Frequently Asked Questions
Please contact us with any questions you may
have.
gavinmarshall@magentainvestment.ca
(888) 267-1744 ext. 222
1. What is a private mortgage
investment?
2. How risky are private mortgage
investments that don’t satisfy bank lending
criteria?
3.What is a Mortgage Investment
Corporation (MIC) and how does it differ from
directly held mortgages as a private mortgage
investment vehicle?
4. How does a MIC compare with
other investments?
5. What rate of return may I reasonably
expect?
6. How much is paid for management?
7. Are Magenta shares RRSP and
RRIF eligible?
8. Who can invest in Magenta shares?
9. What are the minimum and maximum
investment amounts? Will share subscription
be closed to new investors?
10. How and when can I liquidate
my investment?
11. How and when are Magenta’s
profits distributed to shareholders?
12. How can I monitor my investment?
13. Who are the Companies’
auditors and legal advisors?
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1. What is a private mortgage
investment?
A private mortgage is simply a mortgage held
by an individual, group of individuals, or private
corporate entity, such as a Mortgage Investment
Corporation (MIC), instead of a bank or other
institutional lender. The legal status of any
mortgage is the same, regardless of who holds
the mortgage. The mortgage borrower is legally
obligated to effect repayment, at a stated interest
rate, to the mortgage holder, or mortgagee,
within a stated time period. The mortgage loan
is secured by a charge on the underlying real
estate owned by the mortgage borrower.
Private mortgage interest rates are typically
higher than bank mortgage rates. Accordingly,
private mortgage investors have the potential
to achieve appreciably higher investment returns
than those afforded by other fixed income type
investments, such as GICs, bonds, and preferred
shares.
Refer to What is a Mortgage
Investment Corporation (MIC)?
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2. How risky are private mortgage
investments that don’t satisfy bank lending
criteria?
Canadian chartered banks are extremely conservative
lenders, functioning in a very rigid, tightly
controlled regulatory environment. Banks are
the major players in the mainstream mortgage market,
denominated in billions of dollars. In this
market, the rigid, computer generated, “one
size fits all” lending policies, employed
by the banks, make good business sense. Given
their size and structure, banks are not equipped
to underwrite mortgages on an individual, “deal
by deal” basis, carefully scrutinizing
individual applications to ascertain whether
or not real risk is within reasonable limits.
Most fundamentally, banks are not “equity
lenders”. In assessing a mortgage application,
a bank’s primary focus is on the question
of whether or not the prospective borrower has
the capacity and commitment to make the mortgage
payments. In answering this question, factors
relating solely to the borrower, such as income,
employment stability, and credit history are
assessed. Only if the borrower meets or exceeds
the requisite computer generated credit score,
will the bank consider the question of the adequacy
of the real estate securing the mortgage loan.
Banks routinely decline mortgage applications
for a variety of borrower specific reasons including
credit history, the inability of self-employed
applicants to sufficiently document income,
job tenure, and debt service ratios that exceed
regulatory and policy defined limits. The fact
that the underlying real estate security adequately
limits the real risk is irrelevant.
Private mortgage lenders are typically “equity
lenders”, in that their primary focus
is the strength and quality of the underlying
real estate security. Risk is limited as long
as the real estate security is sufficient to
protect the lender in the event of a default.
The vast majority of Magenta’s portfolio
is comprised of mortgages on owner occupied,
single family homes. Experience and commons
sense tell us that these mortgagors will default
on other obligations such as credit cards and
loans, before missing a mortgage payment.
Banks also operate in a very narrow policy
box, with respect to mortgage and property type,
preferring to avoid or limit mortgages on recreational
properties, building lots, and raw land, or
construction or residential second mortgages.
These sorts of mortgages are not necessarily
inherently risky. The real issue is whether
or not the private mortgage investor has the
expertise to carefully scrutinize and structure
the mortgage investment, so as to limit the
risk to an acceptable level.
In short, banks are precluded by government
regulation and corporate policy, from underwriting
a wide variety of mortgages, wherein investor
risk may be limited to reasonable levels, largely
by virtue of the strength and value of the underlying
real estate security.
Refer to What We Do - What is a Typical Magenta Mortgage? to see some recent illustrative examples of the types of mortgages Magenta funds.
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3. What is a Mortgage Investment Corporation (MIC) and how does it differ from directly held mortgages as a private mortgage investment vehicle?
Refer to What We Do
and What is a Mortgage Investment
Corporation (MIC)?
An individual investor may fund 100% of an
individual mortgage, and hold the mortgage directly.
The investor is solely responsible for sourcing
and evaluating the mortgage investment, negotiating
the interest rate and other terms and conditions
applicable to the mortgage, and instructing
the solicitor preparing and registering the
mortgage. Subsequently, the investor has to
collect the payments, and deal with any arrears
or default problems that may arise.
