The Tri City Group was founded in the 1960’s by Ruth and Henry Goodman, who started a private lending club with friends and family at a bridge table in New York. They made their money building dry cleaning plants and were looking for ways to guard their capital while allowing it to earn a steady income. Having been raised in the aftermath of the Great Depression during which they saw banks, insurance companies and stock markets collapse, they were looking for an investment vehicle that maximized security. In other words, they wanted their capital not only secured by an asset, but they wanted that asset to be immutable such that whether the Great Depression happened again, the asset never went away. As real estate fits that description, they decided to become private lenders. What started as a small business with friends and family in 1960’s has now grown into the Tri City Group of Companies today, which is managed by Ruth and Henry’s son, Michael Goodman. It manages more than 400 investor accounts and more than $85m of investor capital across approximately 150 mortgages, which are mostly residential. Ruth and Henry found that residential mortgages are the safest, and Tri City today follows their wisdom.

The TCGMIMT is a licensed and regulated mortgage lender in British Columbia.  It is a private mortgage lender that only takes real estate as security and is set up a Mutual Fund Trust (MFT) , hundred percent owned by its investors, also called unitholders.   The trust is managed by Tri City Fund Management Ltd. which underwrites and funds each loan.

The maximum loan-to-value ratio for each loan is capped at 75%. Exceptions to this rule require unanimous approval from the Credit Committee and are considered only in rare circumstances.

Tri City Fund Management Ltd. is a Fund Manager. It’s personnel have decades of private lending experience, managing their own capital and that of investors in a shared pool.

In addition to managing TCGMIMT, Tri City Fund Management also manages the Tri City Mortgage Fund (TCFM), a mortgage trust now closed for investment.  Tri City Fund Management manages approximately $90 million in mortgage funds. 

Since 2010, TCFM has been providing a stable return to investors who are looking for capital preservation and a steady income, with returns that exceed GIC’s and are not correlated to the stock market.

Depending on the asset mix, Mortgage Trusts can sometimes offer lower-risk/volatility and more stabilized returns than many equity funds. They provide a means to participate in real estate markets without directly investing in property, while providing the safety of a registered charge in front of the owners’ equity position. This concept is known as loan-to-value. Private lenders favor this form of income over equities because once the mortgage is registered in the name of the Mortgage Trust; it becomes a debt registered by the Province on the specific title of the investment. This is distinctly different than equities as one is never quite sure what the underlying assets of a company are, and what the value would be in a volatile market. Also, common stockholders are the last to receive value if a company is liquidated, being preceded by mortgage holders first, and then bondholders, followed by preferred shareholders.  Often, mortgage trusts are referred to as equity lenders.

The trust is considered an equity lender, which means it lends against the equity in the property.  While equity lending rates usually exceed those of traditional banks, borrowers chose equity lenders for speed and efficiency.  For example, while a bank may underwrite a borrower’s financial situation and lend up to 90 percent of the property value, relying on the borrower’s income to pay the loan, equity lenders are different.  They don’t want to take on the risk of the borrower’s income, or his ability to pay.  Rather, they are willing to take on the risk of the property value.  As such, they are more stringent when valuing the property, and less stringent when valuing the borrower’s income.  This works out for equity lenders because the borrower’s income situation can change on a whim, however, property values are more stable.  So, while a bank takes on more borrower risk and will lend more against a given property, equity lenders will lend less against that same property, but their lending processes will be faster because they are not spending as much time underwriting the borrower’s income.  Rather, they evaluate the property and determine how much property risk they want to take, and if the borrower is a good fit for the trust.  They charge more and lend less than traditional banks, but they are faster and easier to deal with.

It works out well for investors because the returns are more predictable, and property risk is reduced and the business can be run efficiently, keeping costs down.

For borrowers, such as those embarking on real estate projects necessitating short-term improvements to enhance property value before resale or refinancing, transactional speed is more important than rate.  For others who may face temporary credit challenges resulting from factors such as immigration status or self-employment, they may be ineligible for loans at major bank rates, in which case they provide a market for equity lenders.

The trust is also a bridge lender and provides interim financing, affording borrowers the time needed to reorganize and qualify for more cost-effective funding. Our management team employs common-sense practices, prioritizing exit opportunities, equity cushions, and the borrower's ability to meet financial obligations.

The main risks associated with Mortgage Trusts are credit and interest rate risks. Credit refers to the borrowers’ ability to pay and can change with borrower circumstances. Assuming there is substantial equity in the property the ability of the borrower to pay is immaterial to the security of the loan and the borrower’s ability to pay. If the borrower does not pay, the lender can force the property to be sold. The loan-to-value ratio of a mortgage when advanced by a lender is a significant factor in the risk profile of a specific mortgage. 

Interest rates can fluctuate and affect how borrowers repay or refinance their loan. Trusts that carry mortgages with shorter terms are less affected by interest rate risk. Thus, the Monthly Income Mortgage Trust generally only lends for 12 months at one interest rate, with an opportunity to renew at a higher interest rate for three additional months.

The yield of a Mortgage Trust also depends in part on the trust manager finding quality mortgages that meet the trust’s investment and risk criteria. An experienced lender, with an excellent track record and established relationships with brokers and developers, would be in a better position to originate these mortgages than a less experienced lender. Trusts with the managers’ money in them may cause those analyzing the loan requests to be more cautious about funding than those managers who only manage another person’s money. In the Monthly Income Mortgage Trust and the Tri City Mortgage Investment Fund, the founders of the trust have significant amounts of money from the principals and their friends and family invested. Specifically, Michael Goodman through his holding company has a total of four million dollars invested in common units.

