Ask a developer why a bank turned down a construction loan and the answer often comes back to presales, equity or leverage. Behind those conversations is a set of federal capital rules that most borrowers never read. They set how much capital a bank must hold against each type of loan, and therefore how attractive that loan is to the bank. For Ontario rental construction, one clause matters a lot.

The default: construction loans are expensive to hold

Under the Office of the Superintendent of Financial Institutions' Capital Adequacy Requirements for 2026, loans that finance land acquisition, development and construction (ADC) get a 150% risk weight by default.[1] A higher risk weight means the bank needs more capital for each dollar it lends, which raises its cost and lowers its return on that loan.

Residential ADC loans can qualify for a lower 100% risk weight if they meet three conditions:[1]

  • The bank's underwriting meets OSFI's prudential standards.
  • For construction, presale contracts cover more than 50% of total contracts, or the borrower has contributed equity at risk of at least 25% of the project's appraised as-completed value. Presales must be binding, with a substantial deposit that the buyer would lose if they walked away.
  • For land acquisition, the loan-to-value ratio doesn't exceed 60%.

The rental carve-out

High-rise residential projects, defined as five or more storeys, can only get the 100% weight if they meet the 50% presale test. Equity alone isn't enough. But the guideline says purpose-built rental construction projects are excluded from that requirement and can still qualify for 100% if they meet the other conditions.[1]

That exception makes sense, since rental buildings don't presell units. Without it, every rental tower would be stuck at 150%. With it, a rental project with at least 25% equity at risk and sound underwriting can be held at 100%, the same as a well-presold condo.

The practical effect is that banks have a regulatory reason to prefer well-capitalized rental construction over condo projects that are struggling to hit presale targets. In today's market, where condo presales in Toronto are weak, that tilt matters.

Where the 300% weight comes in

The rules are much harsher for junior debt. If a bank holds a subordinated or mezzanine tranche of an ADC loan, that exposure is risk-weighted at 300%.[1] At that level, most banks find mezzanine construction lending uneconomic.

That's a big part of why the capital stack in Canadian construction is split the way it is. Banks and government programs tend to provide senior debt. The layer between senior debt and the developer's equity is often filled by private lenders, mortgage investment corporations and funds that don't face the same capital charges.

What's changing

OSFI consulted last fall on a revised guideline for 2027, with comments due by February 18, 2026. The draft proposes several changes to ADC treatment:[2]

  • A 90% risk weight for residential ADC loans, both high-rise and low-rise, where presales are at least 75%.
  • A lower base risk weight for low-rise residential, from 150% to 130%.
  • A 110% weight for commercial ADC loans with at least 50% presales or pre-leases, up to a 70% loan-to-value ratio.
  • Allowing substantially complete projects with LTVs below 80% and a certificate of occupancy to move to income-producing real estate treatment.
  • Clearer definitions of equity at risk and high-rise buildings.

OSFI said it expected to publish the final version in September 2026, with the new rules taking effect on November 1, 2026 or January 1, 2027, depending on a bank's fiscal year.[2] Until the final text is out, the draft is only a proposal, and details could change.

Reading the implications

Several points follow from the current rules and the draft, without predicting how individual banks will respond:

  1. Equity matters more for rentals. Since rental projects can't use presales, the 25% equity-at-risk test is the route to the lower weight. Projects with thinner equity are more likely to need private capital somewhere in the stack.
  2. The proposed 90% weight would favour heavily presold condos. That could make banks more competitive on the strongest condo projects, while doing little for projects with weak sales.
  3. Low-rise could get cheaper to finance. A move from 150% to 130% for low-rise residential would lower banks' capital cost on townhouse and low-rise rental construction.
  4. Mezzanine stays private. None of the proposed changes touch the 300% weight on junior tranches.
  5. Lease-up timing could improve. The proposed shift to income-producing treatment at completion could reduce capital charges during lease-up, which might make banks more willing to hold loans until permanent financing is in place.

For private construction lenders in Ontario, the takeaway is that their role is shaped by bank capital rules as much as by market conditions. Where rules make a loan expensive for banks to hold, private capital is more likely to fill the gap.

Sources

[1] Capital Adequacy Requirements (CAR) (2026), Chapter 4: Credit Risk, Standardized Approach, Office of the Superintendent of Financial Institutions: https://www.osfi-bsif.gc.ca/en/guidance/guidance-library/capital-adequacy-requirements-car-2026-chapter-4-credit-risk-standardized-approach

[2] Draft Capital Adequacy Requirements Guideline (2027), letter, Office of the Superintendent of Financial Institutions: https://www.osfi-bsif.gc.ca/en/guidance/guidance-library/draft-capital-adequacy-requirements-guideline-2027-letter