Let me tell you about options most property owners don’t fully understand.
You own a commercial property. Strong cash flow. Good tenant. You’re considering your financing options.
Your broker mentions you could refinance with a traditional mortgage. Or you could explore REIT financing. Or maybe even sell to a REIT and lease back the property.
These sound like similar options, but they’re fundamentally different. Understanding these differences can save you money or help you access capital in ways traditional financing can’t.
What REITs Actually Are
Let’s start with basics because most people’s understanding of REITs is fuzzy.
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs trade like stocks. They’re required to distribute most of their income as dividends to shareholders.
In Canada, REITs must be publicly traded and meet specific regulatory requirements. They provide investors access to commercial real estate returns without buying properties directly.
REITs specialize by property type: retail REITs, office REITs, industrial REITs, residential REITs, healthcare REITs, etc.
Why does this matter to you as a property owner? Because REITs interact with property owners in several ways that affect your financing options.
Three Different REIT-Related Options
When people talk about “REIT financing,” they’re usually referring to one of three different structures. Let me clarify each.
Option 1: Selling to a REIT
You sell your property outright to a REIT. They buy it. You receive proceeds. The transaction is done. You’re no longer the owner.
This isn’t financing. This is a sale. But it’s often mentioned in the same conversation because it’s a way to monetize your property.
Option 2: Sale-Leaseback with a REIT
You sell your property to a REIT and immediately lease it back on a long-term lease. The REIT becomes your landlord. You become their tenant.
This is also not financing in the traditional sense. But it functions like financing because you’re converting property ownership into liquid capital while maintaining operational control through the lease.
Option 3: REIT-Provided Mortgage Financing
Some REITs provide mortgage financing on properties they don’t own. They become your lender, holding a mortgage on your property.
This IS financing. The REIT is functioning as a lender, not a buyer.
These are three completely different structures with different implications. Let’s explore each.
Selling to a REIT (Outright Sale)
When you sell to a REIT, you’re just selling property. But REITs as buyers have specific characteristics.
Why REITs Buy Properties:
REITs need to continuously acquire properties to grow their asset base and provide dividend growth to shareholders. They’re active buyers in most markets.
They prefer properties that fit their investment criteria:
- Strong, creditworthy tenants
- Long-term leases
- Predictable cash flows
- Properties matching their sector focus
Advantages of Selling to a REIT:
Institutional Buyer: REITs are sophisticated buyers with substantial capital. They can close quickly and handle complex transactions.
Fair Pricing: REITs typically pay market value or close to it. They’re financial buyers evaluating investment returns, not emotional buyers.
Clean Transaction: Once sold, you’re done. No ongoing property management obligations. Capital is liquid.
Disadvantages:
Loss of Upside: You no longer own the property. Future appreciation benefits the REIT, not you.
Tax Hit: You’re triggering capital gains in the year of sale. Depending on your tax position, this could be significant.
No Control: If you were occupying the property for your business, you no longer control it. You’re either relocating or negotiating a lease.
When This Makes Sense:
Selling to a REIT makes sense when you want to exit property ownership entirely, monetize appreciation, and deploy capital elsewhere.
It doesn’t make sense if you want to retain ownership or if you need the property for your business operations.
Sale-Leaseback with a REIT
This is a more nuanced structure that blends elements of sale and financing.
How REIT Sale-Leasebacks Work:
You sell your property to a REIT at or near market value. Simultaneously, you sign a long-term lease (usually 10-25 years) and lease the property back.
From an operational standpoint, nothing changes. You’re still operating from the same location. But financially, you’ve converted owned real estate into liquid capital plus a lease obligation.
Why REITs Like Sale-Leasebacks:
REITs get a property with a built-in, creditworthy tenant (you) on a long-term lease. This is exactly what they want—predictable, long-term cash flow.
You’re not just a random tenant. You’re the previous owner who has deep operational ties to the location. You’re unlikely to leave. This tenancy stability is valuable to the REIT.
Advantages for Property Owners:
Capital Access: You convert illiquid real estate equity into liquid capital without borrowing. Your balance sheet shows no debt (just lease obligations).
