The bank will accept your pharmacy lease if it gives the buyer a secure right to stay in the premises for as long as the loan runs. Every lender we have worked with, banks such as Scotiabank, BMO, National Bank and CIBC, and credit unions, applies the same rule of thumb: the amortization follows the remaining lease term, including renewal options that are solid and transferable. In the current market that means up to about 12 years of amortization when 12 years remain, and 10 to 12 years is the usual result on a good lease. Fewer years means a shorter loan, higher payments and a bigger down payment, and below a certain point no loan at all.
That is why at PharmacyBroker.ca we read the lease before the financial statements, and it is why this is the first article in our Lease is Everything series. A $1.5 million pharmacy with $300,000 of normalized EBITDA is a very different loan on a 12 year lease than on a 4 year lease, even though nothing about the business has changed. This article explains how lenders read the lease, what makes a renewal option count, what a short lease does to the numbers, and what the bank will need from your landlord before it funds.
Why the bank reads the lease before the financials are final
A pharmacy acquisition loan is a cash flow loan. The lender is not lending against fixtures and inventory, which it could never sell for anything close to the loan balance. It is lending against the prescriptions that walk through the door at one address, every day, for the next decade. Move the address and the cash flow is no longer the cash flow the bank underwrote.
So the lender’s first question is not how much the pharmacy earns but how long the buyer can keep earning it there. The lease answers that and sets the longest amortization the bank will consider. Only then does the lender run the earnings through its coverage test.
This is also why the lease should go to the lender the day the letter of intent is signed, not after due diligence. In our experience a lease that reaches the bank late delays financing, and a delayed financing condition is how a sale misses its closing date. If you are looking at a pharmacy for sale, ask for the full lease, every amendment and every renewal notice before you spend money on anything else.
The rule of thumb: amortization follows the lease
There is no published bank policy that says a pharmacy loan’s amortization must match the lease term. It is a practice, and in our experience a near universal one across the major banks and the credit unions we have worked with in several provinces.
Remaining lease term, including solid options, sets the ceiling. In the current market up to 12 years of amortization is available when 12 years remain on the lease including options. Most pharmacy acquisition loans we see land at 10 to 12 years. A longer lease does not buy a longer loan beyond what the lender offers, but a shorter lease takes years off.
Options count when they are real. Lenders accept renewal options as part of the term as long as they are proper commercial options written into the lease. Most count them without argument. The next section covers what “proper” means.
The firm term alone is rarely enough. In the deal files we have open this autumn, most pharmacies for sale had fewer than five firm years remaining and several had under a year. Those sales depend on the options, or on an extension negotiated before the buyer’s bank sees the lease.
Get your lender’s lease requirement in writing before the LOI is signed. It is a rule of thumb, not a rule you can quote back to a credit officer.
What makes a renewal option count
The word “option” in a lease covers everything from a unilateral tenant right to a polite suggestion. Lenders, and the lawyers who read leases for them, sort them into two piles.
A solid commercial option has three features.
- Unconditional, or close to it. The tenant exercises it by giving notice within the window, and the landlord has no choice but to grant it. Options conditioned on the tenant “not being in default” are common and usually acceptable, but ask your lawyer whether a past, cured default could be used against a buyer. Options that require the landlord to “agree on terms” are not options.
- Transferable to the buyer. The option must survive an assignment of the lease, or a change of control if the deal is a share sale. Some leases make options personal to the original tenant, and some cancel them if the lease is ever assigned. In one of our recent files the options fell away if the tenant assigned the lease or changed its trading name, which would have left a buyer with the firm term only. The seller negotiated two fresh five year options with the landlord before listing, and the problem went away.
- A rent mechanism that works. Fixed steps or a fixed percentage are easiest for a lender to model. Market rent is acceptable if the lease says how it is set, with a floor at the last year’s rent and arbitration if the parties cannot agree, the most common wording we see in BC, Alberta and Ontario leases. “Market rent to be agreed” with no fallback is a weak option, because the landlord can refuse to agree and the lease simply ends. Arash has signed leases with every one of these mechanisms and now insists on a defined increase at each renewal, worded so that it can move the rent down as well as up.
A hope of renewal is everything else. A landlord who has been good to you for 15 years and “will definitely renew” is not a lease term. Nor is a letter saying the landlord is willing to discuss a new lease. Such letters help at the margins, but only a signed amendment extends the amortization. And an option is worth nothing if the notice window has passed, so check the dates before you rely on one.
What a short lease does to the numbers
Here is the arithmetic behind the rule of thumb, using our standard pharmacy and a simple model. These are illustrations, not a lender’s quote or market data.
