The EMD – The Layperson’s Guide for Everyday Real Estate Investing

Introduction to the Exempt Market Dealer

Many Canadians are keen to invest in real estate-backed securities. 

After all, Louis Glickman, the renowned American investor and philanthropist famously said: 

“The best investment on earth is earth.” 

Yet often all the bureaucratic and complicated legal protocols hold us back. 

This article intentionally avoids arcane legalese and references to specific provisions of statutes and regulations, policies, bulletins and adjudicated cases. That’s right, there will be no long explanations of what a national instrument 45-106 prospectus, national instrument 31-103 or 45-106 prospectus and registration is.

Instead, the intent is to explain in understandable language how a layperson can best participate in real estate investing using an Exempt Market Dealer (“EMD”) to a meaningful advantage.

A Background on Exempt Market Dealers

It’s important to understand the basic background related to the regulated Canadian securities investment landscape

Start with the fact that interests in real estate are considered “securities”. 

Securities legislation and regulators across Canada are increasingly looking to implement appropriate levels of consumer protection measures, especially since the financial crisis of 2007-2008. 

Typically, companies who offer stocks, bonds, mutual bonds and the like in the publicly traded capital market are required to prepare a disclosure document called a “prospectus” and have it precleared by a securities regulator like the Ontario Securities Commission (the “OSC”) before going public. 

However, there are some important prospectus and registration exemptions, one of which is where there is an offering memorandum (“OM”) detailing all the material facts to assist prospective purchasers in their decision whether to invest in the securities being offered by an issuer. An OM is similar to a prospectus but need not have the regulator’s prior sign-off.  

Interested in Learning More Inside-Industry Real Estate Investing Knowledge? Read these Articles Today.

It is this OM Exemption that gives birth to alternative investments exempted from the rigours of a prospectus and brings into play an Exempt Market Dealing representative, all within what is called the Exempt Marketplace

Exempt Market Dealer

Examining the Exempt Market Dealer

The Exempt Market Dealer is the vehicle that facilitates your purchase of real estate-backed securities in the Exempt Marketplace. 

An Exempt Market Dealer is a fully registered government-regulated securities dealer who acts as a dealer to distribute prospectus-exempt securities to qualified investors. Those include various categories of investors, defined by prescribed income and asset tests and investment limits. An exception is made for so-called “accredited investors” where investments and investment funds are not capped. 

The criteria for determining where you fit in can be complex and is beyond the scope of this paper, but suffice it to say, the Exempt Market Dealer will figure it out as part of their “Know Your Client” (“KYC”) obligations.

Trying to Make Sense of Your Real Estate Investment Options?

We’ve got the help you need, right at the click of a button.

This means collecting salient information about a client’s complete financial circumstances, investment objectives and risk tolerance. Importantly, any Exempt Market Dealer in Canada must ensure the exempt market security is “suitable” for the investor. 

For example, an elderly investor’s proposed investment of 90% of their wealth into a risky long-term real estate play is “unsuitable” and in the ordinary course must be rejected by the Exempt Market Dealer.

Why Choose Fundscraper as Your Exempt Market Dealer?

Fundscraper Capital Inc. (“FCI”) is Canada’s premier online platform for real estate investing. FCI is registered on the Exempt Market Dealer List as an Exempt Market Dealer with the Ontario, British Columbia, Alberta, Quebec, New Brunswick, and Prince Edward Island Securities Commissions.

Want to Learn More About How Fundscraper Works?

Watch our How-it-Works video and learn about your investment options today!

As such, FCI files regular reports to and is subject to periodic audits by regulators. It meets government requirements for operating capital (such as mutual funds) and must make timely reports to clients.

What sets FCI apart?

  • An informative, easy-to-navigate website www.fundscraper.com
  • Modern technology and best of practice compliance standards.
  • A marketplace with a wide variety of product offerings by proven issuers for the most conservative risk-averse investors to those more adventuresome.
  • In addition, we offer Fundscraper Property Trust sponsored investment opportunities, which qualify for investments by Registered Funds, like RRSPs, RIFFs, and TFSAs. 
  •   A comprehensive dashboard that keeps you informed in real-time of the status of your investments handled by FCI.
  • Concierge services by knowledgeable Dealer Representatives, all of whom have completed extensive training and licensing requirements of the OSC.
  • FCI’s senior management and Board of Advisors are comprised of seasoned experts in real estate development, finance, private equity, law and technology. 
  • FCI’s track record includes 7500+ registered members of its community, 10%+ in earned net annualized return since it launched in 2017 and $420 million in capital placed in real estate projects across North America. 

Conclusion on Exempt Market Dealers

Don’t bother taking an Exempt Market Dealer course. Instead, engage Fundscraper and make us your trusted ally by joining the Fundscraper community of investors.

