Buying a Storefront, Warehouse or Mixed-Use Building Without Riba

Which properties count as commercial real estate

The category covers retail units, offices, warehouses, industrial buildings and mixed-use buildings with shops on the ground floor. A rental building with five or more units is also generally handled as a commercial file by Canadian financiers.

Why requirements are stricter than for a house

A purely commercial property does not qualify for CMHC mortgage insurance, so the financier carries the risk alone. It therefore analyses the property's income, the strength of the tenants, lease terms and the operating business's ability to pay.

Down payment: plan for a large share of the price

In conventional commercial lending, a down payment in the range of 25% to 35% is common (indicative). Halal financiers often ask for as much, or more for a specialised property. The funds can come from the business, the partners or an investor partner.

Tenants' activities must also be permissible

The financier reviews what any tenants do: a bar, a liquor store or a gaming hall can be a problem. According to many scholars, a minimal share of doubtful income can be purified by a donation, but each board sets its own limit.

Diminishing musharaka for premises used by the business

The business and the financier buy the property together, then the business rents the financier's share and buys it back gradually. The principle is that of residential diminishing musharaka, but with commercial leases, larger amounts and additional guarantees.

Ijara on a building bought by the financier

The financier acquires the building and leases it to the business for a fixed term, with a separate promise to sell at the end. As in property ijara, rent can be reviewed under a written formula, and major ownership risks stay with the financier.

Property murabaha: a fixed price paid in instalments

The financier buys the property and immediately resells it to the business at a markup, payable over several years. The total price is known at signing. This approach involves two successive transfers of ownership, which affects land transfer tax.

Separating the property company from the operating company

Many owners hold the building in a separate company that leases it to the operating business. This shields the property from business risks and eases a future sale. A lawyer and an accountant check the tax effect and fit with the halal contract.

Land transfer tax and the risk of paying twice

Transfer taxes also hit commercial property, from Ontario and Toronto land transfer tax to Quebec duties and BC property transfer tax; Alberta charges registration fees instead. If the financier takes title then transfers it, tax may be due twice, as halal financing taxes explains.

GST/HST on the sale of a commercial building

Unlike most existing homes, the sale of a commercial building is in principle taxable. A registered buyer often self-assesses the tax and recovers it through a credit. Where the financier resells the property, an accountant should review each transfer.

Appraisal, inspection and environmental report

The financier requires an appraisal by an accredited appraiser and, for an industrial building or a former gas station, often a Phase I environmental site assessment. Contamination discovered after purchase can cost more than the building itself.

Who finances halal commercial property in Canada

Mississauga-based Tjara says it offers halal residential and commercial financing in all provinces, with an ethical and sharia advisory board. Cooperatives and private investor groups also set up musharaka deals for premises and mixed-use buildings.

Steps to buy commercial property with halal financing

1. Define the use, total budget and ownership structure with an accountant before searching for a building.
2. Check existing tenants' activities and current leases to rule out income considered impermissible.
3. Get approval in principle from a commercial halal financier by presenting financial statements and the down payment.
4. Sign an offer conditional on financing, inspection, appraisal and the environmental report.
5. Have a lawyer or notary review the chosen structure, the title transfer and the transfer taxes.
6. Sign the musharaka, ijara or murabaha contracts, then register the financier's rights at the land registry.

Acquisition costs for a commercial building financed without interest

Documents required to finance a commercial building

• Accepted offer to purchase and property listing sheet
• Current leases and rent roll
• Financial statements of the building and the operating business
• Articles of the purchasing company and share register
• Proof of down payment and its source
• Appraisal report and building inspection report
• Environmental site assessment, if required
• Certificate of location in Quebec or survey elsewhere

Mistakes to avoid before buying commercial premises the halal way

• Signing a firm offer without a financing condition, when halal commercial approval often takes longer.
• Ignoring the activity of an existing tenant whose lease cannot be ended for several years.
• Underestimating transfer taxes when the financier takes title before passing it to the business.
• Skipping the environmental report for a former garage or industrial site and inheriting costly clean-up.
• Buying the building in a personal name without accounting advice, at the expense of protection and tax.

Questions on buying commercial premises without riba