Which Commercial Properties Are 'Unfinanceable' in Canada (and How to Fix Them)

Why Some Commercial Properties Can't Get Traditional Financing

In the Canadian commercial mortgage market, not all properties are created equal. While banks eagerly finance well-tenanted office buildings and stabilized multi-family assets, an entire category of commercial real estate exists that institutional lenders simply will not touch. These so-called "unfinanceable" properties present risks - environmental, regulatory, or reputational - that fall outside the tolerance of Schedule I and Schedule II banks.

Source: OSFI, Guideline B-20 - Residential Mortgage Underwriting Practices and Procedures, 2023

The good news? Most of these properties can be financed, just not through traditional channels. Private lending solutions and specialized lenders fill this gap, though at higher rates and with different structures. Understanding why a property is declined is the first step toward finding the right financing path.

Gas Stations and Fuel-Related Properties

Gas stations rank among the most challenging commercial properties to finance in Canada. The primary concern is environmental liability - specifically, the risk of underground fuel storage tank (UST) leaks contaminating soil and groundwater.

Under Ontario's Environmental Protection Act (EPA), property owners bear strict liability for contamination cleanup, which can cost anywhere from $100,000 to several million dollars.

Source: Ontario Ministry of the Environment, Conservation and Parks, Environmental Protection Act, R.S.O. 1990

How to get financing:

• Obtain a Phase I and Phase II Environmental Site Assessment (ESA) before approaching lenders
• Secure environmental liability insurance (policies are available through specialty insurers)
• Approach private lenders who accept environmental risk at 65–70% LTV with rates of 7–10%
• Work with lenders specializing in petroleum properties (e.g., some credit unions with sector expertise)

Source: Technical Standards and Safety Authority (TSSA), Fuel Oil Code Requirements, 2024

Cannabis Facilities

Despite cannabis being legal in Canada since October 2018, most major banks still refuse to finance cannabis-related properties. The reason is twofold: international banking relationships governed by U.S. federal law (where cannabis remains a Schedule I substance) and the reputational risk banks associate with the sector.

Source: Cannabis Act, S.C. 2018, c. 16, Government of Canada

Even properties merely leased to cannabis tenants can become untouchable for traditional lenders. Federally regulated banks, which include all Schedule I institutions, face compliance concerns around anti-money laundering (AML) regulations when cannabis proceeds are involved.

What makes cannabis properties hard to finance:

• Federal banking regulations in jurisdictions where correspondent banks operate
• Volatile tenant sector with high business failure rates
• Specialized HVAC, security, and electrical requirements that reduce alternative-use value
• Odour and neighbourhood complaints creating municipal risk

How to get financing:

• Private mortgage lenders are the most reliable path, typically financing at 60–70% LTV
• Some alternative lenders (non-bank) have developed cannabis-specific programs
• Structure the deal with a personal guarantee and cross-collateralization to improve terms
• Demonstrate strong tenant financials and long-term lease commitments

For more on alternative property types and financing strategies, see our guide on specialty property financing.

Rooming Houses and Multi-Tenant Dwellings

Rooming houses - properties with multiple individual rooms rented to separate tenants sharing common facilities - face financing barriers due to regulatory risk and management complexity. Many municipalities in Ontario have historically restricted or prohibited rooming houses, and even where permitted, they require specific licensing.

Source: City of Toronto, Multi-Tenant Houses Bylaw (Chapter 285), 2024

Toronto, for example, only legalized rooming houses city-wide in 2024 after decades of geographic restrictions. Other Ontario municipalities still limit or ban them. This regulatory uncertainty makes banks nervous.

Why lenders decline rooming houses:

• Zoning non-conformance - many operate illegally or in regulatory grey areas
• Fire code compliance - retrofit costs for sprinklers, egress, and fire separations can exceed $50,000–$150,000
• Tenant management - higher turnover, damage risk, and social service involvement
• Appraisal challenges - limited comparable sales data
• Insurance difficulty - many standard commercial policies exclude rooming houses

How to get financing:

• Ensure full municipal licensing and fire code compliance before applying
• Private lenders will finance compliant rooming houses at 65–75% LTV
• Present a professional property management plan with vacancy and maintenance reserves
• Strong cash flow documentation (rent rolls, bank statements) is essential

Churches and Places of Worship

Religious properties are among the most misunderstood "unfinanceable" categories. The issue is not the property type itself but rather the limited alternative-use value and non-standard income streams that make underwriting difficult.

Source: CMHC, Commercial Mortgage Underwriting Guidelines, 2024

Churches generate income primarily through donations and event rentals, which lack the contractual predictability of commercial leases. If the congregation disbands, the lender is left with a large, single-purpose building that may sit vacant for years.

