Silver Fund Mortgage Investment Corporation

Exempt Market Offering - Ontario | Question and Answer Sheet

A mortgage investment corporation is a unique tax flow through corporation available for mortgage investment in Canada. A mortgage investment corporation is a corporation formed under a suitable Business Corporations Act that meets stated criteria of the Canada Income Tax Act. Meeting this criteria allows the corporation to be considered to be a flow-through for tax recognition purposes, such that tax is not paid by the corporation but rather the flow-through of incoming capital is recognized in the hands of the investors and taxed accordingly.

Mortgage investment corporations lend funds for private mortgages on real estate located in Canada. They have generally been designed to allow smaller non-institutional investors, to be able to invest on an economic basis in the mortgage market in Canada.

Mortgage investment corporations generally lend money to persons that meet rigorous credit criteria but would not have been able to acquire the mortgage from traditional mortgage providers such as banks, credit unions, and larger alternative lenders. The reasons are generally a shorter term, a more intense due diligence or credit process is required, the property is a second home or recreational property, among others. This inability of the real estate owners to acquire mortgages in the traditional markets allow the mortgage investment corporation to charge higher rates of interest. After the market usual charges for management, which are generally in the 1.5-2% range, and accordingly less than mutual funds and similar pooled investment vehicles, there is, in the current market, a return of 7.5 to 8% available to the shareholders of the mortgage investment corporation.

Mortgage investment corporations are constrained in their investment activities to real estate meeting the criteria specified by Revenue Canada. The experience in the sector inhabited by mortgage investment corporations has been a very low loan loss, making this a safe and secured investment when managed by experienced mortgage administrators. It is the mortgage administration experience which is relevant to the safety of the investment at a mortgage investment corporation and not the related investor management which is readily done using computers supported or third party supplied administrative services. Collection on the mortgages is what distinguishes the successful mortgage investment corporation, this requires a culture of credit based origination and experienced collection activities, this is the purview of experienced mortgage administrators.

Mortgage investment corporations do not invest in defaulted, compromised or sub-prime mortgage product. They chose to credit-qualified homeowners with specific issues that do not appeal to the more traditional, large-scale, mortgage providers. One of the most common bases for a mortgage investment corporation being able to acquire a high return on credit conservative, mortgages is to invest in sectors that require more intense, hands-on, management and credit review at the time of origination. This differs from the conduit base sub-prime mortgage lending which caused concerns in the last credit crisis.

As a result, investors are able to achieve superior returns with a conservative investment profile, investing in mortgages on real estate, legally and properly secured, located in Canada. The owners of the real estate need not be Canadians, but the real estate must be located in Canada.

Investors in mortgage investment corporations acquire shares, these are shares of a business corporation and therefore have the protections of the Business Corporations Act chosen, This will be either a Canada federal corporation or a provincial corporation. All provinces of Canada have robust, modern, business corporation statutes providing protection to the investors. The types of shares will vary by investment corporation, but many will use a share called non-voting for the offering to investors. These non-voting shares are actually limited vote shares, providing protection to the investors by insuring that they vote on matters specific to the shares which they hold. This effectively prohibits the ability of any other shareholders from changing the attributes to the shares. This gives the holders of the non-voting shares fixed attribute shares, with the attributes being changed only upon a vote of ⅔rd of the holders of that class of non-voting shares.

The voting shares are required to be held by four or more persons, generally management. This is done for ease of management and administration.

The economics for the shares are dictated by the terms of the share attributes and by the offering promises which are made. As noted these cannot be amended except by the 66.67% votes of the holders of that class of shares. Generally a hurdle rate is designated for the shareholders. The income of the mortgage investment corporation is first applied to its expenses, which are fixed by the terms of contract, generally in the range of 1.5-2% of the revenue, the balance is distributed firstly to the entitled share holders, until they receive the expressed hurdle rate. There is generally a sharing of revenue over and above the hurdle rate when funds are available.

A mortgage investment corporation will most commonly hold mortgages which only pay principle at maturity. This means that the revenue is all interest revenue during the term of the mortgage, with the capital of each mortgage coming back to the mortgage investment corporation on maturity. Fees and expenses are paid from the interest and fee-based income, not from the return of principle.

Silver Fund intends to invest in 1st and 2nd residential mortgages primarily.  Additionally, a portion of its portfolio may consist of commercial, mixed-use and land real estate.

The principles behind Silver Fund have been in the mortgage origination business for many years, and have developed a reliable, sufficient, flow of mortgage opportunities to allow them to sustain the investment model. The volume of the mortgages which is available to the principals, through their ongoing business operations in the mortgage brokerage and administration business, will be sufficient to allow the mortgage investment corporation to have sustained access to mortgages which meet the strict credit criteria of the Silver Fund portfolio policy.

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