How you structure your property purchase affects your financing options, tax treatment, liability protection, and future flexibility. Get the structure right from the start, and everything else becomes easier.
Let me show you the key structural decisions and how to make them strategically.
Personal vs Corporate Ownership
Your first big decision: buy personally or through a corporation? Each has advantages and disadvantages.
Personal ownership is simpler. You buy the property in your name, the mortgage is in your name, and rental income flows to your personal tax return. Lenders are comfortable with personal ownership and financing is straightforward.
Advantages: Simpler structure, easier qualifying (lenders look at you directly), access to principal residence exemption if applicable, lower accounting costs.
Disadvantages: Full personal liability, all income taxed at your personal rates, less flexibility for estate planning.
Corporate ownership means setting up a corporation (usually a holding company) to own the property. The corporation gets the mortgage, receives rental income, and pays expenses.
Advantages: Limited liability protection, potential tax deferral, easier to bring in partners, cleaner for estate planning and succession.
Disadvantages: More complex, higher accounting costs, some lenders less comfortable with corporate borrowers, may require personal guarantees anyway.
There’s no universally right answer. Work with your accountant and lawyer to evaluate what makes sense for your situation.
Holding Companies vs Operating Companies
If you go the corporate route, should the property be owned by your operating company or a separate holding company?
Operating company ownership: If you own a business that will occupy the property, that business could own it directly. Revenue and expenses all flow through one company.
Disadvantage: The property becomes an asset of the operating company, exposed to operating business liabilities. If the business gets sued or goes bankrupt, the property could be at risk.
Separate holding company: Create a corporation solely to own the property. It holds the real estate and rents it to your operating business (or other tenants).
Advantage: The real estate is protected from operating business liabilities. If the operating business fails, the real estate company still owns the property.
For most situations where you’re buying commercial real estate separately from business operations, a separate holding company provides better asset protection.
Partnership Structures
If you’re buying with partners, structure this carefully from day one.
General partnership: All partners share ownership and liability equally (or in agreed proportions). Simple but offers no liability protection.
Limited partnership: General partners manage the property and have full liability. Limited partners invest capital but have limited liability. This works when some partners want control and others just want investment returns.
Joint venture company: Create a corporation owned by all partners in agreed percentages. The corporation owns the property. This provides liability protection and clear ownership structure.
Co-ownership agreement: If buying personally with partners, have a detailed co-ownership agreement covering decision-making, profit distribution, dispute resolution, and exit procedures.
Never enter partnership without clear written agreements. Use lawyers to document everything properly.
Purchase Price Allocation
When buying commercial property, the purchase price should be allocated among different asset categories. This affects your taxes.
Land: Not depreciable for tax purposes. The portion allocated to land can’t be written off.
Building: Depreciable at 4% annually (Class 1) or 6% (Class 3) depending on age and type. Depreciation creates tax deductions.
Equipment or fixtures: If the property includes equipment, furniture, or fixtures, these might be depreciable at higher rates (20% to 30%).
Work with your accountant to allocate the purchase price tax-efficiently while staying within reasonable bounds. Allocating too much to building and not enough to land raises red flags with CRA.
Lenders care about this too. They want reasonable allocations that reflect actual value distribution.
Assuming Existing Financing vs New Mortgage
Sometimes properties come with existing mortgages that can be assumed. Should you assume or arrange new financing?
Assuming existing financing can work if the rate and terms are good. No appraisal, no application, sometimes lower costs.
Disadvantages: You inherit whatever terms the existing mortgage has. The rate might be high. The mortgage might have restrictive covenants. The amount might not be what you need.
New financing gives you current rates and terms suited to your needs. You can structure the mortgage amount, amortization, and terms how you want.
Disadvantages: Full application process, appraisal costs, lender fees.
Compare the costs and benefits. Sometimes assuming existing financing saves money. Sometimes it locks you into poor terms that aren’t worth the convenience.
Seller Financing Integration
If the seller is willing to carry part of the purchase price, how you structure this matters.
Second mortgage: Most common structure. You get a first mortgage for 60% to 65% of the price. Seller provides a second mortgage for 15% to 20%. You contribute 20% to 25% down payment.
The first mortgage lender needs to approve the second mortgage terms and ensure it’s subordinate to their first position.
Delayed payment: The seller might agree to a delayed payment of part of the purchase price. You pay $800,000 at closing, then pay another $100,000 in 12 months. This keeps cash in your pocket initially.
Earn-out or contingent payment: Part of the purchase price is contingent on future property performance. “If NOI exceeds $X in year one, I’ll pay you an additional $Y.” This shares risk and can bridge valuation gaps.
Any seller financing should be documented formally with lawyers. Don’t use handshake deals.
Timing Your Purchase and Financing
When you close affects your financing and taxes.
Fiscal year-end timing: If you’re buying corporately, timing the purchase relative to your corporation’s year-end can affect how quickly you get depreciation deductions.
Interest rate environment: If rates are rising, lock in financing sooner. If falling, you might delay or choose shorter terms or variable rates.
Cash flow timing: Closing at month-end vs mid-month affects pro-rations and when your first mortgage payment is due.
Construction or lease-up timing: If the property needs work or has vacancy, timing the purchase so you have time to lease up before mortgage payments start can be strategic.
Think beyond just “close as soon as possible” and consider what timing optimizes your financial position.
Down Payment Sourcing and Documentation
How you source your down payment affects lender comfort and deal structure.
Personal savings is cleanest. Money in your bank accounts for 90+ days needs minimal documentation.
HELOC or refinance of other property works but creates more debt. Lenders need to see you can service all your debt, not just the new mortgage.
Partner contributions require clear documentation showing each partner’s contribution and ownership share.
Family gifts need gift letters stating the money is a gift with no repayment expectation.
