More than one-third of the money raised from investors to provide syndicated mortgage loans for Fortress Real Developments Inc.’s building projects was paid out as cash commissions to salespeople and as consulting fees to Fortress, new court documents say.
The court filings show Ontario’s financial regulator, the Financial Services Commission of Ontario (FSCO), has significant concerns about lending practices at Fortress’s affiliated mortgage brokerage company, Building & Development Mortgages Canada Inc. (BDMC). The company has raised more than $700-million from 11,000 investors since 2013, primarily to finance Fortress’s real estate development projects.
In an affidavit filed in court, FSCO lawyer Brendan Forbes said the regulator has received “numerous” complaints from investors about BDMC and the performance of their loans “compared to the promises made to them at the time they invested.” Many investors are people who have put significant portions of their retirement savings in the syndicated loans, he said.
“As a result of its investigations, FSCO is of the view that there are serious regulatory issues associated with BDMC [syndicated mortgage loans],” he said.
Ontario Superior Court Justice Glenn Hainey approved FSCO’s request on Friday to appoint FAAN Mortgage Administrators Inc. as a trustee to take control of BDMC.
In an affidavit filed to support the trustee application, Mr. Forbes said 35 per cent of the principal amount of money raised to provide syndicated mortgage loans for each Fortress development project was paid out as consulting fees to Fortress and as commissions to salespeople involved in raising the syndicated mortgage loans from investors, including individual agents, brokers “and unlicensed persons.”
Mr. Forbes said the breakdown of the payout structure was not specifically defined, but Fortress co-founder Vince Petrozza told FSCO Fortress’s development consulting fee typically amounted to 2 per cent to 5 per cent of total project costs.
Mr. Forbes said the Fortress portion “may be as high as 12 per cent,” according to information from staff at another mortgage brokerage firm associated with Fortress.
Borrowers that receive syndicated mortgage loans typically pay fees of 1 per cent to 3 per cent of the mortgage amount, including broker fees, according to mortgage web site Ratehub.ca.
The development consulting agreements also give Fortress the right to 50 per cent of project profits, subject to certain fees and deductions, the affidavit said. The agreements also ranked repayment of Fortress’s equity advances ahead of the loans from syndicated mortgage investors.
Fortress is a real estate development company that partners with builders on new projects, primarily condominiums. The company’s web site says it is developing or has completed 80 projects across Canada with a value of $6-billion.
BDMC acted as Fortress’s mortgage broker, helping the company raise funds for its projects. It is wholly owned by Ildina Galati and operates from the same address as Fortress.
Mr. Petrozza, Fortress’s chief operating officer, was registered as a mortgage broker with BDMC, but his licence was revoked in a Feb. 7 settlement agreement between FSCO and several other parties related to BDMC. Ms. Galati voluntarily surrendered her licence under the agreement.
Mr. Forbes said that in 2013, Ms. Galati directed some BDMC staff to leave the company and help form three independent brokerage firms – FFM Capital Inc., FMP Mortgage Investments Inc. and FDS Broker Services Inc. – to act on behalf of people seeking to invest in syndicated mortgage projects.
He said the intention was to create “some degree of separation” between the brokers acting for individual investors and BDMC, which was acting for Fortress. But he said many tasks investors’ brokers usually perform – such as due diligence reviews on projects and obtaining property valuations – were still done by BDMC as the borrower’s broker.
FAAN was appointed to oversee BDMC under the Feb. 7 agreement. But the arrangement fell apart this month after BDMC committed “multiple breaches” of the terms, FSCO said. FSCO moved on Friday to have the court appoint FAAN as trustee of BDMC, giving it far broader powers.
Among the breaches of the agreement, FAAN said a new mortgage broker company created to replace BDMC – called Canadian Development Capital & Mortgage Services Inc. (CDCM) and headed by Ms. Galati’s mother, Julie Galati − has not transferred requested records about mortgage loans. Fortress has also failed to provide requested documents.
In his affidavit, Mr. Forbes said FAAN had to take control of BDMC or “no independent third party” would be protecting investors’ interests.
“This situation is untenable and puts the 11,000 individual investors and their investments at risk,” he said.
BDMC did not contest Friday’s application to appoint FAAN as trustee. The company has not replied to requests for comment about FSCO’s concerns.
The RCMP has been investigating Fortress and related companies as part of a mortgage fraud investigation, searching six sites on April 13, including Fortress’s head office and BDMC’s office in Richmond Hill, north of Toronto.