Finally, investments in mortgages are affected by general economic conditions and local real estate markets. Different classifications of mortgages are affected differently. Residential mortgages are generally considered the safest of the property classes. Commercial and large development mortgages generally are higher risk and, therefore, garner higher fees and interest rates. Factors such as demand for leased space, fluctuations in occupancy rates, time delays and operating expenses can all be huge factors with respect to many commercial mortgages.  It is for this reason that the Monthly Income Mortgage Trust and the Tri City Mortgage Investment Fund focus on financing condominiums, townhouses and Single-family dwellings.

Mortgages are relatively non-liquid investments as compared to stocks, mutual funds, and some GICs. However, a trust that invests in short-term mortgages provides the trust manager more flexibility to respond to market conditions and provide liquidity. Another advantage of mortgage trust investing in short-term mortgages is it offers a better opportunity to repatriate investors’ money than those with longer-term loans.  Mortgage trust units are more akin to a bond or an investment certificate, which are cashable but only with a penalty in the near term. A mortgage trust that is functioning in normal times and invests in short-term mortgages should have the capital available to pay out investors who want to use their money elsewhere for a variety of reasons. As with many GIC’s, early withdrawal penalties apply with many trusts and MICs. The Monthly Income Mortgage Trust has a unit class, which has a one- year term, although funds can be withdrawn at any time at the investor’s request assuming funds are available to pay the investor his/her capital back.

In short, some of the benefits of investing in mortgages are the holders of the mortgage are secured by the land and buildings and are in a position where the mortgage holders are paid in order of their charge. Failure to do so by the owner starts a process of foreclosure whereby the court orders that the property be put up for sale and sold by the court to the highest bidder. The ranking of the mortgage, commonly referred to as first, second or third, dictates who gets paid the proceeds of the sale first. Thus, the equity in the property, which is referred to as loan-to-value, becomes a key factor as to whether all mortgage holders get paid. If the loan-to-value is in order, then it protects the value of the mortgage, and the lenders get paid back their interest and principal. 

Another benefit to keep in mind about mortgage lending is that the laws of foreclosure in Canada are very well defined and there is an established procedure for a lender to recover its debt. 

It has not been uncommon for private individuals to lend their money on mortgages. While there are pluses and minuses to all investing plans, here are some of the advantages of investing with others in a Mortgage Trust or a Mortgage Investment Corporation, commonly referred to as a MIC. By pooling funds, individuals can invest in a diversified portfolio of mortgages managed by experienced underwriters and mortgage professionals who understand this business inside and out. In contrast, when people act on their own behalf as private mortgage lenders, they are exposed to both regulatory complications and the considerable infrastructure it takes to engage in the business. In addition, there are substantial capital requirements, which most individuals do not have. Most individual investors are not able to invest in a large enough number of mortgages to benefit from diversification, and therefore have greater risk. Furthermore, with first mortgage amounts in Vancouver climbing on average towards a million dollars, most people do not have enough money to even fund one first mortgage, let alone a diversified portfolio of mortgages. By pooling funds, small investors are given an opportunity to invest in higher yielding investments, such as mortgages, than they would normally have access to. 

The other reason why it makes sense to be in a pool of mortgages is the ability of the manager of the pool to create a flow of mortgages to look at and pick from. At Tri City Group, we looked at almost 900 mortgage proposals last year to fund one in twelve mortgage opportunities. Mortgage brokers do not want to be bothered calling various one-off investors attempting to get a mortgage funded when they can call a mortgage pool, which generally has funds available. 

Most REITs are publicly traded shares of a company whose primary business is buying, owning, and managing groups of income-producing properties, such as apartment buildings, hotels and shopping malls. Income received in the form of rent or leases is distributed to investors. In effect, an investor is placing himself or herself in the position of the owner, as opposed to the debtor. In terms of investing, this is a much riskier position than holding the mortgage because the first loss is to the investor in the REIT. There is no longer the protection of the equity in front of the debt held by the investors in the Mortgage Trust. Interest rate rise and vacancy can affect in the extreme REIT’s.

Mortgage Trusts have what we believe is one major advantage over MIC’s. In the event of a downturn, Mortgage Trusts can hold real estate whereas MICs cannot. Unlike stock investors, Mortgage Trusts can (in certain circumstances) seize the underlying asset, i.e. the real estate. At that point, they can choose to rent it, hold it or sell it. In a 1930 style depression, this could be a major advantage in preserving and even profiting on the mortgage investments made by the trust. This one feature strongly distinguishes investing in a Mortgage Trust over a stock portfolio. 

In addition, MICs resemble Mortgage Trusts, but have additional restrictions with respect to the types of mortgages MICs can invest in. At least 50% of the assets of a MIC must be invested in residential mortgages. While our Mortgage Trust focuses on residential mortgages, there may be points in the market whereby the trust manager feels it is better to invest in another asset class. In the market place, it is harder to finance other asset classes generally and thus, at certain times it may be advantageous to the trust and the investors to pick mortgages securing other types of buildings. 

Before investing in a Mortgage Trust, the following trust information should be reviewed and evaluated:

• What is the maximum loan-to-value ratio on any one property?

• What is the maximum percentage or dollar value that can be invested in any one mortgage?

• What are the lending guidelines for commercial and industrial mortgages?

• Where are the mortgages located?

• Do the managers have their own equity in the fund?

• How experienced are the managers in identifying mortgages?

These details are published in a trust’s Offering Memorandum.