Contributor: Pension lawyer Jean Pierre Laporte, BA, MA, LLB. (Jp.laporte@integris-mgt.com)

One of the key parts of a successful real estate transaction is securing financing for the buyer. Buyers have a wide range of options, from lower-cost “A” lenders to high-interest private mortgages. In many cases, lenders also want extra guarantees beyond the property itself, which can make it harder for some buyers to qualify. Pension plans offer another path to financing that’s worth considering.

Registered pension plans have broader investment options than Registered Retirement Savings Plans (RRSPs). For example, a pension plan can buy land as an investment, while an RRSP can’t. RRSP holders can buy shares of Mortgage Investment Corporations or even use their RRSP for a personal mortgage, but the complexity and administrative costs often make this an expensive route.

By contrast, pension plans set up by a Personal Real Estate Corporation (PREC) for a REALTOR® can be used to provide private mortgages to borrowers. This is done through a Pension Realty Corporation, a tax-exempt corporation that can only have registered pension plans as shareholders. A Pension Realty Corporation can retain a mortgage brokerage firm and act as a source of capital for deals.

Because a Pension Realty Corporation doesn’t pay tax on its income, it doesn’t need to charge as high an interest rate as traditional lenders such as banks and credit unions. A private mortgage from a Pension Realty Corporation can sometimes be offered at a rate below that of “A” lenders without impacting the loan’s profitability.

And since a Pension Realty Corporation isn’t subject to the same regulatory capital requirements as a bank, its underwriting criteria can be more flexible. This creates an opportunity for Realtors to help clients who may not qualify with “A” lenders but don’t want to take on higher-cost alternatives.

Since your income depends on completing transactions, having more financing options can make a big difference. Pension plan lending can help close deals that might otherwise fall through.

There’s also a double benefit for Realtors with a PREC:

• More transactions can mean more commission income.
• Loan repayments flow back into the pension plan tax-free, growing retirement savings more efficiently than traditional taxable mortgage investments.

Compared to conventional lenders, who face the highest levels of taxation on interest income, this structure can be a powerful advantage.