Operational Continuity: Your business continues operating from the same location. Customers, employees, and operations are unaffected.
Flexibility: The capital you receive can be deployed in your business, invested elsewhere, or used for succession planning.
Tax Efficiency: Lease payments are fully tax-deductible operating expenses. Depending on your situation, this might be more tax-efficient than ownership.
Disadvantages:
Loss of Ownership: You don’t own the property anymore. Appreciation benefits the REIT.
Lease Obligation: You’ve traded optional ownership for mandatory lease payments. If your business struggles, you still owe rent.
Less Control: Landlord approval might be needed for modifications or subleasing.
Capital Gains Tax: The sale triggers immediate tax on your appreciation.
When This Makes Sense:
Sale-leaseback with a REIT makes sense for established businesses needing capital for growth, acquisition, or diversification who are tied to their current location operationally.
It doesn’t make sense if you’re likely to relocate, if you want to capture real estate appreciation, or if lease obligations would constrain your business flexibility.
REIT Mortgage Financing
Now let’s talk about actual financing—where a REIT provides a mortgage on your property.
How REIT Financing Works:
Some REITs operate mortgage programs where they originate commercial mortgages. They’re functioning as a lender, not a property buyer.
You retain ownership. They hold a mortgage secured by your property. You make monthly payments just like with traditional financing.
The difference is your lender is a REIT rather than a bank.
Why REITs Provide Mortgages:
Mortgage REITs (sometimes called mREITs) invest in real estate debt rather than real estate equity. They make money from interest income and loan origination fees.
For these REITs, providing mortgages is their business model.
Typical REIT Mortgage Terms:
- Loan-to-value: 60-75%
- Interest rates: Typically 0.5-1.5% higher than traditional bank rates
- Terms: 5-10 years
- Amortization: 20-25 years
- Property types: They tend to focus on strong, income-producing commercial properties
Advantages of REIT Mortgages:
Flexibility: REITs often lend on properties or situations that don’t fit traditional bank criteria. Value-add properties, specialized property types, or borrowers with unique circumstances.
Speed: REIT lenders can sometimes move faster than traditional banks. Their underwriting can be more streamlined.
Relationship: Some REIT lenders are willing to finance entire portfolios or provide ongoing relationships as you grow.
Less Red Tape: REIT lenders might have less bureaucracy than large banks.
Disadvantages:
Higher Cost: REIT mortgage rates are typically higher than traditional bank rates. You’re paying for their flexibility and speed.
Shorter Terms: REIT mortgages often have shorter terms than traditional financing, creating more frequent refinancing requirements.
Less Availability: Not every REIT offers mortgage financing. Finding REIT mortgage programs requires specialized knowledge.
When This Makes Sense:
REIT mortgage financing makes sense when traditional lenders decline your deal or can’t provide adequate loan amounts, when you need faster closing, or when your property type doesn’t fit traditional lending criteria.
It doesn’t make sense if you qualify for traditional financing at lower rates.
Traditional Mortgage Comparison
Let’s directly compare REIT-related options to traditional commercial mortgages.
Traditional Commercial Mortgage:
- Lender: Bank, credit union, or traditional lender
- You retain ownership
- Rates: 5.5-7% currently (varies by market)
- Terms: Typically 5-10 years
- LTV: 65-80% depending on property and borrower
- Requirements: Strong property income, good borrower credit, traditional property types
- Best for: Straightforward deals with established properties and creditworthy borrowers
REIT Outright Purchase:
- Not financing, but an exit strategy
- You sell property at market value
- Immediate liquidity
- Loss of future upside
- Tax consequences
- Best for: Exiting property ownership entirely
REIT Sale-Leaseback:
- Converts ownership to capital plus lease obligation
- No debt on balance sheet
- Operational continuity
- Loss of ownership and appreciation
- Lease obligations
- Best for: Businesses needing capital while maintaining location control
REIT Mortgage Financing:
- Higher rates than traditional (6.5-9%)
- More flexible on property types and borrower situations
- Often faster and less bureaucratic
- Shorter terms typically
- Best for: Deals that don’t fit traditional criteria
The Hidden Option: Hybrid REIT Structures
Some transactions blend elements of these options.