The pharmacy. Normalized EBITDA of $300,000, valued at 5 times for $1.5 million plus inventory at cost. The model lender takes a $50,000 annual reserve off EBITDA for cash taxes, maintenance capital and working capital, leaving $250,000 of cash available for debt service. It wants coverage of 1.25, so it accepts annual debt service of at most $200,000. Interest is 8 percent with annual payments, and the lender advances no more than 80 percent of the price.
| Lease position | Amortization the lender accepts | Debt the cash flow supports | Modelled loan | Buyer’s equity |
|---|---|---|---|---|
| A. Ten firm years plus two transferable five year options | 10 years | About $1,342,000 | $1,200,000 (capped at 80 percent of price) | $300,000 |
| B. Five firm years, later option not counted, rent up $30,000 at closing | 5 years | About $703,000 | About $703,000 | About $512,000 on a $1,215,000 price |
| C. Two firm years, no usable option | 2 years | About $357,000 | About $357,000 | Whatever the finite value is, most lenders decline |
In scenario A the cash flow supports about $1.34 million of debt over 10 years, so the lender’s 80 percent cap is the binding limit, not the lease. The buyer borrows $1.2 million, pays about $178,800 a year and shows coverage of about 1.40.
Scenario B is the one most sellers are actually in. Five firm years, an option the lender will not count, and a landlord who wants $30,000 more rent at assignment. The rent takes EBITDA to $270,000 and cash for debt service to $220,000. Our model buyer also pays a lower multiple for the added risk, so the price falls to $1.215 million. You might expect the smaller price to help the buyer. It does not. Over five years that cash flow supports only about $703,000 of debt, so the buyer needs about $512,000 of equity, more than $200,000 above scenario A, to buy a cheaper pharmacy. The price goes down and the cheque the buyer has to write goes up. Article 2 in this series, how rent changes what a pharmacy is worth, takes the rent side apart.
Scenario C is not a pharmacy with a discount. Over two years the cash flow supports about $357,000 of debt, and a business that may end in two years has a finite value, not a multiple. Many lenders would decline the file outright.
The stress test lenders run. Take scenario A and change one thing: the rent goes up $30,000 a year with no offsetting gain. Cash for debt service drops to $220,000, and coverage on the $1.2 million loan falls from 1.40 to 1.23, below the 1.25 floor. To get back to 1.25 the loan has to shrink to about $1.18 million, or the buyer has to show more cash flow. This is why a lender reads the escalation schedule and the renewal rent clause as carefully as the term. A rent step that looks small on the lease can breach a covenant on an otherwise healthy loan.
Our guide to EBITDA normalization explains how the lender gets from the statements to the cash flow number it lends against.
Down payment and coverage: the other two levers
The lease sets the amortization. Two other numbers then decide how much the buyer borrows and how much they bring. Our pharmacy financing guide covers both in depth, along with everything else lenders check, so here is only how they interact with the lease.
Down payment. In the current market we see up to 100 percent financing on good pharmacies with good leases and strong buyers, and 100 percent loans are not uncommon. Other lenders want up to 20 percent down. Where a buyer lands depends on the lender, the buyer’s own balance sheet and, again, the lease. A short lease pushes a buyer toward a bigger down payment faster than almost anything else, because the shorter amortization is what makes the coverage fail.
Debt service coverage. 1.25 is the figure most lenders plan around, a little higher or lower depending on the lender and the file. It is a planning hurdle rather than a published rule, and every lender defines the cash flow side a little differently. Lenders also look past the store: the owner’s salary as a working pharmacist, a co-signing spouse’s income and other guarantors all come into the picture.
None of this replaces the lease. A buyer with 30 percent down and a spouse with a good salary still gets a five year amortization on a five year lease.
What the lender needs from your landlord
Once the lender has accepted the lease in principle, it needs the landlord to sign things. This is where sales slip, because the landlord is the one party in the deal with no deadline and no money at stake.
Consent to the assignment or change of control. The landlord’s written agreement to the buyer taking over the lease, or to the change in who owns the tenant company. Most commercial leases require it, and the lender will not fund without it.
Landlord waiver, sometimes called a lender acknowledgement. The lender takes security over the pharmacy’s assets, including fixtures and inventory sitting in the landlord’s building. The waiver sets out what happens between landlord and lender if the borrower defaults: the lender’s right to enter and remove or sell its collateral, and whether the landlord gives up its own claim over those goods for unpaid rent. Landlords do not love signing these, because a waiver limits their security. Some return the bank’s form with revisions, some sit on it. Expect a round or two.
Estoppel certificate. The landlord confirms the lease and all amendments, the term and options, the current rent and that the tenant is not in default. It is where missing amendments and unrecorded arrears tend to show up.
