Frequently Asked Questions

ANNUAL MEETING MAY 15, 2007
INVESTORS FREQUENTLY ASKED QUESTIONS

1. Why did the trustees amend the investment policy for second mortgages and how does this benefit the Fund?
We view this as a technical change because we have always done these kinds of transactions at Romspen.  The definition of “Second Mortgage” was too narrow.  For example, the way it was written we could not do a second mortgage on a pre-sold condominium development.  Technically those loans are third mortgages because the deposit insurance company also registers a mortgage on title.  It was also unclear whether we could wrap a first mortgage or do other creative financing where we wish to subordinate our debt.

The principal benefit of this change to the fund is that we can now use more of our subordinate mortgage basket without increasing portfolio’s loan-to-value.  For example, if we have a 60% loan-to-value (“LTV”) first mortgage yielding 10%, we can assign a senior position in the loan to another lender for 50% LTV at 8% and retain the 50-60% LTV portion as a synthetic second mortgage yielding 20%.  This is a much better deal than we could find as a pure second mortgage.  To earn 20% on a pure second mortgage we would probably have to go up as high as 80% or 90% LTV.

2. Why did the trustees increase the borrowing limit to 35% of the value of mortgages?When we originally set the limit to 25% we expected in rough terms that our mortgages on average would have an interest rate about 4% higher than the revolving loan with the result that we would add about 1% to the Fund’s overall yield, because 25% of 4% is 1%.   Unfortunately we did not anticipate how severely the cash we receive from borrowers who repay their mortgage loans would impact the average loan balance.  In practice, we found that the average daily loan balance works out to be about 10% less than the borrowing limit (in the fourth quarter of 2006, our average loan balance was about 14% of mortgages even though the credit limit was 25%).  This is similar to what many of our long term investors also noticed this year.   Many of them told us they did not realize how severely, in the pre-Fund days, their own annual incomes had been affected by these repayments.  Many only noticed this year when their T5’s showed more income than in the years when they held syndicated mortgages.  We decided to set the limit at 35% so that we can get closer to an average use of 25% and so that we may achieve an overall increase in yield of closer to our original target of 1%.  In our view, this is still a modest degree of leverage.

Another reason, although to the trustees a less important one, was that some of our competitors operate with a much higher degree of leverage than our Fund; some with credit limits as high as 60% or more.  This permits them to offer a lower interest rate to borrowers while still giving a high return to their investors.  We certainly do not believe that such a degree of leverage is appropriate for us and our investors, and thankfully, so far we continue to find many high quality loans at good rates.  Perhaps in different economic circumstances, we may choose to be a little more rate competitive in certain markets.

3. Does the 35% borrowing limit apply to only to first mortgages or to all mortgages, and what if part of a mortgage is assigned to another lender?
Technically, the 35% limit applies to the retained portion all mortgages, first or non-first. As a practical matter though, no lender will consider a non-first mortgage as acceptable collateral for our revolving loan, so the 35% will likely apply only to first mortgages.

4. How do the trustees determine each month’s distribution?
There is no set interest rate at any given time.  The trustees meet shortly before each distribution is declared to review the financial results of the Fund for the previous month.  They take into consideration the interest earned on the Fund’s mortgage investments, expenses incurred, the provision for loan losses, and determine the amount of the distribution at that time.  The Fund must distribute all of its taxable income to unitholders shortly after the end of each calendar year, so the January distribution represents the final accounting for the previous calendar year.

5. Why was my T3 amount for 2006 different from the total amounts I actually received in 2006?
The income distribution in January, 2007 represents taxable income of the Fund for 2006, so it is included in the T3 even though it is paid in 2007.

6. Does the proposed income tax legislation for income trusts, also known as SIFT’s, specifically exempt the Fund by definition or does the Fund fall into a “grey” area that must be successfully argued?
It is absolutely clear that the proposed new SIFT tax does not apply to the Fund because we are not public.  However, the proposed tax does complicate matters if we decide to go public.  We certainly would not want to go public if it were not possible to do so in a tax efficient manner.

7. What are the top five mortgages based on dollars and what per cent do they make up of the entire portfolio?   Is management comfortable with this level of concentration? 
The investment policies of the Fund limit the amount we can lend to any single borrower to 10% of the portfolio.   We are comfortable with this limit because in our view our larger loans are often our better loans.   Our top five mortgages as of Dec 31 added up to $71 million which was 23.6% of the portfolio.  Their average LTV was 54% when we advanced, and it’s likely lower today.  These borrowers are backed by very wealthy people who are committed to their ventures and have ample means to see them through.  Investment summaries for every mortgage are posted on our website, but you need a password to get this level of detail.  Please call our Ann Ralston if you want to get your password.

8. Looking into the future, with only three trustees, what would happen should one of the trustees be disabled and otherwise not carry on their duties?  Would it make overall good governance to expand the board of trustees?
Although there are only three trustees, there are several other senior managers at Romspen, including Blake Cassidy, Vitor Fonseca, and Mary Gianfriddo, so we are not dependent on any single trustee.  The management group will continue to expand as we continue to grow.  When we started the Fund, we considered including some independent trustees but we decided against it, knowing this was perhaps somewhat unusual.  Since the only purpose of the Fund is to invest in mortgages, we could not imagine that an independent trustee, who never met the borrower, visited the property, or examined the details would be in a position to add much value to the investment decision process.  Our compact board is, when taken collectively, the largest investor in the Fund, this creates excellent motivation to be cautious.  A compact board of insiders is also very efficient at making decisions and it minimizes bureaucracy and cost.  So far, we have not found the lack of independent trustees to be an impediment to attracting capital from individual accredited investors.  On the contrary, it seems that many of our investors take a more active approach to due diligence when they decide to invest in our Fund than they may when considering other investments through a broker or intermediary.  We think that this personal attention is healthy and better for governance than arbitrary rules and regulations.  If we wanted to attract institutional investors or if we wanted to go public, we would have to change our approach to governance because our optics are not what people on Bay Street are used to seeing.  However, we have always operated our business this way, and we see no reason to change now.

These frequently asked questions and answers are provided for explanatory purposes only. They are not intended to be a complete description of the Fund. For a complete description of the Fund, Please refer to the Offering Memorandum.