Anonymised, illustrative composite. The rent roll had been in the data room since week one. Nobody had put it next to the loan application, and nobody had a floor plan.
At a glance
The vendor had built the distributor over thirty-one years and bought the building in 2004, letting the surplus space as the business consolidated into a smaller footprint. By 2026 the trade counter, warehouse and offices took 3,360 square feet of an 8,400-square-foot building, the remaining 5,040 let to two unrelated tenants. The buyer, a regional distributor expanding east, wanted both. Price $1,480,000: $760,000 for the real property and $720,000 for the business — inventory $300,000, racking, forklifts and vehicles $260,000, customer book and supply relationships $160,000. The plan put $600,000 of the building purchase on a programme term loan.
The tenants were the point of the building from both sides’ perspective. They covered a meaningful share of the occupancy cost and the buyer had no intention of displacing them; the business does not need 8,400 square feet. The programme’s real-property class does not accommodate that, and does not accommodate it twice over. The test is not the economics of the building, its security value, or the quality of the tenants’ covenants. It is how much of the floor the borrower’s own business uses, and what it intends to do with it.
3,360 of 8,400 square feet is 40%. The threshold is 50%, and nothing in the plan brought the tenanted area into the business’s own use inside the window the Regulations allow: the leases had three and five years to run, so the building would still have been 60% let at the three-year mark.
It is worth noticing what the test does not measure, because two other numbers pointed the other way. An appraiser attributed roughly 55% of the building’s value to the trade-counter and warehouse portion, better fit-out than the leased bays; and the business generated about eleven times the rent the tenants paid. Neither figure is the test. Area is.
The real property came out of the programme and was bought by a separate company with a conventional mortgage of $494,000 at 65% loan-to-value, the operating company taking a ten-year lease of its 3,360 square feet at market. The programme loan was rebuilt on the operating assets alone — racking, forklifts and vehicles $260,000, leaseholds $55,000, intangibles $95,000, $410,000 in total, inside both the $500,000 and $150,000 maxima. Sources against the $1,480,000 price: $494,000 mortgage, $410,000 programme loan, $340,000 equity, $236,000 vendor take-back.
Section 5(2) of the Regulations, marginal note Loan Classes and Conditions, applies to one class only — paragraph 5(1)(a), “loans to finance the purchase or improvement of real property or immovables of which the borrower is or will become the owner”. It is the only place in the Regulations that looks at how premises are used, and it imposes two conditions, both to be satisfied when the loan is approved.
Paragraph (a) is the occupancy test: “at least 50% of the area of the real property or immovables is used for the operation of the small business or is intended to be so used within 90 days after the final disbursement under the loan agreement”. Area, expressly. The alternative limb is a ninety-day window from final disbursement, far too short to run out two commercial leases.
Paragraph (b) is the intention test and runs on a different clock: “that portion of the area is not intended to be used within three years after the day on which the loan is made for” resale or leasing or subleasing — three years from the day the loan is made, not from disbursement. A borrower can fail (b) after passing (a), by intending to let part of its own occupied space later.
The exception gets misremembered, and it is narrow in two ways. The words are “except in the case of a small business in the health care industry, hospitality industry or mini-storage industry”, and all three are defined in section 1(1) by reference to Statistics Canada’s 1980 Standard Industrial Classification: “Major Group 86 — Health and Social Service Industries”, “Major Group 91 — Accommodation Service Industries” and “479 — Other Storage and Warehousing Industries”. A plumbing supply distributor is none of them, and a warehouse is not a mini-storage facility. More importantly, the exception sits inside paragraph (b), not paragraph (a). Even a medical building, where letting suites to other practitioners is the whole model, must still put 50% of the floor into the borrower’s own use.
The mirror image catches tenants rather than owners: subsection 5(4) provides that “A loan referred to in paragraph (1)(b) may not be made if the real property or immovables are intended to be used within three years after the day on which the loan is made for subleasing”, with the same exception.
The building went into a separate company on a conventional mortgage and the operating company took a market lease of its 3,360 square feet — a familiar structure, as separating property into a distinct holding company sets out, but here forced by the financing rather than chosen for planning.
The structure does not rescue the programme loan. Had the property company been the borrower it would have failed section 5(2) twice: it occupies none of the area, and its whole purpose is to lease. The separation worked by taking the real property out of the programme. The lease then had to be long enough to support the leasehold-improvement component, which is why it was written for ten years.
A loan registered in the real-property class on a 40%-occupied building is made contrary to a prohibition, and the cure is narrow. Section 24 provides that “Notwithstanding that a loan was made contrary to a prohibition set out in any of subsections 5(2) to (4) and (6)” the Minister must still pay — but only if the non-compliance was inadvertent and “the non-compliance was due to inaccurate information having been provided by the borrower to the lender”.
Read that second condition from the borrower’s side: the cure is available to the lender precisely where the borrower misled it. A buyer who tells the lender the building is owner-occupied while a rent roll sits in the data room is supplying the fact pattern the cure is built on, and section 16(1)(a) of the Act makes it an offence if a person “knowingly makes any false statement or misrepresentation in an application, report or other document”. Doing it properly cost about 130 basis points on $494,000, against a facility that was unavailable anyway.
The rent roll and the loan application were prepared by different people and never read together. The rent roll went into the data room in week one; the application described the property as the business’s premises — true, and incomplete.
The practical check is a floor plan with the areas marked, put next to paragraph 5(2)(a) before the term sheet is signed. Nobody here had one: the building was described by address, price and cap rate, never by the square-footage split between occupier and tenants. Where a deal buys premises alongside a business, as buying real estate alongside the operating business sets out, that split is the first number to write.
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