How to Structure a Commercial Deal Before You Even Apply

Why Deal Structure Matters More Than You Think

Most commercial mortgage applications are won or lost before the borrower ever submits a formal request. The difference between a smooth approval and a frustrating decline often comes down to deal structure - how the ownership is organized, how equity is sourced, how guarantees are arranged, and how thoroughly the borrower has prepared their documentation.

Source: CMHC, Commercial Lending Best Practices - Borrower Preparation Guide, 2024

Institutional lenders evaluate commercial mortgage applications through a lens of risk mitigation. Every structural choice you make - from the legal entity that holds the property to the way you split equity with partners - either increases or decreases the lender's perceived risk. This guide walks you through the key structural decisions and how to optimize each one for maximum approval probability.

For a complete overview of financing options available, visit our financing options page.

Holding Companies vs. Personal Ownership

One of the first decisions in structuring a commercial property acquisition is whether to hold the property personally or through a corporation. In Canada, the vast majority of commercial real estate is held through single-purpose corporations (SPCs) or holding company structures, and lenders strongly prefer this.

Source: CRA, Income Tax Folio S4-F7-C1 - Amalgamations of Canadian Corporations, 2024

Why lenders prefer SPCs:

• Clean title: The corporation holds only the subject property, making the lender's security straightforward
• Limited liability: If the project fails, other assets are protected (though personal guarantees are typically still required)
• Simpler foreclosure: In a worst case, the lender deals with a single-asset entity rather than untangling personal affairs
• Tax efficiency: Income splitting, capital gains exemptions, and dividend strategies are available through corporate structures

Important note: While corporate structures offer tax advantages, we are not providing tax advice. Consult a qualified accountant and tax lawyer before finalizing your ownership structure. CRA scrutiny of real estate holding companies has increased significantly in recent years.

Source: CRA, Focus on Real Estate - Compliance Activities in the Real Estate Sector, 2024

Partner Equity Splits and Co-Borrower Structures

Many commercial deals involve multiple investors or partners. How you structure equity contributions and decision-making authority has a direct impact on your mortgage approval.

What lenders want to see:

• A clear majority owner (51%+ ownership) who acts as the operating partner and primary contact
• Source of equity documented for all partners - lenders must verify that down payment funds are not borrowed (anti-money laundering requirements under FINTRAC)
• A shareholder agreement or partnership agreement that addresses dispute resolution, buyout provisions, and decision-making authority
• All partners with clean credit - one partner's poor credit can jeopardize the entire application

Source: FINTRAC, Reporting Requirements for Real Estate Transactions, 2024

Critical tip: Have all equity contributions in a Canadian bank account at least 90 days before applying. Last-minute transfers, especially from international sources, trigger enhanced due diligence that can delay or derail your application.

Personal Guarantees: What You Need to Know

Almost every commercial mortgage in Canada requires a personal guarantee from the principals - even when the property is held in a corporation. This guarantee makes you personally liable for the mortgage if the corporate borrower defaults.

Source: OSFI, Guideline B-20 - Credit Risk Management, 2023

Types of personal guarantees:

• Full recourse: You are personally liable for the entire mortgage amount. Standard for most conventional lenders.
• Limited recourse: Your personal liability is capped at a specific amount or percentage (e.g., 50% of the mortgage). Available from some institutional lenders on strong deals.
• Non-recourse: No personal liability beyond the property itself. Very rare in Canada - typically only available on CMHC-insured deals or very large institutional transactions.
• Burn-off guarantee: Recourse that reduces over time (e.g., from 100% to 0% over 5 years) as the loan-to-value decreases. Increasingly common.

"Bad boy" carve-outs: Even on non-recourse loans, there are always carve-outs that restore full personal liability for certain acts: fraud, environmental contamination, bankruptcy filing, and failure to maintain insurance. These are non-negotiable.

Negotiation strategy: If you're a strong borrower (high net worth, strong credit, real estate track record), push for a limited or burn-off guarantee. The savings in personal risk can be substantial, and many lenders have flexibility here even if they don't advertise it.

Letter of Intent (LOI) Best Practices

Before you sign a purchase agreement, you should execute a Letter of Intent - a non-binding (usually) document that outlines the key deal terms. The LOI is your opportunity to structure the deal in a way that facilitates financing.