Business funds require showing the business can afford to contribute the capital without impairing operations.
Structure your down payment sourcing to minimize lender concerns and documentation requirements.
Lease-Back Arrangements
Sometimes buyers purchase a property they’ll use in their own business. How you structure this affects financing and taxes.
Lease to yourself: If you own the property corporately and your business operates from it, you should have a formal lease between your property company and your operating company. Charge market rent.
This seems odd—paying rent to yourself. But it creates proper documentation of property income, justifies the property value to lenders, and provides tax deductions to the operating company.
Occupy without lease: Some owner-users don’t create formal leases to themselves. This can complicate financing because lenders want to see documented income from the property.
For best financing and cleanest tax treatment, always use formal lease agreements even in related-party situations.
Dealing with Zoning and Use Restrictions
Your financing can be affected by how the property’s use is structured.
Conforming use: If the property’s use matches current zoning perfectly, financing is straightforward.
Non-conforming use: If the property’s use is non-conforming (legal but doesn’t match current zoning—often grandfathered from before zoning changed), some lenders get nervous. If the current use fails, you might not be able to re-establish it.
Conditional use or variance required: If you need zoning variances or conditional use permits to operate as planned, get these approvals before closing. Lenders want certainty about what can be done with the property.
Structure your purchase with conditions that let you verify zoning works for your intended use before you close.
Environmental Liability Management
Structure your purchase to minimize environmental liability risk.
Purchase through corporation: If contamination is discovered post-closing, corporate ownership limits your personal liability to the corporate assets.
Environmental indemnity from seller: Negotiate that the seller indemnifies you for any pre-existing contamination discovered post-closing.
Environmental insurance: Available for properties with known environmental issues. You pay premium but transfer cleanup risk to the insurer.
Escrow for potential issues: If Phase I identified potential concerns, hold back funds in escrow to cover potential Phase II or remediation costs.
Environmental liability can exceed property value. Structure protections from day one.
Capital Contributions vs Loans from Partners
If partners are contributing money, is it a capital contribution or a loan to the partnership/company?
Capital contribution: Money becomes equity. Partners own the property proportionally to their capital contribution. They participate in profits and appreciation.
Loan: Partner loans money to the entity, which must be repaid with interest. They get their money back with interest but don’t participate in appreciation or profits beyond the interest.
These create very different tax and economic outcomes. Structure intentionally based on what partners want.
Document everything. Don’t rely on “we’ll figure it out later” because that creates conflicts.
Purchase Agreement Conditions
Structure your purchase agreement with conditions that protect your financing.
Financing condition: “Conditional on obtaining financing satisfactory to the purchaser.” This lets you walk away if you can’t get acceptable financing.
Appraisal condition: Sometimes separated from financing condition. Lets you back out if the appraisal is too low.
Environmental condition: “Conditional on satisfactory environmental assessment.” Protects you if contamination is found.
Due diligence condition: General condition allowing you time to review all property information and back out if you discover problems.
Strong conditions protect you. In hot markets, sellers might resist extensive conditions. Balance protection against making your offer competitive.
Holdbacks and Delayed Payments
Sometimes structuring part of the purchase price as holdbacks or delayed payments helps financing.
Repair holdback: If the property needs repairs, hold back funds to complete them. This reassures lenders the work will get done.
Rent-up holdback: If spaces are vacant, hold back funds until they’re leased. This incentivizes the seller to help lease up and provides cushion if leasing takes longer than expected.
Delayed closing payment: Part of the price paid at closing, part paid 6 or 12 months later. This reduces initial cash needs and gives you time to generate income from the property before making full payment.
These structures require seller agreement, but they can bridge gaps and make deals work.
Tax Planning Integration
Work with your accountant to structure the purchase tax-efficiently.
Depreciation planning: Maximize depreciable assets (building, equipment) vs non-depreciable (land).
GST/HST considerations: Commercial property sales might be subject to GST/HST. Understand who pays and how it affects your financing needs.
Income splitting: If family members will be involved, structure ownership to facilitate income splitting within CRA rules.
Estate planning: Structure ownership to facilitate eventual estate transfer to next generation.
Tax loss utilization: If you have tax losses in other areas, timing property purchase to offset against those losses might be strategic.
Tax planning affects both immediate costs and long-term returns. Integrate it into purchase structure.
Exit Strategy Consideration
Even as you’re buying, think about eventual exit. How you structure purchase affects exit options.
Clean corporate structure makes the entity saleable. Buyer purchases the corporation, not just the property.
Multiple properties in one entity creates complications if you want to sell properties separately later.
Partnership structures should include exit provisions—buyout rights, first refusal options, drag-along rights.
Structure today with tomorrow’s flexibility in mind.
Your Structuring Action Plan
Before you make an offer on commercial property:
- Consult with your accountant about personal vs corporate ownership
- If partners are involved, discuss ownership structure and get it in writing
- Talk to lenders or your broker about their requirements for different structures
- Work with your lawyer to draft proper purchase agreements with protective conditions
- Plan your down payment sourcing and documentation
- Consider tax implications of different structures
- Think about environmental protection strategies
- Plan for future flexibility and exit
Getting structure right from the beginning prevents problems and expensive restructuring later.
Moving Forward
Property purchase structure matters as much as the property itself. The same property structured differently can result in vastly different tax outcomes, financing options, and liability exposure.
Don’t wing this. Work with experienced accountants, lawyers, and mortgage professionals who understand commercial real estate. Their fees are investments in getting your structure right.
At Creek Road Financial Inc., we help clients think through purchase structure regularly. We know how different structures affect financing options and can help you navigate these decisions. We work with your accountant and lawyer to ensure the structure works for both financing and tax optimization.
The right structure sets you up for success. Take the time to get it right.