multi-residential second mortgages offer multi-tenant income stream and reduced exposure to economic cycles.

Terms are limited to 1 year.

An investment in the Silverfern Secured Mortgage Fund is available by purchase at a price of $1,000.00 per unit (a minimum purchase of 5 units). These units currently pay a 10% annual yield to the investor (paid monthly). Silverfern is sold by Offering Memorandum to accredited and eligible investors for amount in excess of $10,000.00 Paramount Equity Financial Corporation.

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 19

FEATURES

INFILL PROJECT SEEING OPPORTUNITIES VERUS OBSTACLES

Much is written about the cutthroat real estate market in Canada, especially in major urban centres such as Vancouver and Toronto, where homeowners often find themselves in bidding wars. And mortgage brokers know all too well that the flipside of all of that is an equally competitive market for residential mortgages; where one or two decimal points could make the difference between winning or losing a deal.

While construction lending isn’t for everyone, for business savvy brokers looking for a new challenge, the financial rewards can be substantial, with typical broker commissions of 1% on projects that are often several millions of dollars, translating into returns of $10’s of thousands of dollars for a single deal.

The most obvious prerequisite for getting into the commercial lending game is to take one of the many commercial lending courses offered. Less obvious, is the ongoing need to educate yourself about the changing landscape of commercial lending, especially when it comes to financing infill construction projects.

The ‘sweet spot’ for the infill marketspace, are projects which either fly under the radar of institutional lenders or deemed “unsuitable” by major banks. Yet many of these projects are not only viable but, with the right mix of broker, builder and lender, can be highly profitable for all parties involved. Here’s a brief rundown of the different kinds of projects that are getting financed… all profitable, and all financed through alternative (vs. institutional) lending: THE SMELL OF OPPORTUNITY VS. GAS. Once a commercial/automotive business, the site required soil remediation due to some soil contaminated with gas. Original financing of just over $1 million was provided to purchase the site, cover its clean-up costs and severing the property into nine residential lots. An additional round of construction financing will be provided to finance the nine homes once the severance is approved.

Takeaway: the banks weren’t prepared to consider this project until the site had been entirely cleaned up. Alternative lending turned vision into reality.

LEARNING HOW TO MAKE MONEY. A former high school built in 1923, the developer purchased the 4-storey building on 2.1 acres for $1.7 million in 2011 in order to convert the historically designated property into a 35-unit residential condominium. Although 80% of the project was sold, the bank’s requirements and demands were too onerous. An $11.6 million first 20 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

FINANCING mortgage was provided to take out the existing financing plus cover the construction costs to complete the project. Takeaway: alternative financing is a viable alternative when lending requirements translate into major delays and administrative headaches.

SEEING A GREAT VIEW VS. JUST TOO SMALL. The developer had the option of expanding an existing three-storey, six-unit residential condominium building by adding a seventh-floor penthouse unit on top of the building. The 1,886 sq. ft. penthouse with 568 sq. ft. terrace and private elevator would be sold on completion.

Due to the complexity of the project (including several years of approvals) and the small size of the loan in the eyes of institutional lenders, a $975,000 first mortgage was provided through alternative lending.

Takeaway: look for opportunities instead of obstacles. Thanks to a simple underwriting process, constructions advances were provided to help expedite the project.

THE FASTER THE BETTER. The developer purchased a semi-detached home on a 25.5 x 123 ft. lot, obtaining approvals to build an addition and renovate the property into a two-unit, three storey, 3,850 sq. ft. condominium building. To maximize return on investment the developer wanted to finish the project as soon as possible. The mortgage broker opted for an alternative lender in order to avoid costly delays with initial funds and construction advances. A $1.78 million first mortgage was provided to discharge the existing mortgage, cover the hard construction costs, soft costs and for interest.

Takeaway: speed in the form of a quick approval process for financing can get your builder to the finish line faster.

To excel in the infill construction market, brokers need to keep apprised of its dynamics – trends, viability, hidden opportunities – and at the same time cultivate relationships with builders (or construction companies) and lenders that are disinclined to finance these projects.

Paul Rayment is Executive Vice-President at Foremost Financial Corporation, a boutique mortgage lender specializing in infillconstruction financing for residential, commercial or industrial projects.

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 21

FEATURES

PC

LAWYERS Accessible Lawyers Keeping You Informed!

Call Us 416-477-5941 Or 1-877-777-8977 (Toll Free) REAL ESTATE, CONSTRUCTION, FINANCE, CORPORATE, BUSINESS, LITIGATION, WILLS, ESTATES, TAX, PERSONAL INJURY, NOTARY, EMPLOYMENT AND FAMILY LAW

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Levy Zavet PC Lawyers 315 Eglington Ave. W., Ste 201 Toronto, ON, M5N 1A1 Canada

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Real Estate Law & Closings, Business Law, Litigation Jeff Levy 416-477-5941 Ask@LevyZavet.com LevyZavet.com

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24 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

BILL 55, WHAT EFFECTS IT HAS ON YOU AS A BROKER Bill 55 is an omnibus Bill that was enacted in July 1st, 2015. Of particular concern to Mortgage Broker/Agents is the re vision of “The Collection Agencies Act” into the “The Collection and Debt Settlement Services Act.” In the past, many mortgage brokerages negotiated debt settlement on behalf of their clients - this service has now been curtailed.

The Collection and Debt Settlement Services Act, administered

by The Ministry of Government and Consumer Services, clearly states that the negotiation of consumer debt settlement on behalf of the creditor must be conducted by a representative of a licenced Collection Agency. “(2) Subsection 1 (1) of the Act is amended by adding the following definitions: “debt settlement services” means offering or undertaking to act for a debtor in arrangements or negotiations with the debtor’s creditors or receiving money from a debtor for distribution to the debtor’s creditors, where the services are provided in consideration of a fee, commission or other remuneration that is payable by the debtor; “debt settlement services agreement” means an agreement under which a collection agency provides debt settlement services to a debtor;” For many years brokerages assisted in negotiating satisfactory settlements while arranging debt consolidation mortgage financing, perhaps charging a normal service fee (or including it in what was charged for securing a mortgage.)

There is no known legal action claiming a brokerage charged an excessive fee for consumer dent settlement.

The enactment of Bill 55 places the authority to act as an agent for the debtor in the hands of a collection agency. This creates confusion.

As a matter of business, Collection Agencies aggressively seek out Creditors large and small for their business collection accounts.

These clients are big banks, Finance Companies, Credit Card Companies, etc. To capture and retain these clients they must of course to collect on these accounts. So the question that begs to be asked: How can a Collection Agency representing, say a Visa Client in the morning, perform a satisfactory result for a creditor against the same Visa Company in the afternoon?”

This Act is flawed and should be revisited. It offers little to no protection for the debtor/client- whom it was designed to help- and an unfair advantage to the Creditors. This Act has, in effect, turned Collection Agencies into Creditors shills.

To view the Act, Google- Bill 55, Stronger Protection for Ontario Consumers Act, 2013.

Malcolm Eccles is currently the Principal Broker of CIR Mortgage Corporation and has been a practicing mortgage broker since 1973.

Eccles is the Founder Past President of the Independent Mortgage Brokers Association of Ontario (IMBA) currently known as the Canadian Mortgage Brokers Association (CMBA).

WWW.PMTODAY.CA • PRIVATE MATTERS TODAY • 25

ADVERTISERS INDEX

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