Insurance. Proof of the tenant’s insurance including fire coverage, with the lender noted where it requires that.
Timing. In our experience lease matters should be settled with the lender about four weeks before closing. Each document has to be requested, drafted, revised and signed by a landlord who has other things to do. Tell the landlord as soon as the LOI is firm and the purchase agreement is being drafted. If these are not in hand, the closing moves. Our sale timeline guide shows where this sits in the full sequence.
Three lease features lenders treat differently
Demolition and relocation clauses. A demolition clause lets the landlord end the lease early, often on 6 to 12 months’ notice, if the building is to be redeveloped. From a lender’s seat, a 10 year lease with a demolition clause exercisable in year three is a three year lease. In our experience pharmacies in buildings with a strict demolition clause often cannot be financed at all. These clauses are common in older buildings where the landlord wants an exit, and at minimum the clause should not be exercisable before the end of the lease including options. Relocation clauses are a cousin: the landlord can move you within the building or complex, and in many provinces a relocation is treated as a new pharmacy opening, with a new licence, a gap between locations and patients who do not all follow. Article 7, demolition and relocation clauses, covers both.
Subleases and shared units. Pharmacies inside clinics, grocery stores and other host businesses often hold a sublease rather than a head lease. Lenders can finance these, and we have seen them financed, as long as the sublease and the head lease together cover the amortization. The lender reads both documents. Subleases also carry restrictions a head lease does not: hours tied to the host, signage and access controlled by the host, and a term that can never run past the head lease, whatever the sublease says about renewal.
Share sale or asset sale. For the lender’s ability to lend against the lease, the structure makes little difference in our experience. In an asset sale the lease is assigned to the buyer’s company. In a share sale the tenant company stays the same, but many leases treat a change of control as an assignment and require the same consent, and the lender still wants the waiver and estoppel. The choice between them is driven by tax, the seller’s lifetime capital gains exemption and the buyer’s appetite for inherited liabilities, which we explain in asset sale versus share sale. The one place structure matters for financing is the government program below.
What about the Canada Small Business Financing Program?
Buyers sometimes ask whether the Canada Small Business Financing Program (CSBFP) can get around a lease or down payment problem. Here are the current facts, from the program’s own guidelines and borrower summary, which we checked in October 2026.
- Term loans are capped at $1 million per borrower. Within that, no more than $500,000 can go to leasehold improvements and equipment, and no more than $150,000 to intangible assets and working capital. Goodwill counts as an intangible, and only when it is part of a going concern asset purchase.
- Financing the purchase of shares is not eligible.
- Government coverage runs 15 years from the first principal and interest payment. A loan can be amortized longer, but the balance at year 15 has to be refinanced conventionally.
- The lender, not the government, approves the loan.
- The program rules we have read contain no clause tying the loan term to the premises lease. That does not stop the lender from applying its own lease requirement, and in our experience it will.
So a $1.5 million pharmacy bought through a share sale cannot use the program at all, and an asset sale of the same pharmacy could put at most $150,000 of its goodwill through it. We rarely see the CSBFP used for pharmacy acquisitions. It may suit a start up or a leasehold improvement loan with some lenders.
What to ask your lender
Before you sign an LOI, or before you list, put these to the lender in writing.
- What remaining lease term, including options, do you need for a 10 year amortization? For 12?
- Which renewal options will you count? One conditioned on no default? Market rent with arbitration?
- What is your coverage requirement and exactly how do you calculate cash available for debt service?
- What down payment are you working from on this file, and what would move it?
- Which landlord documents do you need before funding, on whose form, and by what date?
- How do you treat a demolition or relocation clause that can be exercised during the amortization, and what do you need from the head landlord if this is a sublease?
- Does a share sale or an asset sale change anything on your side?
The answers tell you whether the lease as it stands supports the price. If it does not, the fix is on the seller’s side, with the landlord, before anyone else sees the deal.
Before the letter of intent
For a seller, the buyer’s bank will read your lease after the price has been agreed. If the lease comes up short then, the price comes down or the deal falls over, and you will be negotiating with your landlord under a closing deadline. Read the lease now, count the years including options, check that the options survive an assignment, and if you are under 10 years, start the extension conversation before you list. The hub has the full argument for why we treat the lease as everything.
For a buyer, get the lease in front of your lender on day one and get the lender’s lease requirement in writing. Then you know the amortization, you know the equity, and you know whether this pharmacy for sale is one you can actually close.
This is general information, not legal or financial advice. Have your lawyer read the lease and your lender confirm its requirements. If you want to know what a bank would lend against your pharmacy and your lease today, request a valuation and we will read the lease first, the same way the lender will.