The Modern Playbook for Super Successful Real Estate Investing

Every winning team has two things: a great coach and a great playbook. At Fundscraper, our coach is Luan Ha, MBA, our founder and CEO. And he recently published “The Modern Playbook for Super Successful Real Estate Investing.”

What is the Modern Playbook for Super Successful Real Estate Investing?

Luan is one of North America’s leading real estate experts. His playbook — which you can download for free — is filled with valuable insights about putting your money to work. He writes in a conversational, easy-to-understand style, drawing comparisons to the sport of professional football: scouting, leading, game-planning, and play-calling. But you don’t have to be a sports fan to get a lot out of it. If you’re interested in learning more about real estate investment, this free resource is an excellent place to start.

A good playbook is the secret of success, whether in sports or business.

Luan methodically describes the background homework behind his playbook. In the “Tips and Quotes” section, he explores advice from industry icons that helped him find success. Very informative is the “Profiles of Best Investors” section, a look at the big players, banks, institutions, wealthy families, and pensions. Have you ever heard of the famous 20% rule of investing, practiced by the Yale University Endowment Fund? Luan will tell you all about it!

Luan’s 9 best go-to plays for successful real estate investing

At the heart of Luan’s playbook is his actual list of go-to plays. These are the real, tried-and-true methods that got him to where he is today:

  1. Do your Due Diligence – from creating a checklist, to relying on experts to make sure the “story” makes common sense
  2. Determine the Location Works – all the factors to bear in mind
  3. Assess the Fundamentals of Supply and Demand – key things to remember
  4. Understand the Zoning – useful rules of thumb
  5. Consider Debt as an Investment Vehicle – important considerations
  6. Carefully Analyze the Debt Leverage of the Project – a double edged sword
  7. Figure Out Your Real Estate Investment Style – match your risk appetite, liquidity, expectations and return objectives to the deal
  8. Maximize Your Exit Options – more are better
  9. Avoid Mistakes – automatic if you follow the first 8 Go To Plays

Luan is convinced his playbook will give you a leg up in making real estate decisions. At the same time, he recognizes that not everyone has the time or skills to make these types of decisions on their own. That’s where Fundscraper comes into play!

How to get started

Who are we? We’re a team of experts who can do the heavy lifting for you, but at the same time, leave it to you to decide which real estate investments are right for you. We’ll be your coach, or your cheerleader, or both. We’re here as much or as little as you need.

Fundscraper is on the cutting edge of technology and government compliance. We’re registered with and regulated by the Ontario Securities Commission and also falls within the jurisdiction of Financial Services Regulatory Authority of Ontario.

To quote Luan, “Go for the touchdown and pass the ball to Fundscraper.”

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

Why Real Estate Is an Essential Part of Every Investment Portfolio

Think you can’t afford a real estate investment? Think again. Worried now isn’t the right time to add another property to your portfolio? It is possible, and we’ve got you. Even if the extent of your financial experience is a high-yield savings account, you can—and should!—diversify your portfolio with real estate. We’ll teach you how the 1% invests.

Key Points

  • Think you can’t afford a real estate investment? Think again. Worried now isn’t the right time to add another property to your portfolio? It is possible.
  • Too often, the traditional portfolio mix fails to achieve optimum performance because of the under-representation of direct real estate investing. 
  • Every investor’s goal should be to build a more perfect portfolio designed for maximum rewards and minimum risk.

The case for diversifying your investment portfolio

Too often, the traditional portfolio mix fails to achieve optimum performance because of the under-representation of direct real estate investing. Our thesis is simple: You’ll likely be more successful if you put more emphasis on solid direct real estate investing, while at the same time maintaining a high degree of safety.

Being risk averse is a good thing. We’re risk averse, too! Most people are naturally risk averse. We’re drawn to what we know and hesitant of what we don’t know. The average person knows more about traditional investments like stocks and bonds, so that’s where they put most of their money. But the investment environment, especially in the stock and bond markets, can be volatile. If you’re risk-averse, you should know that limiting your investments to only the public markets is one of the biggest investing risks of all.

Investing limited only to public markets risks the chance of devastation if the “bubble” precipitously bursts based on factors beyond our control, such as environmental disasters, inflation, or fluctuating interest rates. Common sense tells us to spread our money out into a diversity of pots, hoping the ups and downs will balance out and we will enjoy a somewhat stable, if unspectacular, return on our investments. As such, it’s a good idea to put a bigger emphasis on real estate investing.

Every investor’s goal should be to build a more perfect portfolio designed for maximum rewards and minimum risk.

Why is real estate an essential part of an investment portfolio?