How to get financing:

• Demonstrate diversified income (daycare programs, event space rental, community programs)
• Propose a conversion plan (e.g., to residential lofts or community centre) as a fallback
• Private financing available at 50–65% LTV depending on location and condition
• Some denominational lending programs exist (e.g., through the Anglican, Catholic, or United Church networks)

Properties with Environmental Contamination

Beyond gas stations, a wide range of commercial properties can carry environmental contamination - former dry cleaners (perchloroethylene), industrial sites (heavy metals), auto body shops (solvents), and agricultural properties (pesticides). Ontario's Record of Site Condition (RSC) process governs how these sites can be remediated and returned to productive use.

Source: Ontario Ministry of the Environment, Conservation and Parks, Records of Site Condition (O. Reg. 153/04), 2024

Alberta follows a similar framework under the Alberta Environmental Protection and Enhancement Act (EPEA), with the Alberta Energy Regulator overseeing contaminated sites.

Source: Alberta Energy Regulator, Contaminated Sites Framework, 2023

The financing challenge:

• Brownfield designation - formally identified contaminated sites face extreme lending restrictions
• Remediation timeline - cleanup can take 1–5+ years, during which the property generates no income
• Liability transfer - even after a sale, previous owners can be held liable under Ontario's "polluter pays" principle
• Appraisal impairment - contaminated properties are appraised at remediated value minus cleanup costs

How to get financing:

• Complete Phase I and Phase II ESAs and obtain remediation cost estimates
• Purchase environmental impairment liability (EIL) insurance to backstop lender risk
• Private bridge financing can fund acquisition while remediation proceeds
• Apply for provincial brownfield remediation tax incentives (available in Ontario and Alberta)
• Once remediated, transition to conventional financing at standard terms

For related information on environmental considerations, read our article on understanding commercial appraisals.

Mixed-Use Properties with Non-Conforming Tenants

Mixed-use buildings present unique challenges when tenants include businesses that lenders view as high-risk: payday loan shops, tattoo parlours, vape stores, adult entertainment, pawnbrokers, or unlicensed food operations. Even if these tenants pay rent reliably, the reputational and regulatory risk they carry can render the entire property unfinanceable through traditional channels.

Source: FSRA, Mortgage Brokerage Standards of Practice, 2024

Why non-conforming tenants cause problems:

• Municipal licensing risk - some businesses may not survive regulatory changes
• Insurance exclusions - standard commercial policies may exclude certain tenant types
• Appraisal discounts - appraisers apply risk premiums for non-conforming use
• Refinancing difficulty - future lenders may decline based on tenant mix

How to get financing:

• Replace or phase out non-conforming tenants before applying (ideal but not always practical)
• Segregate the property's income streams to show non-conforming tenants represent less than 20–25% of revenue
• Private lenders are generally tenant-type agnostic, financing at 65–75% LTV
• Secure strong lease documentation showing tenant compliance with all municipal regulations

Your Path Forward: Financing the "Unfinanceable"

If you own or are looking to acquire a property that falls into any of these categories, the key is to approach financing strategically rather than simply submitting to a bank and hoping for the best. Here is a general framework:

1. Identify the specific objection - environmental, regulatory, income, or tenant-related
2. Remediate what you can - compliance, insurance, documentation
3. Engage a specialist broker - The Mortgage World works with 40+ lenders, including private and specialty lenders experienced with challenging property types
4. Structure the deal appropriately - higher equity, personal guarantees, and cross-collateralization can offset lender concerns
5. Plan your exit - many private loans are 1–2 year terms with a clear path to conventional refinancing

For a deeper look at specialty property financing or to discuss your specific situation, reach out to our team. We've helped clients across Ontario, Alberta, and Manitoba finance properties that other brokers couldn't place.

Also read: How to Structure a Commercial Deal Before You Even Apply for tips on preparing your application for maximum approval probability.

References

1. OSFI Guideline B-20 - Residential Mortgage Underwriting Practices and Procedures: https://www.osfi-bsif.gc.ca/en/guidance/guidance-library/residential-mortgage-underwriting-practices-procedures
2. Ontario Environmental Protection Act, R.S.O. 1990: https://www.ontario.ca/laws/statute/90e19
3. Technical Standards and Safety Authority (TSSA): https://www.tssa.org/en/fuels.aspx
4. Cannabis Act, S.C. 2018, c. 16: https://laws-lois.justice.gc.ca/eng/acts/c-24.5/
5. City of Toronto Multi-Tenant Houses Bylaw: https://www.toronto.ca/community-people/housing-shelter/multi-tenant-rooming-houses/
6. Ontario Records of Site Condition (O. Reg. 153/04): https://www.ontario.ca/laws/regulation/040153
7. Alberta Energy Regulator, Contaminated Sites: https://www.aer.ca/regulating-development/project-closure/liability-management
8. FSRA Mortgage Brokerage Standards: https://www.fsrao.ca/industry/mortgage-brokering
9. CMHC Commercial Mortgage Guidelines: https://www.cmhc-schl.gc.ca/professionals/project-funding-and-mortgage-financing