Given the typical principal amount of mortgages
in today’s real estate market, the investor
would require a huge amount of capital to fund
even a small mortgage portfolio.
A Mortgage Investment Corporation (MIC), is
a private mortgage investment vehicle wherein
individual investors pool their investment capital
through share acquisition. The MIC employs a
professional manager to source, scrutinize and
acquire individual mortgages with the best risk/return
profile. The manager is responsible for all
aspects of mortgage portfolio administration.
The mortgage portfolio is continuously managed,
with newly invested share capital, and the proceeds
from repaid and discharged mortgages, being
utilized to fund new mortgages.
100% of a MIC’s net income, as verified
by external audit, is paid out to the shareholders
by way of an annual dividend. Like any company,
a MIC’s net income is equivalent to its
revenues, less its expenses. Revenue is earned
in the form of mortgage interest, and fees and
penalties. Principal expenses are the management
fees, and audit and other professional fees.
A MIC may utilize funds borrowed from a bank
or other lender, in addition to its share capital,
to fund a portion of its mortgage portfolio.
Some of the salient differences between direct
mortgage investing and a MIC, may be summarized
as follows:
| |
Direct |
MIC |
| Investment Amount |
Substantial to achieve even minimal diversification |
Relatively small |
| Management |
Individual investor wholly responsible
|
Professional manager |
| Return |
Depends on mortgage type and the expertise
and diligence of the investor |
A professionally managed MIC, employing
the prudent use of financial leverage (debt),
should achieve higher returns, with lower
risk |
| Risk |
Depends on portfolio size and composition
and the expertise and diligence of the investor |
Portfolio size, and the underwriting and
portfolio administration expertise of the
Manager, serve to reduce risk |
| Liquidity |
Mortgage repaid at maturity provided borrower is capable of doing so |
Shares may be tendered for cancellation
after 2 years |
| RRSP/RRIF Eligibility |
Yes
High trustee fees
Large principal amounts reduce flexibility
|
Yes
No fees depending
on the Trustee
Any share amount
may be deposited; greater flexibility |
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4. How does a MIC compare with
other investments?
Refer to Investment
Performance.
Most homeowners who have had a mortgage would
have a good understanding of what a mortgage
is and how it works. Most other investments,
such as stocks, bonds, income trusts and mutual
funds, are affected by variables not always
readily understood by the average investor.
MIC share values do not fluctuate in response
to market forces like publicly traded stocks,
bonds and income trusts, or mutual fund unit
values. MIC share values are always equivalent
to the share issue price, because of the Income
Tax Act (ITA) rule requiring 100% of a MIC’s
net income to be paid out to the shareholders
by way of an annual dividend. The share value
would only decrease if the MIC experienced an
annual operating loss.
For example, a MIC commences operations with
$1 million in share capital, comprised of 1
million shares issued for $1.00. each, contributed
by a number of individual investors. It utilizes
the share capital to acquire a mortgage portfolio,
in the amount of $1 million. At the end of the
first operating year, the MIC earns an annual
net income of $100,000., or 10 cents per share,
representing an annual shareholder return on
investment of 10.00%. The Income Tax Act requires
that all of the net income must be distributed
to the shareholders in the form of a dividend.
If all of the shareholders take a cash dividend,
the MIC’s assets would remain at $1 million,
which when divided by the 1 million shares outstanding,
means that the shares are worth $1.00., consistent
with the issue price. Conversely, if all of
the shareholders elected to receive their dividend
in the form of additional shares, the MIC’s
assets would be $1,100,000., which when divided
by the 1,100,000 shares now outstanding by virtue
of the stock dividend, would again equate to
a share value of $1.00. However every investor would have 10% more shares, worth 10% more than their original investment.
MIC share values are a function of the quality
of the Company’s mortgage portfolio, which
in turn is principally determined by the value
of the real estate securing the mortgages. Real
estate values are affected by a number of factors,
including the condition, location and type of
the property, and local market conditions. These
are factors that can be readily seen, measured
and compared. Real estate values tend to be
much less volatile than stock and bond prices.
Even if the borrower defaults, the mortgage
investor is protected by collateral that is
stable and immoveable. Magenta’s mortgage portfolio is low risk for a number of reasons: (i) The real estate security is residential, comprised primarily of single family owner occupied homes; (ii) First mortgages are heavily over weighted; (iii) Lending is concentrated in stable, largely recession proof real estate markets dominated by the public sector, such as Ottawa and Kingston, Ontario.
MIC shares typically produce consistent returns,
primarily because of the nature of mortgage
investments. Mortgage interest rates are fixed,
and repayment must occur at regular intervals.
MIC shares generate substantial regular income
relative to alternative investments.
In short, MIC investments are typically characterized
by constant share values, extremely attractive,
consistent returns, and the potential to generate
regular income.
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5. What rate of return may I
reasonably expect?