Direct real estate investing fluctuates quite distinctly from other conventional asset groups like stocks and bonds. For instance, real estate is tangible and is what lawyers call an “immovable.” It’s not a substitute that should take the place of other assets in your portfolio, but rather an asset group all its own.

Unlike stocks and bonds, real estate trades privately based on local factors such as location, supply, demand, and investment lifespan. It is often scarce, particularly in growing areas, which translates to a history of appreciating value. In your portfolio, real estate investing is a channel to investments backed by real hard assets providing a regular income stream and long term growth coupled with the benefits of diversification.

You can enjoy superior performance and diversity at the same time. This is especially true if you’re maintaining and growing the value of your retirement portfolio. Smart real estate investing can only enhance the prospect of enjoying the benefits of things like reasonable leverage (typically as much as 4 or 5 times) and the miracle of compound interest over an extended period of time.

You can add real estate to your portfolio without actually buying property.

What are the benefits of real estate investment?

Meaningful real estate investing is essential for a well-rounded and successful investment package, and the benefits go well beyond diversification. The most obvious benefit of real estate investment is the financial one. Real estate earns attractive monthly returns and can provide a regular fixed income stream over a set time frame. Speaking of tangibility, that’s another benefit: Real estate is a hard permanent asset that can be easily securitized. It has value, and you can calculate that value at any given moment.

Take advantage of having solid real estate investing as a meaningful part of your portfolio. It’s a self-evident way to enjoy reasonable returns and balance out the vagaries and unpredictable fluctuations in public securities markets, both domestic and international. It’ll pay off in the long term while maintaining a high degree of safety.

Other benefits of real estate investment to note include:

  • The ability to take advantage of leverage
  • Tax deductions
  • A chance to create added value
  • An increased voice in the management of the asset

What is the 20% rule of investing?

Most of us never get a chance to participate directly in a major real estate project — usually grabbed up by big players, like private equity firms, banks, insurance companies, pension funds, and government institutions. We are mostly left to public mutual funds, real estate investment trusts (REITs), exchange traded funds (ETFs), and the like.

Consider the experience of and the lessons to be learned from the Yale University Endowment, which is one of the best performing investment portfolios in North America, having a current value in the range of $30 billion. The fund is known for its “20% rule” which recommends at least 20% be invested directly in private markets, such as real estate.

This invariably translates into significantly higher returns over time for a real estate investor over one who employs a more traditional allocation based in public markets. One can only conclude that it makes sense to piggyback onto a tried and true paradigm of real estate investing established by the major players.

Your investment portfolio can enjoy superior performance and diversity at the same time.

How do I get started?

If you’re new to real estate investing, the idea of adding such a large asset to your portfolio may seem intimidating. But it’s easier and more attainable than you might think.

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

The Role of the Credit Committee of an Exempt Market Dealer

The Credit Committee, sometimes called the Investment Committee, is a panel of individuals ubiquitously found in financial institutions, pension and endowment funds, credit unions, banks, insurance companies, and the like. Here, we’ll focus on the role and inner workings of the Credit Committee of an Exempt Market Dealer offering real estate products to the public.

Key Points

  • An EMD is a firm that has been licensed to distribute investment securities that are exempt from the rigours of a prospectus normally required by the Canadian Provinces in which it is registered to carry on business
  • The Board of Directors of an EMD normally establishes the Credit Committee comprised of senior management individuals with authority and relevant skill and experience. They meet regularly to consider new investments and approve, amend or turn away investment opportunities being brought forward under the auspices of the EMD
  • The credit committee serves as a natural buffer or safeguard against an overly enthusiastic promoter. An essential part of its mission is to protect the ultimate consumer of products offered to the public under the umbrella of an EMD

What is an exempt market dealer (EMD)?

An EMD is a firm that has been licensed to distribute investment securities that are exempt from the rigours of a prospectus normally required by the Canadian Provinces in which it is registered to carry on business.

EMDs may act as dealers for prospectus exempt securities sold to qualified clients. Typically, an EMD offers products covered by an Offering Memorandum (OM) which need not be pre-cleared by a Securities Commission. An OM is an issuer-prepared document purporting to describe its business. OMs assist prospective purchasers in their decisions of whether to invest in the securities being offered by the Issuer.

The Credit Committee does much of the “heavy lifting” for investors in evaluating the underlying merit of any investment opportunity.

What is a credit committee and what does it do?

The Board of Directors of an EMD normally establishes the Credit Committee comprised of senior management individuals with authority and relevant skill and experience. They meet regularly to consider new investments and approve, amend or turn away investment opportunities being brought forward under the auspices of the EMD.