LOI provisions that support financing:

• Extended due diligence period: Request 45–60 days (not the standard 15–21 days) to allow time for appraisals, environmental assessments, and lender review
• Financing condition: Always include a condition that the deal is subject to satisfactory financing - without this, you may be legally committed even if financing falls through
• Vendor take-back option: If the vendor is willing to provide a second mortgage for part of the purchase price, this can bridge the gap between your equity and the first mortgage
• Assignment clause: The right to assign the purchase agreement to your holding company before closing
• Existing lease review: Access to all tenant leases, estoppel certificates, and rent rolls as a condition precedent

Source: Real Property Association of Canada (REALPAC), Commercial Real Estate Transaction Standards, 2024

When to engage a mortgage broker:

The ideal time to engage The Mortgage World is before you sign the LOI - not after. We can advise on deal structure, financing conditions, and realistic loan amounts before you commit to purchase terms that may not be financeable.

Due Diligence Checklist

Comprehensive due diligence before submitting your mortgage application saves time and demonstrates professionalism to lenders. Here is the documentation lenders typically require:

Property Documents:

• [x] Current property tax bill and assessment
• [x] Phase I Environmental Site Assessment (Phase II if triggered)
• [x] Building condition report (for existing properties)
• [x] Appraisal (lender will order their own, but having a preliminary one helps with pricing)
• [x] Survey or reference plan
• [x] Zoning confirmation letter from the municipality
• [x] Fire code compliance certificate

Financial Documents:

• [x] 2–3 years of historical operating statements (T1 Generals for the property)
• [x] Current rent roll with lease expiry dates
• [x] Copies of all tenant leases
• [x] Estoppel certificates from tenants
• [x] Capital expenditure history and planned CapEx budget
• [x] Property management agreement (if applicable)

Borrower Documents:

• [x] Personal net worth statement for all guarantors
• [x] 2–3 years of personal tax returns (T1)
• [x] Corporate financial statements (if applicable)
• [x] 90-day bank statements showing equity availability
• [x] Real estate portfolio summary (other owned properties)
• [x] Resume/experience summary in commercial real estate

For a more detailed overview of qualification requirements, visit our how to qualify resource page.

Tax Planning Considerations

While we are not providing tax advice, there are several tax-related structural decisions that affect both your financing and your after-tax returns. Discuss these with your accountant:

• HST on commercial acquisitions: The purchase of most commercial property includes HST. Eligible purchasers can claim input tax credits (ITCs), but the upfront cash requirement is significant.
• Land transfer tax: Ontario, Manitoba, and municipalities like Toronto levy land transfer tax on commercial purchases. Budget 1.5–3.5% of the purchase price.
• Capital cost allowance (CCA): The annual depreciation deduction reduces taxable income but also reduces your adjusted cost base, increasing capital gains tax on sale.
• Principal business corporation (PBC) status: CRA treats corporations whose principal business is real estate rental differently from holding companies. Structure matters.

Source: CRA, Guide T4036 - Rental Income, 2024

When to Engage a Broker (and Why Early Is Better)

The optimal sequence for a commercial property acquisition is:

1. Identify the opportunity - perform preliminary analysis on the property
2. Engage The Mortgage World - we provide a preliminary financing assessment before you commit
3. Structure the deal - based on financing parameters, structure the LOI and ownership appropriately
4. Sign the LOI / purchase agreement - with appropriate financing conditions
5. Submit the mortgage application - with pre-organized documentation
6. Complete due diligence - concurrent with lender underwriting
7. Close the transaction - with aligned closing dates between purchase and mortgage

Too many borrowers follow this sequence in reverse - they sign a purchase agreement, then scramble to find financing, then realize their deal structure creates problems. By engaging a broker early, you avoid costly restructuring and improve your odds of a smooth closing.

For additional guidance on the commercial mortgage process, explore our full financing options page and our guide on what to expect during the commercial mortgage process.

References

1. CMHC Commercial Lending Guidelines: https://www.cmhc-schl.gc.ca/professionals/project-funding-and-mortgage-financing
2. CRA Income Tax Folios - Corporations: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index.html
3. CRA Real Estate Compliance: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/real-estate-sector.html
4. FINTRAC Real Estate Reporting: https://fintrac-canafe.canada.ca/guidance-directives/transaction-operation/rr-dr/re-bi-eng
5. OSFI Guideline B-20: https://www.osfi-bsif.gc.ca/en/guidance/guidance-library/residential-mortgage-underwriting-practices-procedures
6. REALPAC Transaction Standards: https://realpac.ca/
7. CRA Guide T4036 - Rental Income: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036.html