Refer to Investment
Performance.
Past performance is not necessarily an indicator
of future performance or expected returns.
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6. How much is paid for management?
Basic management fees are calculated as a percentage
of assets (1.75%), with an additional bonus
management fee in the event shareholder return
exceeds the TD Canada Trust posted 5 year GIC
rate at the beginning of the fiscal year, plus
4.00%.
Historical shareholder investment returns reflect
the deduction of all operating expenses, including
both basic and bonus management fees calculated as above.
Magenta II Class “A” Participating
Shares are subject to an additional annual management
fee in an amount equivalent to 3.00% of the
issue price of the shares. Magenta II Class
“A” Share ROI will thus be 3.00%
less than that applicable to the Magenta II
Class “B” shares.
Class ”A” shares may be exchanged
for Class “B” shares, once an individual
shareholder’s shareholdings, exclusive
of shares issued through dividend reinvestment,
are equal or greater to $150,000. Refer to
9. below and How
to Invest, I. Direct Cash Investment.
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7. Are Magenta shares RRSP, RRIF and TFSA eligible?
Yes. Refer to How to Invest, II. RRSP/RRIF
INVESTMENT, for complete details.
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8. Who can invest in Magenta
shares?
Canadian residents, living in any
province or territory may subscribe
for shares.
Shares may be held individually, jointly, in
trust, in a corporation, or in a self-directed
RRSP, RRIF or TFSA.
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9. What are the minimum
investment amounts? Will share subscription
be closed to new investors?
Refer to How to Invest,
I. Direct Cash Investment.
Magenta Class “A” Participating
Shares
| Minimum initial
subscription: |
$150,000 |
| Subsequent subscription
amounts: |
$22,000+ |
| Subscription deadline:
|
Issuance of new shares may be suspended without notice at the sole discretion of the Board of Directors |
Magenta II Class “A”
Participating Shares
| Minimum initial
subscription: |
$50,000 |
| Subsequent subscription
amounts: |
$10,000+ |
| Subscription deadline: |
Issuance of new shares may be suspended without notice at the sole discretion of the Board of Directors |
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10. How and when can I
liquidate my investment?
Shares may be transferred to a third party
at any time, subject to the approval of the
Board of Directors.
After 2 years from the date of share issuance,
the Corporation will consider requests by shareholders
for the purchase of their shares for cancellation,
at a price equivalent to the issue price of
the shares, or the then current book value of
the shares. Redemption requests received prior to expiration of the 2 year minimum holding period will be honoured in the event that the shareholder dies or becomes disabled or in other exceptional circumstances.
Annual dividends payable with respect to cancelled
shares, will be calculated in the manner outlined
in How to Invest, I. Direct
Cash Investment. For example, shares cancelled
on December 1st, that accordingly would have
been outstanding for 6 months of the fiscal
year ending on May 31st of the following year,
would be entitled to a pro rated dividend equivalent
to 50% of the annual dividend, declared after
completion of the annual audit.
A complete copy of the policy statement with
respect to the purchase of shares for cancellation,
is available upon request.
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11. How and when are Magenta’s
profits distributed to shareholders?
The Income Tax Act requires that 100% of a MIC's net income, as verified by Independent audit, be distributed annually to shareholders in the form of a dividend.
The dividend is taxed as interest income, in that it essentially represents a flow through of mortgage interest income. Both cash and stock dividends earned outside of an RSP, RRIF or TFSA are fully taxable in the calendar year received.
Dividends may be received in the form of cash, additional stock or any combination thereof. Dividends are paid monthly at a fixed rate of 6.00%. The lion’s share of the residual annual dividend, calculated on the basis of management prepared financial statements, is paid at year end. A small ‘top-up’ dividend is paid once the annual dividend is finalized at the conclusion of the audit. For example, in fiscal 2010 the Magenta dividend payment schedule was as follows: (i) 6.00% paid monthly throughout the year; (ii) 3.00% at year end (May 31, 2010); (iii) .69% at the conclusion of the audit (July 31, 2010). Shares issued by way of stock dividends at the conclusion of the audit are allotted on June 1st and accordingly are fully eligible for dividends commencing on that date
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12. How can I monitor my
investment?
All shareholders receive a copy of the annual audited statements and an individualized statement reflecting dividend calculations and share related activity, as well as quarterly management prepared financial statements.
Shareholders holding their shares outside of a registered plan, also received delete the ‘d’ a T5, reflecting the amount of their annual taxable dividend.
Activity pertaining to shares held within an RSP, RRIF or TFSA will also be reflected in the statements provided by the registered plan trustee.
We welcome shareholder inquiries at any time,
and are always happy to discuss the Companies’
results and progress.
Refer to Financial
Statements and Portfolio Info.
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13. Who are the Companies’ auditors?
Refer to Corporate Info
/ Links.
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