Preferred Equity from REITs:
A REIT provides capital structured as preferred equity rather than debt. You retain ownership, but the REIT has a preferred position ahead of your common equity.
This provides capital without traditional debt but gives the REIT some upside participation.
Joint Venture Partnerships:
You partner with a REIT on property ownership. You operate the property. The REIT provides capital. You split returns based on the partnership terms.
This is neither pure financing nor pure sale. It’s somewhere in between.
Development Financing:
Some REITs provide construction or development financing with an option (or obligation) to purchase the completed property.
You’re essentially building for a pre-arranged buyer who’s financing your construction.
These hybrid structures can solve problems that traditional financing or outright sales can’t address.
Tax Considerations
Tax treatment varies dramatically across these options.
Outright Sale to REIT:
- Full capital gains triggered immediately
- Potentially significant tax liability in year of sale
- Proceeds are fully liquid
Sale-Leaseback to REIT:
- Capital gains triggered on sale
- But lease payments are fully deductible going forward
- May be tax-neutral or beneficial depending on circumstances
REIT Mortgage Financing:
- No sale, so no capital gains
- Interest is deductible
- Tax treatment similar to traditional mortgage
Work with your accountant to model the tax implications of each option for your specific situation.
Making Your Decision
Which option is right for you?
Choose traditional commercial mortgage if:
- You qualify for it
- Rates are competitive
- You want straightforward financing
- Your property fits traditional criteria
Choose outright sale to REIT if:
- You want to exit property ownership
- You have alternative uses for capital
- You can manage tax consequences
- You don’t need the property for operations
Choose sale-leaseback with REIT if:
- You need substantial capital
- You must stay in your location
- Balance sheet optimization matters
- Lease obligations won’t constrain your business
Choose REIT mortgage financing if:
- Traditional lenders decline your deal
- You need faster closing
- Your property is non-traditional
- Higher rates are acceptable for flexibility
Finding REIT Options
Not all REITs buy properties or provide financing. You need to know where to look.
Property Sales/Sale-Leasebacks:
Large Canadian REITs like RioCan, Choice Properties, SmartCentres, Allied Properties (and others depending on property type) actively acquire properties.
Work with commercial real estate brokers who have REIT relationships.
REIT Mortgage Financing:
Fewer REITs provide mortgage financing. This requires specialized knowledge of the market.
Some private REITs and mortgage investment corporations (MICs) provide this type of financing.
At Creek Road Financial Inc., we have relationships with REITs and REIT-affiliated lenders across Canada who provide various financing and acquisition structures.
Your REIT Decision
Should you explore REIT-related options for your property?
Start by clarifying what you actually want:
- Do you want to retain ownership or exit?
- Do you need capital or just better financing terms?
- Do you need to stay in your location?
- What are your tax considerations?
- What’s your timeline?
The answers to these questions will point you toward the right option.
What We Do
At Creek Road Financial Inc., we help property owners evaluate REIT-related options alongside traditional financing.
We have relationships with REITs that acquire properties, REITs that provide sale-leaseback structures, and lenders (including some REIT-affiliated lenders) that provide mortgage financing.
We can help you understand the real cost and implications of each option, model the economics, and structure the approach that best serves your goals.
Sometimes traditional financing is clearly superior. Sometimes REIT-related structures provide advantages that traditional financing can’t match. Often, understanding all your options helps you negotiate better terms with your eventual chosen path.
Your Next Step
If you own commercial property and you’re considering financing options, let’s have a conversation about the full range of possibilities.
We’ll review your property, your goals, and your constraints. We’ll explain which options realistically apply to your situation and what the trade-offs look like.
You’ll understand not just one financing option, but the entire landscape of what’s available.
Because commercial property financing isn’t just about banks anymore. REITs, specialty lenders, and hybrid structures have created options that didn’t exist a generation ago.
The key is understanding which options serve your goals and which create problems you don’t need.
Exploring financing options for your commercial property? Contact Creek Road Financial Inc. today. Let’s discuss traditional mortgages, REIT structures, and alternative approaches. Because knowing all your options helps you make the choice that’s actually best for your situation, not just the first option presented to you.