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Ontario regulators appear to finally be cracking down on an increasingly popular type of real-estate investment called a syndicated mortgage that critics say is misleading because of its fanciful promise to deliver both “security” and guaranteed annual returns of eight per cent or more.

The Financial Services Commission of Ontario (FSCO), which regulates insurance and mortgage brokers in the province, recently issued a “cease and desist” order against Toronto’s Tier 1 Transaction and Advisory Services, whose website implores investors to “invest like a bank” by putting their RRSP or TFSA money into “high-demand real-estate development projects not typically available to individual investors.” The order also names Tier 1’s related businesses, as well as Bhaktraj Singh, the company’s chief executive.

Tier 1’s real-estate development projects range from condominiums to long-term care facilities. Investors pick a project and put down a minimum of $25,000 to participate in a syndicated mortgage, which allow dozens of investors to pool their money and lend it to the project’s developers. In exchange, investors are promised annual interest payments of about eight percent, to be paid out quarterly. They are also eligible for extra payments if the project is completed. It’s estimated that Tier 1 has so far raised $110 million through syndicated mortgage investments, according to court documents. Its website lists more than a dozen funded projects.

It sounds like a good deal. But, as is the case with others in the $4-billion Ontario industry, there are concerns that mom and pop investors are being misled about the significant risks associated with big commercial projects. While it’s true syndicated mortgage investors are secured on title, the sleek sales pitches usually gloss over the fact that the syndicate is often the second or third mortgage on the property. That means investors are unlikely to see any cash if a project goes bust. Making matters worse, the value of the properties in question are often inflated because they assume the projects—a new housing division or condo tower—will be completed and 100 per cent sold.

In the case of Tier 1, FSCO says the firm isn’t even licensed as a mortgage brokerage in Ontario, but has nevertheless “carried on the business of dealing in mortgages by arranging and facilitating syndicated mortgage investment transactions in respect of several development projects.” It also alleges the brokering process is “rife with contraventions” of the rules and poses “a significant risk to current and potential future investors.” Tier 1 did not respond to an email seeking comment. Efforts to telephone Singh, the CEO, at Tier 1’s office led to a full voicemail box that didn’t allow messages to be recorded.

In late October, an Ontario court granted the Superintendent of Financial Services’ application to appoint a trustee to oversee 11 companies that were administrating mortgages on behalf of Tier 1’s investors. Its job is to make sure investors receive their interest payments from developers and take steps to address any defaults.

The crackdown on Tier 1 comes as some investors have been calling for similar action against one of the industry’s biggest and most high-profile players: Fortress Real Developments. Let by CEO Jawad Rathore and COO Vince Petrozza, the Toronto-area firm partners with developers on condo projects across the country, from Toronto to Regina, and raises funding through syndicated mortgages. Fortress and the network of brokerages it works with are facing at least three proposed class action lawsuits on behalf of investors who allege they were misled when they invested in three Ontario condo projects. A court must certify the suits before they are allowed to proceed.

Malon Edwards, a spokesperson for FSCO, declined to comment on whether the regulator was looking at the complaints against Fortress. “To maintain the integrity of our investigations, we can neither confirm or deny the existence of an investigation, or do we comment on specific ongoing matters,” Edwards said in an email.

Fortress says it has done nothing wrong. “There is no basis for these proposed class actions,” the company said in an Oct. 28 statement that noted more than 14,000 investors have received payments totaling $91 million in relation to 75 projects (15 of which have been completed). “The allegations made about the defendants and the syndicated mortgage loans are untrue, highly misleading and are clearly aimed at damaging the reputation of Fortress and Fortress projects in an attempt to benefit its competitors.” Fortress goes on to say that one of the plaintiffs is in fact the CEO of a “copycat” company who got his start at one of the brokerages he names in his suit.

A Fortress spokesperson told Maclean’s the firm’s lawyers will soon be filing motions to have the proposed class action suits struck. “There is absolutely no basis to these claims—lenders have suffered no losses,” the spokesperson said. “There is nothing to sue for.”

Originally Posted in Maclean's