Holding Companies vs Operating Companies
“Holding” Companies vs. “Operating” Companies
Why the Difference Matters to Mortgage Lenders
While there may be a number of financial planning reasons for a business to own its real estate in a separate holding company, there is also a lesser known reason; namely, the ease of obtaining mortgage financing. While on the face of it, the scenarios of property held by an operating company and property held in a holding company look identical, the effect on the company’s ability to borrow is quite different. So, what is the root of this difference to a lender? In a word: Liabilities.
Where the title to a property is held by an operating company, certain liabilities of that company can affect the priority of a lender’s interest. For example, CRA may assert statutory priority over the lender’s interest in the property for certain obligations such as GST and employee source deductions. Unfortunately, in the normal course of a mortgage transaction, it is not practical to obtain confirmation of outstanding GST and employee source deduction liabilities of the operating company, if this is even available at all.
Where the property is held by a holding company, there are no employees, thus no risk to the lender of exposure to employee source deduction claims. It is similar for GST. While the holding company may collect and remit GST on the rents charged, those sums are typically significantly less than the GST obligations of the business in the operating company.
Is it impossible to mortgage a property held by an operating company? The answer is both yes and no. Technically and legally it can be done, but practically, many lenders won’t do them and for those that do, borrowers may find it to be more trouble, costly and time consuming than it’s worth. At a minimum, a borrower should expect an in depth review of the financial statements and supporting documents of the operating company to satisfy the lender that remittances to CRA are current and reasonable given the business.
Even where the title to property is held by a holding company, the borrower should expect that the lender will require some proof of regular remittances of GST to CRA.
I can help find solutions for borrowers with complicated financial structures.
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