The Credit Committee has a broad range of duties and responsibilities, including the obligations to:

  • Ensure regulatory compliance for each investment
  • Review regularly investment policies and recommend to the Board of Directors changes in policies, procedures, internal controls and underwriting guidelines
  • Promote wise investment and credit management
  • Rule on investment opportunities, taking into account credit, market, operational and legal risks
  • Ensure any investment is consonant with the EMD’s published investment criteria and policies

What is a loan officer?

The Loan Officer assigned to any proposed transaction is an experienced underwriter charged with presenting the investment opportunity to the Credit Committee, including all the supporting research. An underwriter’s main task is to assess the quality of an investment, its sponsors, and its inherent risks. Oftentimes, the Loan Officer’s presentation to the Credit Committee will have been previously vetted and endorsed by the Loan Officer’s supervising manager.

Why is it called underwriting? The term comes from the historical practice of Lloyd’s of London Insurance of requiring each risk taker (often for a sea voyage with risks of shipwreck) to put their “written” signature “under” the total monetary risk they were willing to assume in return for a fee. Hence the term “underwriting.”

It’s the credit committee’s job to approve, amend, or disapprove of an investment application.

How does a credit committee evaluate an investment opportunity?

Over and above its general obligations, on a daily basis, the Credit Committee is charged with evaluating potential investment opportunities falling within the EMD’s jurisdictional orbit. The review begins with the Loan Officer’s discussion paper, which includes a profile of the people behind the deal, its proposed terms, detailed analyses, and recommendations.

After deliberating over the Loan Officer’s underwriting report and completing any follow up interviews, the Credit Committee can approve, amend, or disapprove of the investment application at hand.

If the application is turned down absolutely or with amendments, the Loan Officer will advise the applicant accordingly. If it’s approved, a letter of intent will be sent. Upon acceptance by the applicant, a term sheet and commitment letter prepared by the Loan Officer and approved by the Credit Committee is forwarded to the applicant for signature and acceptance. The Loan Officer then will confirm that all due diligence and funding requirements are in order and that arrangements are put in place to fund the transaction. The EMD’s Legal Counsel will be retained to prepare and register the mortgage and/or any other security documents and ensure all conditions have been satisfied before funds are released. Barring the need for an extension down the line, the work of the Credit Committee is now done.

At this juncture, the EMD moves on to fulfill its regulatory obligations and attends to matters related to qualification of investors, suitability, conflicts of interest, disclosure, and more. It’s a complex process; the full treatment of these tasks is beyond the scope of this paper!

The credit committee serves as a natural buffer or safeguard against an overly enthusiastic promoter. An essential part of its mission is to protect the ultimate consumer of products offered to the public under the umbrella of an EMD.

What is due diligence?

Due Diligence, as applicable, covers many things, including:

  • The credentials of an Issuer or Sponsor
    The financial details of the proposed deal, including principal amount, yield, duration, and other salient features and conditions
  • Creditworthiness of the borrowers and/or guarantors, including credit checks, financial statements, personal references, and net worth statements
  • Third party reports such as valuation appraisals, architectural certificates, environmental reports, building condition assessments, geotechnical appraisals, and quantity surveyor reports
  • Leases, rent rolls, and estoppel certificates
  • Development budgets and construction schedules
  • Ability of the originator to fund budget shortfalls and need for a Deficiency and Cost Over Run Agreement
  • Zoning and building permits
  • Details of prior and subsequent encumbrances and availability of lender consents, if necessary
  • Assessment of loan to value ratios and other compliance with the EMD’s investment criteria
  • Evaluation of current competing market conditions for similar deals, including prevalent offerings by competitors
  • Timing of advances to the borrowers
  • Availability of collateral security
  • Builder’s risk and liability insurance
  • Validity of repayment schedules, as well as feasibility of exit route through refinancing or sale of underlying property
  • Evaluation of originator’s track record and project’s progress to ensure continued sustainability in case an extended term is needed
  • Location of the property, including marketability, condition, and value
  • Contemporaneous assessment of general economic and societal forces, including state of financial markets, existing and proposed government policies, local issues, and force majeure conditions
  • Review of commitment administrative and all incidental expenses and fees
  • Legal structure and supporting documentation

Meet the Fundscraper credit committee

Our team has over 125 years of experience in real estate development, finance, private equity, law, and technology. We’re proud leaders in our fields! Meet the Fundscraper credit committee here.

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

GET YOUR FREE DIGITAL COPY

The Modern Investor's Playbook
to Super Successful Investing

Become a master of real estate investing! This playbook has inside industry knowledge that you can use to help generate passive income! Discover tactics used by the savviest investors, how to diversify, maximize your returns and avoid mistakes. It’s everything you need to know to invest like a pro.

Start investing with Fundscraper today.